A Turbulent Year for Credit Card Issuers and Cardholders

December 28, 2009

Card issuers respond to high-risk environment, new regulations by significantly changing practices.

The past year has been one of the most turbulent in the history of the credit card industry for both issuers and cardholders. Issuers made substantial changes in their rates and fees to increase revenue. This created higher payments for consumers during a time of recession and high unemployment.

This month, comScore released its Online Credit Card Report: 2009 Edition. The study shows that half of consumers have noticed changes in their account made by their issuer, including higher interest rates, lower credit limits and additional fees. The study also reports that more than two-thirds of consumers have responded to changes in their credit card terms and conditions by closing the account, switching to another card or lowering their spending behavior.

Credit card issuers claim they had to increase rates and fees as well as reduce their lending risks in order to stay in business. They were confronted with a "perfect storm" of three factors which rocked their financial stability:

• The economic downturn, which started in the latter half of 2008, led to a shaky start for banks in 2009. Record losses and bankruptcies continued in the industry and shook consumer confidence.
• During 2009, the unemployment numbers skyrocketed and consumers felt the effects of the worst recession in several generations. As a result, consumers could not make their credit card payments on time and both the default rates and the delinquency rates (payments that are at least 30 days overdue) significantly increased for nearly every issuer. For example, in August, Bank of America, one of the country's largest credit card issuers, reported an annualized default rate of 14.54 percent.
• Congress and President Obama passed far-reaching regulations for the credit card industry when Obama signed the CARD Act of 2009 on May 22. Most of the provisions of this bill take effect in February 2010, and include a restriction on the over-the-limit fees, the marketing of credit cards to adults under 21 and dramatic changes in how issuers can impose interest rate increases.
  
  

The CARD Act provides protections for consumers. However, it has also brought unintended consequences. Issuers were being squeezed by both regulations and the recession, so they made significant changes to make up for the revenue they were losing. These changes have had a significant effect on a wide range of credit card customers, according to credit card monitoring Web site LowCards.com:

1. Issuers raised interest rates. Many issuers raised their rates in 2009, but Citi's 29.99 percent increase on some cardholders who had good credit was the most dramatic. Issuers also raised rates to compensate for accounts that were a higher risk for default. They even raised rates to motivate some customers to close accounts.
2. Issuers added annual fees. Approximately 20 percent of the credit cards in the United States have an annual fee. But in 2009, issuers introduced a number of new cards with annual fees and some even added an annual fee on a small group of their current cardholders. The new Chase Sapphire Preferred Card has an $85 annual fee. American Express just introduced the new Zync charge card with a $25 annual fee and packs of benefits that can be purchased for an additional $20 per pack per year. Bank of America tested annual fees ranging from $29 to $99 on a small percentage of cardholders. Citi notified some of its cardholders that they will be charged an annual fee of $30 to $90 unless they spend at least $2,400 per year.
3. Issuers switched many fixed rate cards to a variable rate. As the Fed eventually raises the prime rate, these cards will no longer be locked into the fixed rate. The variable rates will rise along with the prime rate, even when the new CARD Act provisions take effect.
4. Issuers reduced rewards. Issuers found subtle ways to decrease their costs of reward programs. They eliminated tiers; "simplified" point redemption calculations (which in many cases requires the cardholder use more points for the same reward); and tied bonus miles to a minimum purchase.
5. Issuers increased existing fees. At the beginning of 2009, the industry standard for a balance transfer fee was 3 percent. But some issuers increased that fee during the year. In June, Bank of America increased the balance transfer fee to 4 percent. Discover will follow with a 5 percent balance transfer fee in January.
6. Issuers imposed new fees. Some issuers began charging a 3 percent fee for all transactions made outside the United States in U.S. dollars. Previously, the fee was not added when foreign transactions were made in U.S. dollars. Some issuers also introduced inactive account fees that charge customers a fee for not using their credit card for a period of time.