Fasten your seat belts, credit card holders. It's going to be a bumpy few months.
When President Barack Obama signed credit card reforms into law recently, bankers shook their fists and warned us we'd be sorry. Though some of their threats are so much hot air, the new legislation will force some dramatic and often unwelcome changes.
Who's most at risk? Anyone who carries credit card debt, and that includes those of you with great FICO credit scores.
Who's least at risk? Big spenders with good credit scores who don't carry balances.
"Brace yourselves. For the next nine months, until this law takes effect, issuers will do more of the same: raising interest rates, pushing through new and higher fees, and continuing to scale back credit limits," said Greg McBride, a senior financial analyst at Bankrate.com. "Everybody, including those with very good credit, will have to get accustomed to lower credit limits, higher rates and higher fees as a result."
Read on for how the landscape will change and how you can best cope.
First, a little history: After years of offering cards to virtually everyone, including toddlers and dogs, issuers started overhauling their practices early last year as the recession took hold. (Read my column "The credit card party is officially over" from February 2008 to see how it all began.) Rate increases, account closures and credit limit cuts became more widespread as delinquencies started to spike and as issuers lost access to the securitization market that had provided them with so much cash.
Before the credit crisis, you see, issuers could bundle up your credit card debt and sell it in slices to investors, raising money the card companies could use to extend even more credit.
Once investors became allergic to risk, though, that easy source of funds dried up, and issuers reeled back some of the credit lines they'd proffered in better days. (One prominent banking analyst estimates issuers will cut overall limits by more than half before the end of 2010.)
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Issuers are also making cards harder to get. The deluge of credit card offers that once swamped your mailbox has slowed to a trickle, and the majority of card companies tell the Federal Reserve they've tightened lending criteria by, for example, requiring higher credit scores.
Suddenly, the consumer matters
Meanwhile, the Fed woke up after a long slumber and noticed that some of the issuers' practices weren't exactly fair to their customers. Stuff like:- Hiding fees.
- Raising rates on existing balances for any reason or no reason.
- Jacking up rates because you missed a payment on an unrelated bill.
- Applying payments first to balances with the lowest rate so the higher-rate charges would accrue interest longer.
- Charging interest even in months when a customer didn't carry a balance, a practice known as double-cycle billing.
So the Fed and other banking regulators banned these practices but postponed implementation of the changes until July 2010. That, of course, gave issuers a running start so they could jack up rates, cut limits and impose fees even more furiously.
Video on MSN Money
The new credit card landscapeCNBC's Bertha Combs looks at the shockwaves the new rules will send through the card industry.
Which issuers did. That, in turn, fed a groundswell of public indignation that led lawmakers to impose even stricter reforms by lopsided votes in the House and Senate. For example:
- Interest-rate increases will be permitted only under a few conditions, including when a promotional rate ends or when a cardholder is 60 days late with a payment. Issuers won't be able to raise rates for a year after granting a customer a card.
- Instead of allocating payments proportionately among balances with different interest rates, issuers will have to apply payments to the highest-rate balance first.
- Issuers will have to give 45 days' notice of any significant changes in your card agreement, up from today's 15-day notice, which will give you more time to shop for an alternative.
- "Gotcha" fees for late payments will be harder to impose. Cardholders must be given at least 21 days to pay a bill after the statement closing date. Any payment received by 5 p.m. on the due date will be considered on time. Issuers will no longer be able to assess a late fee if a payment is received on a due date that falls on a day when the issuer is closed, such as a weekend or a holiday.
- Cardholders must agree before issuers can approve over-limit transactions and impose fees.
- Applicants under 21 must prove they have independent income or get a co-signer before they can open a credit card account.
- Issuers can no longer lard subprime credit card offers with upfront fees. Such fees would be limited to 25% of the credit limit.
Like the Fed, though, lawmakers gave card issuers some time before the changes go into effect. So credit card companies have until next February to get their licks in.
And they will.
"Those (cardholders) who are revolving balances, even those with good credit, are going to suffer," predicted CardRatings.com's Curtis Arnold. "There's probably never been a worse time to have credit card debt."
Continued: Your credit card future
Your credit card future
Here's what's going to happen:- Interest rates are going up. Many customers have seen their once-low rates double or even triple in recent months, and that trend won't abate. Issuers are desperate to boost their revenues as charge-offs "climb into the double-digit range," Arnold said. "This is unprecedented territory."
The average rate on credit cards in the past few months has inched up from just under 12% to more than 13.5%, Arnold said, "and I think by the end of the year it will be 1 to 2 percentage points higher." This trend may accelerate as the law's implementation date approaches. "Issuers will raise introductory rates because their hands will be tied," Bill Hardekopf of LowCards.com said. "They won't be able to raise any rates for a year."
- Great balance transfer deals will disappear. Again, this is already happening. Two years ago, someone with good credit could find plenty of low-rate balance transfer offers -- often as low as zero -- with low or no fees. Today, the so-called teaser rates tend to be higher, last only a few months and come with 3% to 4% balance transfer fees that aren't capped, Arnold said. He advised consumers with a balance to look beyond initial teaser rates to find cards with low continuing rates.
"Six to 12 months from now (when your teaser rates expire), there may no longer be any balance transfer offers," Arnold warned, "at least not with any decent terms."
- More fees are coming. Issuers increasingly relied on late and over-limit fees to boost their profits. Once their ability to impose these fees is restricted, issuers will impose others, including annual fees. "Right now, 80% of cards do not have an annual fee," Hardekopf said. "I think that 80% will come way down."
- Subprime cards will all but vanish. Issuers have been fleeing this market anyway as delinquencies and defaults rise. To build or rebuild credit, people will need to turn to secured cards, which require a deposit, Arnold said.
- Instant-approval retail cards may be endangered. The new law requires issuers to consider applicants' ability to repay, something that's tough to do on the fly. So fewer retailers may offer those "10% off today if you get a card" deals.
- Rewards and terms may worsen for some. Bankers threatened to water down rewards programs and eliminate grace periods entirely, meaning that even those who pay their balances in full would owe interest starting from the day a purchase was made.
Video on MSN Money
The new credit card landscapeCNBC's Bertha Combs looks at the shockwaves the new rules will send through the card industry.
Eventually, competition will help
Pretty awful, right? Except such drastic measures are unlikely to stick when it comes to issuers' most creditworthy customers.That's because the credit card industry is still highly competitive, and the most-sought-after cardholders are those with high credit scores, generally FICOs of 740 and above.
If you're not anchored by a balance and you have great credit, you can quickly change cards to one that suits you better, which will continue to be the case even after Congress' restrictions are imposed.
"The competitive nature of the industry will be a check and balance," predicted Hardekopf, who is exactly the kind of high-volume charger with good credit that issuers are seeking. If a card issuer eliminated his grace period or rewards program, he'd switch, and if all issuers imposed such changes, "I'd start writing checks again or use a debit card that offered (rewards) points."
Arnold believes big-spending customers will continue to be prized, even if they don't carry balances, because they generate "interchange" fees, the fees paid by merchants to card issuers that average 1% to 2% of each transaction.
"Those interchange fees, 12 to 24 months from now, are going to be increasingly important for issuers," Arnold said.
So here's your game plan for the next nine months:
- Watch for changes. Check your accounts at least monthly to see whether your account limits or rates have been changed. Read everything your issuers send you via "snail mail" or e-mail, because they may not draw attention to unfavorable alterations in your agreement.
- Fight rate increases and credit limit cuts. You'll have the most leverage if you have good credit, since issuers know you can take your business elsewhere. One of my readers had her rates raised to 27% and 29.9% but persuaded the issuers to lower them to 10% with a phone call. Not everyone will be so successful in this environment, Arnold said, but you should at least try.
- Don't close accounts. It's tempting to say, "Close my account," after one of these interest-rate attacks, especially if it's a little-used card, but don't. Closing a card after a big rate increase could make rates on other cards soar, too, because your available credit has shrunk but the balance you carry on the other cards hasn't. That can ding your credit scores.
- Consider adding a new issuer to your credit card portfolio. Now is not a good time to have all your credit eggs in one basket. You'll have more flexibility to escape onerous changes if you can easily transfer your business to another issuer's cards.
- If you carry a balance, you need to get rid of it. You can no longer count on a never-ending stream of balance transfer offers to keep your rate down. Read "6 steps to dumping toxic debt" for strategies.
- If you're already struggling, explore your alternatives. Card issuers are more willing than in the past to work out payment plans, offer breaks if you enter credit counseling through a legitimate agency or to accept lump settlements for delinquent accounts. (Be advised: Such settlements will further trash your credit scores.) You also may want to discuss your situation with a bankruptcy attorney. Visit MSN Money's Bankruptcy Guide for more information.
Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published May 28, 2009
