Have you noticed anything different about your credit card accounts lately? Read the fine print. Really read it. Chances are the interest rates have crept upward, fees have increased or rewards rates have been diluted, even if you pay your bills on time.
Many of these changes in account terms have already taken effect. Still others, such as the return of routine annual fees, may be on the horizon. Changes have come quickly in interest rates, fees, minimum payments, credit limits and rewards, and none of them favors consumers.
Interest ratesAlthough banks are scooping up billions in bailout money or borrowing money from the Federal Reserve at as low as 0%, they aren't passing on those savings to consumers. Credit card interest rates have increased for many major card issuers and even doubled or tripled for some consumers who pay their bills on time. Bank of America is raising interest rates on about 4 million customers with balances. Citigroup and Capital One have also jacked up rates.
Credit card interest rates are typically pegged to the prime rate, which has fallen from 5.25% a year ago to 3.25% now. But the national average rate for credit cards has actually risen over that period, moving from 11.3% to 12.4%, according to the CreditCards.com's weekly rate survey of large card issuers.
FeesCard companies have become fee addicts. According to industry consultant R.K. Hammer, card issuers raked in $19 billion from penalty fees in 2008, up 5% from 2007. This year, penalty fee income is expected to rise to a record $20.5 billion.
Fees come in many forms:
- Balance transfer fees used to be capped, meaning that no matter how much you transferred, you paid no more than $50 or $75. The caps have been dropped. The standard balance transfer fee has risen to 3%, and Bank of America recently joined Discover in increasing that fee to 4% on certain offers.
- Cash advance fees had been 3%, but Bank of America now has 5% cash advance fees for money obtained through ATMs and at banks, and 4% fees on advances via direct deposit and checks.
- Foreign transaction fees -- charged when you make purchases in other countries or use foreign banks -- are going up for many cardholders. Starting June 1, Bank of America will begin charging for a service it had previously provided free: Transactions made in U.S. dollars but processed through foreign banks (such as online purchases from overseas merchants using foreign banks) will be hit with 3% fees.
Minimum paymentsYou might have to start paying more each month.
Chase increased the minimum payment from 2% to 5% for cardholders with large balances.
Credit limitsMany card issuers are slashing credit limits. Industry analyst Meredith Whitney predicts banks will cut credit card lines by a cumulative $2 trillion this year and $2.7 trillion by the end of 2010.
American Express has taken the most heat over slashing credit limits. Nearly half of its portfolio underwent a major overhaul that included cutting limits by 50% or more. Other issuers have cut limits, too, sometimes to amounts lower than the balances owed, triggering over-the-limit fees on a few accounts. Citigroup is offering some customers up to $550 if they agree to cut their credit limits and stop using their cards for up to 11 months.
Lowering credit limits also can cause immediate damage to the credit scores of consumers who carry balances.
RewardsRewards programs have become less rewarding.
Citigroup's Thank You Rewards program thanked its customers by adding a $39 fee for all tickets redeemed through its CitiMiles program. American Express' Delta SkyMiles "Always Double Miles" program on everyday purchases became "never double miles."
What's behind the upheavalWhy so many changes? Why now, especially after the federal government has pumped billions into struggling banks to help bolster lending? Consider these reasons:
- A perfect storm. Banking and credit industry observers say a tsunami of financial, regulatory and economic forces is leading issuers to drive up the cost of borrowing on credit cards. The recession, financial market turmoil, the frozen credit card securities market, job losses and growing credit card payment defaults are fueling some of the changes.
- Upcoming regulations. Card issuers are also gearing up for 2010, when sweeping changes in federal credit card regulations will go into effect and significantly limit how and when interest rates can be increased. Recently passed federal legislation to curb practices in the card industry will fast-track consumer protections.
- Profitability problems. Moody's, a New York credit rating agency, used a stress analysis to evaluate the strength of the six biggest credit card issuers -- Bank of America, Chase, Citi, American Express, Capital One and Discover -- and found that maintaining profitability this year will be a struggle for some. Capital One and Citi posted losses in the first quarter; American Express eked out only a small gain. The six collectively hold 80% of the nation's nearly $1 trillion in outstanding credit card balances.