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Credit card holders unduly whacked?

As the enactment of new federal legislation nears, a survey says 42% of US cardholders are getting hit with higher interest rates and fees and/or lower credit limits.

By CreditCards.com

More than two out of five U.S. credit card holders report getting whacked by negative changes to their accounts in the past 12 months, according to a new CreditCards.com poll. The survey comes amid rising criticism of banks for raising interest rates and fees and slashing credit limits on millions of accounts in the months just before a tough new credit card law takes effect.

The scientific telephone poll, conducted in June on behalf of CreditCards.com by GfK Roper, also highlights a less-talked-about aspect of the current credit crunch: Some credit card users with high incomes are getting higher -- not lower -- credit limits as banks compete to win over high-end borrowers.

"It is common for issuers to lower limits and/or raise fees and APRs on the weakest of their FICO-scored cardholders, and at the same time raise credit limits on the best FICO-scored customers, those with stellar usage and repayment histories (say, 760 FICO+)," Robert Hammer of R.K. Hammer Investment Bankers, a California card industry consultant, writes in an e-mail. "It is, as one might suspect, a very delicate balancing act."

That balancing act -- of giving to some while taking away credit from others -- may be the reason one-third of cardholders in the survey said they had actually gotten increases in their credit limits over the past 12 months. Credit industry analysts say those contrasts are likely to grow as the industry looks to develop a new and profitable business model in the upcoming era of credit card regulation.

Poll results

The poll contacted 1,004 adults through random-digit dialing. Of the total sample, 824 had credit cards.

The poll asked respondents with credit cards if any of a number of changes in terms had happened to them in the past 12 months. Getting an increase in their credit limits topped the list (33%), followed closely by negative changes such as getting an interest rate (APR) increase (30%) and having a credit card limit lowered (14%). Other changes include being switched to a variable rate card (11%), being offered an incentive to close a card account (8%) and being asked to submit a pay stub or tax return in order to qualify for a credit card (4%).

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Other results include:

  • More than two in every five cardholders (42%) reported some negative change in their credit card accounts.

  • Cardholders reporting credit limit increases were disproportionately higher wage earners. More than two out of five (42%) of people earning $50,000 a year or more said their limits had been increased, and 40% of people earning $75,000 or more a year reported increased credit limits in the past 12 months. The lower wage earners had less success: Only 19% of cardholders making $30,000 to $39,999 a year said their limits had been increased.

  • Nearly 40% of respondents with credit cards said they did not know or had no response to whether they had seen changes in their credit card accounts.

All the major credit card issuers have engaged in one or more of the practices cited in the poll. Annual fees and increased balance transfer and foreign transaction fees are also hitting millions of credit card holders.

Equifax, one of the three major consumer credit reporting agencies, recently revealed that average credit limits declined 3% to $4,594 in 2009 from $4,747 the year before. New credit card issuance dropped 38% during the first four months of 2009 compared with the same time period in 2008, according to Equifax data.

Citi offered cardholders up to $550 in bonuses if they reduced their credit limits and agreed to stop using their cards for up to 11 months.

American Express had a similar strategy, offering $300 in gift cards to entice certain users to pay their balances in full and close their accounts by April 30. Other issuers shut customers off by closing unused or dormant accounts. AmEx also began a policy of requesting pay stubs and income tax returns as proof that cardholders have sufficient income to pay their charge card bills.

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Raising credit card rates © CNBC
Raising credit card rates
CNBC's Margaret Brennan reports on how new credit card legislation is impacting retailers that offer their own lines of consumer credit.

Fixed no more

Bank of America and Chase are both shifting large numbers of cardholders from fixed-rate accounts to variable rates tied to an index or prime rate plus a fixed rate (known as a margin) of, for example, 8.99%. Discover has also notified some of its customers they would be switched to variable rate accounts. Other card issuers are likely to follow. The reason: Come February 2010, when major provisions of the Credit CARD Act of 2009 take effect, credit card companies will be limited in when they can increase interest rates on existing balances.

According to the new law, one of the acceptable ways to jack up rates on existing credit card balances is when accounts have variable APRs. The move from fixed rate to variable APRs may not affect many consumers now -- because the prime rate is at a historically low 3.25% (as of July 28). When the prime rate begins to rise again, credit card issuers will be able to pass the increase on to consumers with variable rate accounts -- regardless of the card users' payment histories.

Continued: Upping the minimum payments

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