When Edward Miller recently applied for a Charles Schwab credit card, a company representative asked him to fax in copies of his bank account statements to verify his net worth.
It was "a bit of a hassle," says the 64-year-old retired economics and finance professor from Bethesda, Md. He complied and was eventually approved for the card -- with a $5,000 limit.
Banks always tighten credit standards in economic slowdowns. But the recently passed Credit Card Act of 2009 is forcing the industry to rewrite the playbook it has used for years. The new legislation aims to limit fluctuating interest rates, ban some controversial practices and arm consumers with more information on their debts.
Banks have until February 2010 to comply with the act's key provisions, although some parts of the law have earlier deadlines. Already begun, for example: Issuers have to mail bills at least 21 days before the due dates and provide at least 45 days' notice before changing any significant terms on a card.
The result: Many banks are tightening things up now before further restrictions go into effect.
Tighter limitsBanks' responses to legislative and economic changes include:
- Tightening standards for credit card applicants, rejecting more people and offering smaller credit lines.
- Raising interest rates and fees and switching customers with fixed rates to variable ones.
- Enhancing rewards programs for a few customers but adding more fees.
For consumers, the banks' tougher underwriting standards may seem like a pendulum shift back to an earlier era when credit cards sported annual fees and double-digit interest rates.
In recent years, issuers cast as wide a net as possible by offering credit to millions of customers, knowing they could always raise rates on those who turned out to be bad bets. That pricing flexibility helped creditors rapidly expand their operations, as those customers with less-than-stellar credit -- many of whom carried balances or paid late fees and penalty rates -- generated millions of dollars in revenue.
Now the industry is scrambling to figure out who its new profitable customer is.
"Without the ability to reprice customers, raise fees or rates, the old profitability calculation won't apply," says Alan Mattei, a managing director at Novantas, a bank consulting firm.
In recent months, banks including Bank of America, Citigroup and JPMorgan Chase have raised interest rates and fees, switched customers with fixed rates to variable ones, and dropped credit lines and closed accounts. Credit Suisse's Moshe Orenbuch says credit card balances could shrink by 10% to 15% through 2012 as banks drop their teaser-rate offers and cut back on offering credit to riskier customers.
Charles Crawford of Grand Prairie, Texas, says that Bank of America raised the interest rate on his $19,000 balance to 23.2% from 12.2% starting with his June statement, citing the size of the balance. Mr. Crawford says the move nearly doubled his monthly finance charges to about $420 from about $220. "I feel so upset with them that I was thinking about not paying them," said the 58-year-old engineer.