YOUR MONEY: Banks gouge consumers ahead of new lawIf you're one of the millions of Americans holding a credit card, this isn't necessarily news: Credit-card issuers are hiking interest rates, penalties and fees in full force ahead of stringent new laws that take effect in February.
By: Jennifer Waters, Marketwatch
CHICAGO -- If you're one of the millions of Americans holding a credit card, this isn't necessarily news: Credit-card issuers are hiking interest rates, penalties and fees in full force ahead of stringent new laws that take effect in February.
In fact, 400 credit cards from the nation's 12 largest bank issuers -- accounting for 90 percent of the $89.8 billion in outstanding consumer credit -- are still using most of the same tactics that the Federal Reserve has called "unfair or deceptive" and that will be outlawed in fewer than four months, according to a new report from the Pew Health Group's Safe Credit Cards Project.
"Until the law takes effect we're seeing that all the major credit-card issuers on the bank side are continuing to engage in these unfair and deceptive practices," said Nick Bourke, project manager of the Safe Credit Card Project. "The numbers of unfair and deceptive practices have grown and in some cases are worse."
Among the other findings:
- 99.7 percent of bank cards allowed issuers to boost interest rates on outstanding balances -- a jump from 93 percent in December
- 95 percent of bank cards are applying payments first to low-rate balances, a practice the Federal Reserve has said will likely cause substantial financial injury to consumers
- 90 percent of bank cards had penalty rate hikes with the vast majority imposed by so-called "hair triggers" of one or two late payments in a year. The median bank penalty rate was 28.99 percent.
As of July, interest rates spiked an average of 20 percent across the board from December of 2008 with some issuers jacking up rates 30 percent and in at least one case 50 percent -- even on their best customers.
Many -- but not all -- of the interest rate increases were tied to user credit scores, which have been dropping as many consumers' credit lines have been cut or cancelled, Bourke said.
There's no question that the economic malaise and the millions of people without jobs has had a damaging effect on credit companies too. Credit-card charge-offs and delinquencies this year have doubled, even tripled in some cases, and are still hovering in record territory at the nation's largest banks with the outlook only worsening. Credit-card charge-offs retreated in September from August's record high, but are still in double digits, according to Moody's Investor Service.
Moody's charge-off index, a measure of credit-card loans that aren't expected to be repaid -- slipped to 10.72 in September from August's peak of 11.49. However, loans at least 30 days late, considered a gauge of future losses, climbed to 5.97 from 5.8. Charge-offs and delinquencies closely follow the jobless numbers: As unemployment rises so too does bad debt.
"Some of (those interest-rate and fee hikes) occurred because of the economic environment we're in," Bourke admitted. "But the timing is pegged at getting a lot of changes in before the bill takes effect."
The American Bankers Association agreed that some higher rates are being pushed ahead of February, but said the embattled economy that is leaving issuers with boatloads of unpaid, unsecured debt is the real driver of such huge interest-rate increase.
"We have to take into account the losses in the credit-card space," said Peter Garuccio, ABA spokesman.
J.P. Morgan Chase, the nation's largest credit-card lender, reported that its credit-card division lost $700 million in the third quarter and expects losses to be higher next year. Bank of America's global card services division reported a loss $1.04 billion in the third quarter and Citi Holdings, which includes the private-label cards, mortgages and other consumer loans, showed a $1.9 billion quarterly loss.
Credit-card companies recognize the pain they are inflicting on many consumers. "We understand that customers don't like price increases, especially in difficult economic times," Citi said in a statement. "However, these actions are necessary given the doubling of credit card losses across the industry from customers not paying back their loans and regulatory changes that eliminate repricing for that risk."
The Pew study looked at rate and fee increases from January to July and doesn't include hikes made since then as issuers press consumers before the law takes effect Feb. 22. Nor does the study take into account the initial credit-card legislation that took effect in August.
American Express Blue card users, for example, weren't slapped with material interest-rate increases during the first part of 2009, but got smacked in recent months, according to BillShrink.com's research. Since then, published regular-purchase rates have shot up nearly 50 percent. Capital One's Platinum Prestige card's rate on new purchases surged 66 percent while Citi's CashReturns MasterCard's rate jumped 46 percent.
"I don't expect to see compliance on these rules from card issuers until they absolutely have to," said Samir Kothari, co-founder of BillShrink, the online consumer-credit service. "Some of these rules are so impactful on their businesses that they will wait until the absolute last minute to put them in place."
ABA's Garuccio noted, however, that bad economy or not, the legislation was bound to lead to higher interest rates and tighter lending policies that would leave some consumers out in the cold. "This would be an issue no matter what," he said.
The Pew study also doesn't include key changes that became law Aug. 20. Card issuers must now alert customers 45 days ahead of any increases and allow them to opt out, moves that eliminated the hair-trigger repricing and gave consumers the choice to say no.
In recent weeks, many cardholders have received those notices, some with pages of explanations. They've also been informed of new fees coming as card issuers look at ways to offset the loss of the hefty revenues streams they have long enjoyed from upping interest rates "at any time, for any reason," as the disclosures generally stated, as well as late and transfer fees.
Annual fees, for example, will turn up on the February statements of some cardholders with Bank of America _ even for some consumers who pay off their cards regularly. The bank notified a limited group of cardholders that it will start charging $29 to $99 annually, with the rates dependent on the risk and profitability of selected accounts. The group cuts across all types of cardholders and is not focused on say, slow-paying consumers or just those who don't carry balances.
The fees, however, are purely a test for Bank of America to determine how consumers value their credit cards, spokeswoman Betty Reis said.
"We have not made any final decisions on whether we'll apply an annual fee going forward," she said.
Citigroup cardholders who don't put more than a specific amount on their cards _ generally about $2,400 a year _ are getting hit with annual fees. Then there are those banks that are charging inactivity fees if the credit cards aren't used during a specific time period.
Chase Card Services and United Airlines recently unveiled three premium credit cards with annual fees that range from $130 to $375.
Expect more of the same and then some from other card issuers that are likely to follow the herd.
"Actions like these are rarely singular events," said Bill Hardekopf, chief executive of LowCards.com, an online credit-card information resource. "One issuer takes a new step and the others likely follow."
Many cards, for example, have pared and even taken away cash-back and other rewards programs, BillShrink found. Others have substantially upped balance-transfer fees and default fees.
American Express, for example, has done away with a two-tier rate for missed payments. Instead of a "default rate" for one missed payment and a "seriously default rate," which was substantially higher, for two and more missed payments, it has only a default rate. However, that rate is now at the higher level, according to BillShrink.
"These are levers that credit-card companies can and will pull to try to make money when and where they can," BillShrink's Kothari said.
At the same time, issuers are launching new cards, cleaning up disclosures and offering flat rates. Bank of America brought out the BankAmericard Basic Visa card that features one basic rate for all transactions _ charges, balance transfers and cash advances _ that is 14 percent above the prime rate, no matter what that rate is. Other cards are tailored to what consumers want more, cash back, rewards or cheap introductory rates.
Chase is taking a similar route with its Blueprint cards, which let cardholder keep interest rates at 0 percent on everyday purchases that they pay off monthly and pay interest only on big-ticket buys that take months to pay off.
Citi is offering consumers a chance to earn back some of the 29.99 percent interest rate they'll be charged at the end of the month. Consumers who make their payment on time will receive a 10 percent credit of the total interest charge. Interest earned back in December and January will be fully credited on statements no later than February 2010 and monthly thereafter.
"We also recognize that customers are frustrated by complicated notices and a perceived lack of options," the company said.
"Nearly all of our customers now have the opportunity to earn back a portion of the increase each month. And eligible customers who do more business with us will have the most opportunity to reduce their rates," according to Citi.
The escalating rates and fees have not gone unnoticed in Washington. Last week Sen. Chris Dodd, D-Conn., proposed a bill to freeze interest rates and fees until the law was fully enacted. He charged that banks were raising rates "to squeeze customers" ahead of the Feb. 22 effective date.
"At a time when families are struggling to make ends meet, jacked-up rates can quickly create crushing debt," he said. "People need to be responsible with their money but they shouldn't be taken to the cleaners by outrageous fees."
Nov. 4, the House voted to limit banks' rate increases on existing credit and to move up the start date for many of the credit-card rule changes. The bill needs Senate approval and a signature by the president before it becomes law.