7 credit card trends that can cost you

Consolidation won't spoil the party -- yet

For most of the 1990s, 10 card issuers controlled about 80% of the credit card business. Today, that's down to five, yet "banks are still hungry," S&P's Azarchs said. "They're still competitive."

That's largely because there hasn't been much growth in the lending side of the credit card business, Azarchs said. People already have a lot of credit cards in their wallets and aren't adding many more, so issuers try to grow by stealing business from each other. Hence all the low-rate offers and rebate deals.

That could change if the industry consolidates much more, and many analysts expect more mergers in coming years.

"Competition is always the thing that's driven this industry," Arnold said. The idea of less competition "scares me."

How to use this news: If you're concerned about industry consolidation, let your lawmakers know. Otherwise, be prepared for less-generous offers and even higher fees if issuers continue their merger binge. It won't happen overnight and may not happen at all. But if you need it, this could be another excuse for paying off your debt while you still have plenty of low-rate options.

Micropayments will grow

Since issuers aren't making as much profit lending money, Azarchs said, they're looking to cash in by increasing the number of transactions they handle.

That means encouraging more small-change transactions of $5 or less. Research firm TowerGroup predicts the volume of small electronic payments -- "micropayments" -- will grow to $11.5 billion by 2009 in the U.S. and $40 billion globally.

"There has been a slow, steady march of credit cards replacing cash, and this is the last frontier," Azarchs said. "It's not like what happened when supermarkets began accepting credit cards, which was huge … but the companies are definitely looking for ways they can make money from processing transactions."

You can already see the signs. Chains including McDonald's and 7-Eleven already accept plastic for small transactions, and Motorola recently announced plans to incorporate a payment chip in some of its cell phones. (Consumers in Asia already use their phones to pay at vending machines and other locations.) TowerGroup managing director Theodore Iacobuzio said such "contactless" options, where a cell phone or key fob is waved in front of a reader, will help fuel micropayment growth. Eventually, he predicts, contactless payments may supplant plastic, just as plastic supplanted checks and cash.

But where credit card companies see profits, merchants see extra costs. Retailers must pay for card-based transactions, typically 1% to 2% of the total charge, which can wipe out their profit on the smallest transactions. Iacobuzio predicts retailers will find ways to reduce the costs, possibly through aggregating many small transactions as Apple does with its iTunes online store.

How to use this news: Expect to see more retailers accepting plastic for small transactions. If you're carrying a balance, you should resist adding to it, even incrementally; otherwise, you can take advantage of the convenience and the possible advantage of being able to track more of your spending.

Security will continue to be an issue

Several well-publicized security breaches at merchants and processors have exposed millions of account numbers to thieves in the past couple of years. The major credit card networks are cracking down, but they have their work cut out for them.

Visa USA recently reported that the vast majority of the merchants it surveyed weren't properly protecting consumer data. Visa found only 17% of the 231 large merchants it questioned were following payment card industry guidelines regarding customer data security.

"Securing payments is not something Visa can do alone," said Visa spokeswoman Rosetta Jones. "We need the participation and cooperation of everyone involved in processing the data."

One of the biggest problems: retailers and processors are hanging on to data they shouldn't. Deliberately or because of quirks in the software they use to process card transactions, customer-account numbers and PINs may be stowed in unencrypted databases that are vulnerable to hacker attacks.

The major networks, including Visa and MasterCard, will respond by fining issuing banks, which in turn will fine the merchants involved, said Avivah Litan, payment card industry analyst with research firm Gartner. That will help force better compliance, she said.

"The networks are getting a lot tougher than they used to be," Litan said.

How to use this news: If you're given a choice, don't let a merchant (online or otherwise) store your account information. Check your monthly statements for unauthorized activity or, better yet, use personal finance software or online account access to scan your accounts at least weekly. If you spot a problem, call the issuer immediately but then follow up in writing to preserve your consumer rights under federal law. Also, consider having at least two open, active credit card accounts; replacing a lost, stolen or compromised card can take five to 10 business days, and you may want to have an alternate card available while you wait.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.

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