Credit card issuers are responding to record defaults and new regulations by breaking a few records of their own. Banks such as JPMorgan Chase and Citigroup are jacking up interest rates and transfer fees to levels not seen in recent history, hitting record numbers of consumers.
JPMorgan Chase, the biggest credit card provider, has levied some of the largest increases. The bank raised the minimum payment on outstanding balances from 2% to 5% for some customers, according to a June 30 Bloomberg article. JPMorgan has also raised its balance-transfer fee from 3% to 5% -- the highest rate among the large consumer banks, according to Bloomberg.
Citigroup has reportedly raised rates on outstanding balances nearly 3 percentage points to an average of 24% for 13 million to 15 million cardholders, according to a July 1 article in the Financial Times. The new rates impact customers with Sears and Macy's cards issued through Citibank.
The rate increases come in the wake of record defaults and as banks grapple with a reform measure signed into law this week that they argue could cost them hundreds of millions in lost fees and other revenue.
Raising fees and interest rates has helped the banks absorb losses and maintain profit margins, says Cynthia Ullrich, senior director in Fitch's Asset Backed Securities Group. Higher rates yield larger payments from customers in good standing, helping mitigate losses from the increasing number of people who are not able to pay their bills.
The new credit card law, whose toughest consumer rate protections take effect Feb. 22, 2010, is also fueling fee increases. Banks typically have charged new customers low "teaser" interest rates that then increase based on the risk of lending to a particular customer. The goal of such introductory rates is to attract customers with good credit, who would apply only for cards with low rates.
The law removes the incentive for banks to offer teaser rates by fixing rates for everyone except those customers who are already 60 days behind on their payments. Customers who are two months late can restore their "original" rate by making payment on time for six months.
What we're seeing now are banks increasing fees before the law goes into effect, in an effort to maintain profits. A JPMorgan executive told Bloomberg that it expects the new law will cost the bank $500 million this year.
The problem with this bank strategy is that it's painting all lenders with a broad brush, penalizing many customers who will see rate increases despite stellar credit histories.
