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The Basics

Credit card rates, fees marching up

Where is the consumer's share of the Fed's recent rate cut? Card issuers are raising fees and interest rates, even on good customers, to offset their losses. But you can take action.

By The Wall Street Journal

The Federal Reserve has slashed its benchmark rate to near zero, yet many people are getting hit with higher rates and fees on their credit cards.

Normally, when the Fed cuts rates, credit card issuers follow suit, resulting in lower monthly payments for cardholders. Though average credit card rates have fallen slightly as the Fed has cut interest rates, banks and retailers are trying to offset rising losses in their credit card operations by raising rates and fees across a broader swath of their existing customers.

Banks had already been tightening the screws on people with less-than-perfect credit in recent months. Now, even customers who pay their bills on time will find it more expensive to carry a balance.

The Chase unit of JPMorgan Chase is raising its rates on credit card cash advances and overdraft protection, as well as its default rate, which is triggered when cardholders exceed their credit limits or are late on their payments. The bank will also start charging a new $10 monthly service fee to some cardholders who have been carrying large balances for at least two years, while raising their monthly minimum payments to 5% of their outstanding balance, from 2%.

The Citibank unit of Citigroup and American Express have been notifying groups of cardholders that they will raise their regular interest rates by 2 to 3 percentage points. In addition, AmEx is raising its rates on cash advances, late payments and defaults, increasing its foreign-exchange fees to 2.7% from 2% on its consumer and small-business cards, and eliminating ways to earn rewards on one of its popular cards.

Retailers are also getting stingier with credit. Home Depot has reduced credit lines on its in-store cards, which are issued by Citibank, for customers with delinquent accounts or those whose credit scores have dropped dramatically. Nordstrom has begun notifying customers that it is raising interest rates on its store credit cards, while Target, which has also raised interest rates and late fees, is issuing fewer cards and reducing spending limits as customer delinquencies have jumped sharply.

Many big banks reported weak credit card results for the third quarter, with charge-offs -- reflecting loans considered to be uncollectible -- rising to more than 5% of total credit card balances and poised to deteriorate further.

"Some credit card issuers are desperately looking to recoup their charge-off losses by increasing interest rates or hiking punitive fees," says Gwenn Bezard, a research director at Aite Group, a research firm. "Those rates or fee increases can affect consumers that are perfectly good customers."

Card issuers cite the current economic turmoil to explain the changes. "Obviously, this is something we're doing to reflect the cost of doing business," says Desiree Fish, an American Express spokeswoman.

Clamping down access

At the same time, banks are clamping down access to credit, which could further crimp consumer spending. The number of credit cards in use in the second quarter dropped 5% from the first quarter to an estimated 663 million -- the biggest quarterly drop in several years -- as people received fewer credit card offers and issuers canceled more of those cards, says Laura Nishikawa, an analyst at Innovest Strategic Value Advisors, a New York investment research firm.

Gerard Hallee, a software developer in Snohomish, Wash., says American Express notified him in October that it was slashing the credit line on his personal credit card to $500 from $12,000. Among the reasons cited: Hallee was carrying high balances on other cards, and other customers who had a residential loan from his mortgage lender also had a poor repayment history with the company.

Though he does carry balances on several cards, his monthly balances on his AmEx card are usually less than $1,000, and he has paid off his balances every month for the past two years. "I guess it's a knee-jerk reaction that they want to cut their exposure in the whole credit business," Hallee says.

A few days later, his application for an AmEx business credit card was denied. Then the company cut the limit on his existing business line of credit to $15,700 from $17,000. An American Express spokeswoman says that while the company can't comment on individual accounts, it looks at a number of factors when making credit decisions.

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