Credit-card issuers are going to have to play by a whole new set of rules that take effect Monday and are considered consumer-friendly — but will also cut into some of their traditional sources of revenue.
Don't expect those companies to take that lying down. Card issuers are expected to spend the next year experimenting with new products and fees — as well as higher interest rates — testing just how much consumers are willing to shell out.
The Credit Card Accountability Responsibility and Disclosure Act, signed into law in May, is a sweeping overhaul of the card industry and includes provisions to help reduce the amount of interest consumers pay. The bulk of reforms take effect Feb. 22.
As card issuers prepared for the new rules in recent months, many have raised interest rates on customers — to the dismay of consumer advocates. At the same time, the weak economy and fears of rising defaults caused card companies to cancel accounts and lower credit limits on anyone who appeared risky.
The CARD Act will help many vulnerable consumers.
"The biggest winners are consumers who have been taken the most advantage of," says Josh Frank, senior researcher with the Center for Responsible Lending. These are cardholders who carry balances and have seen their interest rates jump or card terms change for no apparent reason or because they accidentally triggered a late fee, he says.
Consumers who are good managers of credit, though, might be unhappy to find that card issuers may be passing on higher interest rates and fees to them.
Here's what the next year in credit cards might look like:
UP, UP AND AWAY:
The CARD Act doesn't prevent issuers from raising interest rates, although there are more restrictions on when and how they can do so. Because card issuers can't quickly raise rates or change terms on their riskiest customers, they will charge higher interest rates across the board to protect against potential losses, banking experts say.
Synovate, which tracks card solicitations, found that offers in the fourth quarter of last year carried an average rate of 13.5 percent, up from 11.47 percent a year earlier.
CHARGE, OR ELSE:
"A lot of the talk around the industry is trying to figure out some of the fees that are going to come," says Anuj Shahani of Synovate. He says one of the most anticipated: the inactivity fee.
Card companies say it costs them money to maintain accounts, and they are starting to slap a fee on unprofitable customers who rarely use their cards. Fifth Third Bank started charging a $19 inactivity fee last year if a card hasn't been used in the past 12 months.
And beginning in April, Citi will charge infrequent users a $60 annual fee. If they charge at least $2,400 in the year, Citi will credit their account by $60.
"It's kind of an indicator how the industry is grappling for what is the best way they can make back some of the profits that they are ostensibly losing ... without alienating their customer base," says Samir Kothari, co-founder of BillShrink.
WELCOME BACK, ANNUAL FEES:
Once common, annual fees now usually appear only on subprime and high-end reward cards, Shahani says. But card issuers are eyeing a revival. Bank of America, for example, is testing annual fees, and will start charging this month a small percentage of customers a $29 to $99 fee.
"We will see some major card issuers floating annual-fee trial balloons on basic card products for $20 or $40 to see if those stick. If they do, you will see many, many more card issuers go to annual fees," said Mike Brauneis of Protiviti, which helps financial institutions implement regulatory changes.
Synovate reports that 35 percent of card offers in the fourth quarter carried an annual fee, the largest percentage in a decade. A year earlier, 23 percent had annual fees.
"Consumers should be outraged," says Bill Hardekopf, chief executive of LowCards.com. "You can certainly shop around and find a card without an annual fee."
FEES FOR NOT KNOWING YOUR LIMITS:
Issuers have typically covered customers going over their credit line, but often for a steep price of $35. The CARD Act doesn't allow over-the-limit fees unless customers opt to have their overcharges covered.
Many card issuers are working 24/7 to develop opt-in policies, Brauneis says. Capital One launched one last fall, charging $29 each month a customer exceeds the limit.
Consumer advocates expect a big promotional push by banks to get customers to sign up for this service. Don't take the bait. "I can't think of many consumers for whom it would be worth it," Frank says.
PRICIER BALANCING ACTS:
The standard fee for transferring a balance from one card to another used to be around 3 percent of the amount transferred, not to exceed $75 or so. But that fee has been going up to 4 percent and 5 percent in the past year, and the dollar cap has disappeared. So you can end up paying hundreds of dollars on a transfer.
Consumer advocates expect issuers to continue pitching balance transfers to collect the lucrative fees. If you're tempted to transfer to another card for a lower rate, make sure you know the terms. Card reforms require that promotional rates must last at least six months, so check what your rate will jump to after that.
SKIMPIER REWARDS FOR SOME:
Card issuers last year watered down rewards, such as reducing points on purchases or trimming cash-back awards. That dilution is expected to continue on basic cards.
But issuers will be launching richer reward programs to compete for the most profitable customers: good credit risks who carry a balance, pay interest and occasionally trigger fees.
American Express, for instance, introduced an enhanced Premier Rewards Gold Card last fall that carries a $175 annual fee. Cardholders earn higher points for certain purchases and will receive 15,000 bonus points if they spend $30,000 during the year.
NEW LAW, NEW PRODUCTS:
Issuers have introduced new cards in the past six months, and they say these products have been in the works for a long time. But many seem designed in the spirit of the CARD Act, which aims to make card rules clearer and turn us into better money managers.
For instance, the BankAmericard Basic Visa comes with one rate for all transactions, no over-the-limit fee and a single page of disclosures. The Citi Forward card will cut your interest rate a quarter-point — up to eight times — if you stay below your credit limit and make on-time payments for three months.
This is just the start of changes you can expect.
"We are in an experimental transition period," says Nessa Feddis, a vice president with the American Bankers Association. "The consumer will drive the market."
(c) 2010, The Baltimore Sun. Distributed by McClatchy-Tribune Information Services.