By Eileen AJ
The Associated Press
NEW YORK
Your next credit card statement is going to contain an ugly truth: how
much that card really costs to use.
Now, thanks to a long-awaited law that goes into effect Monday, you'll
know that if you pay the minimum on a $3,000 balance with a 14 percent
interest rate, it could take you 10 years to pay off.
"Jaws will drop," said David Robertson, publisher of The Nilson Report, a
newsletter that tracks the industry. "I don't doubt for a nanosecond
that it's going to give a lot of people a sinking feeling in their
stomachs."
That's not all that will make them queasy.
During the past nine months, credit card companies jacked up interest
rates, created new fees and cut credit lines. They also closed down
millions of accounts. So a law hailed as the most sweeping piece of
consumer legislation in decades has helped make it more difficult for
millions of Americans to get credit, and made that credit more
expensive.
It wasn't supposed to be this way. The law that President Barack Obama
signed last May shields card users from sudden interest rate hikes,
excessive fees and other gimmicks that card companies have used to drive
up profits. Consumers will save at least $10 billion a year from curbs
on interest rate increases alone, according to the Pew Charitable Trust,
which tracks credit card issues.
But there was a catch. Card companies had nine months to prepare while
certain rules were clarified by the Federal Reserve. They used that time
to take actions that ended up hurting the same customers who were
supposed to be helped.
Consumer advocates say the law still offers important protections for
the users of some 1.4 billion credit cards.
"We expected some rate increases; we expected some annual fees," said Ed
Mierzwinski of the U.S. Public Interest Research Group, an advocacy
organization that lobbied for the law.
To be sure, the law takes effect while credit card companies are still
reeling from the recession.
In 2007, the top 12 card issuers earned a combined $19 billion from
credit cards, according to The Nilson Report. A year later, amid the
financial meltdown, profits for those companies fell more than 65
percent to $6.32 billion. The plunge was largely because defaults
ballooned as unemployment soared.
Profit figures for 2009 aren't yet available. But banks wrote off about
$35 billion in credit card debt last year, as the unemployment rate
topped 10 percent. Analysts predict the default rate will remain at
least twice as high as normal through this year, and longer if
unemployment stays high.
At the same time, the law is expected to cut into future profits. FICO
Inc., the company best known for its credit scores, projects the average
card will generate less than $100 a month in revenue within three
years, down from $200 a month before the law.
That helps explain why the industry reacted so aggressively to the
legislation. Among the moves it made:
— Resurrected annual fees.
Annual fees, common until about 10 years ago, have made a comeback.
During the final three months of last year, 43 percent of new offers for
credit cards contained annual fees, versus 25 percent in the same
period a year earlier, according to Mintel International, which tracks
marketing data. Several banks also added these fees to existing
accounts. One example: Many Citigroup customers will start paying a $60
annual fee on April 1.
— Created new fees and raised old ones.
These include a $1 processing fee for paper statements for cards issued
by stores such as Victoria's Secret and Ann Taylor. Another example is a
$19 inactivity fee Fifth Third Bank now charges customers who haven't
used their card for twelve months.
Other banks increased existing fees. JPMorgan Chase, for instance raised
the cost of balance transfers from one card to another to 5 percent of
the transfer from 3 percent.
— Raised interest rates.
The average rate offered for a new card climbed to 13.6 percent last
week, from 10.7 percent during the same week a year ago — meaning
cardholders had to pay almost 30 percent more in interest, according to
Bankrate.com.
For millions of other accounts, variable interest rates that can rise
with the market replaced fixed rates. The Fed is expected to start
raising its benchmark interest rates later this year, which would likely
trigger an increase on those cards.
Besides making credit more expensive, banks also made it harder to get
and keep credit cards. One big reason: Since the financial meltdown,
many credit card issuers have been trying to reduce risk.
The number of Visa, MasterCard and American Express cards in circulation
dropped 15 percent in 2009, for example. Rarely used cards were among
the first cut off. Some cards linked to rewards programs for purchases
like gasoline were likewise shut down.
Card companies also slashed credit limits for millions of accounts that
remain open. About 40 percent of banks cut credit lines on existing
accounts, according to the consultant TowerGroup, which estimated that
such moves eliminated about $1 trillion in available credit. Much of
that was unused.
Credit lines were frequently cut in regions most affected by the housing
crisis and high unemployment, such as Florida and California, said Curt
Beaudouin, a senior analyst at Moody's Investors Service. "They're not
doing it willy nilly, they're doing it systematically," he said.
Companies are also making fewer solicitations. Mailed offers for new
cards increased in the final three months of 2009 for the first time in
two years, but there were only about 575 million. That's about a third
of the average number of quarterly offers from 2000 through 2008,
according to Mintel.
Because the law makes credit cards less profitable, some subprime
borrowers may not be able to get cards at all, at least for the next few
years. There's no fixed definition, but subprime borrowers generally
have a FICO score below 660. For a good portion of this group, options
may be limited to alternatives like PayPal and other electronic payment
services, prepaid cards and payday lenders.
"Not everyone either deserves or should have an open-ended credit card,"
said Roger C. Hochschild, chief operating officer of Discover Financial
Services.
Joining those who won't easily get cards: college students and others
under age 21. The law strictly limits card marketing on campuses, ending
giveaways like T-shirts and pizza Cards can only be granted to
applicants who show they have the means to repay, or those who have a
co-signer who can pay.
"Some of the more vulnerable parts of the population are a little bit
more protected," said Georgetown University finance professor James
Angel. But he predicts card companies will find ways around most of the
new restrictions. And once the economy recovers, he expects the lending
spigot to open again.
In the meantime, there is one group of consumers that banks will chase
after — those who carry a balance from month to month for at least part
of the year, and pay their bills on time. They're the most profitable
and least risky group for banks.
Also a target customer: anyone willing to do more business with the bank
that issues their card, say opening a checking or savings account or
taking out a mortgage.
"What we want is a deeper relationship with our customers," said Andy
Rowe, an executive vice president with Bank of America's card business.
Customers willing to stick with a single bank may even be able to get
annual fees waived or get a better interest rate, he said. "That's where
the competition will be."
(This version CORRECTS time period for Fifth Third Bank inactivity fee
to 12 months. )
