Your Credit-Card Competitors Are Going for Gold

CU360
April 22, 2010 | COMMENTS

The Credit CARD Act that took effect last month could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers already are deploying new tactics that could prove costly for even the most cautious cardholder.

Banning a range of formerly profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue, reports The Wall Street Journal.

"There are countless fees that can be introduced and rates can go through the roof," Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms, tells the Journal.

Consider a new offer from Citigroup. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if it's not paid on time, the interest rate is 29%.

The new regulations couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing market and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults.

The banks could be hurt further as consumers try to clean up their finances, especially high-cost, credit-card debt. Consumers carry an average credit-card balance of just over $5,400, down about $200 from five years ago, according to Chicago-based TransUnion. In such an environment, consumers might push back against new card fees or jump to a rival issuer—often credit unions—that compete by keeping fees low or nonexistent.

Expect to see banks use these tactics to support sagging profit margins:

• Raising rates. As long as credit-card companies inform consumers ahead of time and don't make any sudden rate changes, they're mostly free under the law to charge whatever they want. They can raise the rate on new purchases so long as they provide 45 days notice that they are doing so.
• Switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are currently low. But they give the companies more flexibility to collect a higher rate in the future if they alert customers to the terms now. Many card companies already have sent out notices that change the terms of the card contract to a higher or variable rate.
• Adding more fees for extra services, such as requesting a year-end itemization of all purchases, paper statements, or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.
• Reaping fees on overseas transactions. Not only are banks raising foreign-exchange transaction fees, they're expanding the definition of what qualifies as a foreign transaction. Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars.
• Adding new fees to formerly lucrative rewards programs. Cardholders who pay late will lose their rewards points, but they can reinstate them to their accounts if they pay a fee.
• Cutting out 0% teaser rates and no-annual-fee offers to new customers. Card companies are trying to woo new cardholders, but this time around, the pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.

Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have annual fees, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs—but also fees. Plain-vanilla cards that don't have annual fees (or rewards programs) represented only 11% of mail offers in the fourth quarter, according to Comperemedia.

Consumers can fight back against some of the industry's tactics, notes the Journal. Most people need only one or two credit cards that are widely accepted. It might be worthwhile for consumers to consolidate debt on the card that has the lowest interest rate, assuming it makes sense after factoring in the balance-transfer fee.

Regulations going into effect later this year will place even more constraints on credit-card companies. Starting in August, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to reject a change of terms in their card agreements. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.

Credit unions often offer lower rates than large banks, advises the Journal, which cites some credit union cards with rates as low as 7.9% on a basic credit card.

That compares with an interest rate of 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by Lowcards.com, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.

This article was orginally published online by CU360, an online portal for benchmarking tools, market insights, industry data, and analytical information at cu360.cuna.org. Reprinted with permission.