New federal protections for credit card users go into force today, but in advance of the tougher rules, banks have been raising fees and interest rates -- hoping to ensure that one of their historically most lucrative businesses remains that way.
Since Congress approved the landmark credit card overhaul legislation last spring, many issuers of plastic have jacked up interest rates, switched accounts from fixed to variable rates, and raised annual fees and penalties for late payments. The actions are helping banks lock in revenue ahead of the new restrictions under the Credit Card Accountability, Responsibility and Disclosure Act.
Since April, the average variable rate on new cards has risen steadily to 11.22% as of this week from 10.69%, according to Bankrate.com, a consumer finance website. This comes even though the prime rate, the index to which card rates are generally pegged, hasn't moved in that period.
"It seems [banks] are getting their shots in while they can," said Greg McBride, senior financial analyst at Bankrate. The sweeping actions by banks -- which must now give customers at least 45 days' notice when making a significant change -- signal a profound shift in the way banks and consumers deal with plastic. Bankers and others have argued that the new law will further crimp consumer spending by leading to reduced access to credit and higher interest rates for cardholders, thus hurting an economic recovery.
Consumers say they are already feeling the pinch of higher credit card fees.
Melody Davenport, 44, of Stockton says the rate on her credit card issued by JPMorgan Chase nearly doubled this summer to around 11%. She says she is carrying a balance of about $12,000 on the card, which means Davenport is now paying an additional $50 a month in finance charges.
"It's hard, because when I make payments now, the principal doesn't go down," she said. "I'm not real happy."
A spokeswoman for JPMorgan Chase, the largest issuer of credit cards, said the bank could not comment on a specific account. Nor would Chase say how many of its cardholders had been hit with interest rate increases in recent months.
"Changing costs are requiring Chase to more closely examine the rates and terms we offer our customer," Chase spokeswoman Stephanie Jacobson said in an e-mail. She said the bank had not increased late-payment fees.
Bank of America, the second-largest credit card bank, said that in April it told some customers whose rates were below 10% that they would increase starting in June. Other card accounts also were "repriced" based on a review of credit risk, spokeswoman Betty Riess said.
She declined to give the total number of cardholders affected but said it was fewer than 10% of all credit card accounts. In its financial statement filed with the Federal Reserve, the bank reported personal card loans of $69.4 billion as of June 30.
After seeing their housing and personal wealth hammered by the recession, U.S. consumers are saving more and paring down their debts, a trend that the new law could reinforce.
For the three months that ended June 30, U.S. households on average carried a credit card balance of $7,987, down from a high of $8,529 in the third quarter of last year, according to Moody's Economy.com.
With longer notifications and mailing of bills at least 21 days before the payment due date, as well as other rules that card issuers must comply with later, the law could lead to consumers being more discriminate in using credit and help them further reduce their debts.
"People are changing their mind-set," said Jacob Gold, an author and certified financial planner in Scottsdale, Ariz. "They're understanding that they need to get their arms around their debt."
At the same time, card companies in recent months have drastically cut back on solicitation mailings, tightened lending standards and slashed credit limits.
In taking steps before today's deadline, banks have cited the weak economy but also appear to be anticipating fundamental changes in this line of business. Card issuers have lost billions of dollars in the last year, according to regulatory filings. And come February, the law will restrict their ability to raise interest rates on existing balances, a method that banks used to reduce risk and boost profits.
Total credit card lines have fallen sharply at Bank of America and other lenders as they have racked up increasing losses because of defaults. Banks charged off a record 9.55% of their credit card loans in the second quarter, according to the Federal Reserve.
Although more recent signs suggest that credit card defaults are stabilizing, banks face continued troubles in this sector, given that card delinquency rates typically rise with the unemployment rate -- which is expected to stay high for the next couple of years. The new credit card rules will add to the already precarious climate for card issuers, says Peter Garuccio of the American Bankers Assn.
"The business model is totally different now," he said.
The new law also will block card issuers from raising rates in the first year after an account is opened, unless the account has a variable rate or a required minimum payment is not received within 60 days of the due date. But even when cardholders are two months late on a payment, banks would still have to provide a notice at least 45 days before boosting the interest rate, giving the customer the option of stopping use of the card and paying off the balance at the lower rate.
(One exception to the notification rule is when the index, such as the prime rate, goes up, which would trigger an automatic increase in the variable rate.)
Other changes made before the law goes into effect include raising rates on cash advances and bumping up penalties for late payments.
"I think Congress left a loophole wide enough for trucks to go through," said Linda Sherry, a spokeswoman for the nonprofit rights' group Consumer Action, referring to the nine-month lag between the enactment and full implementation next February.
Jim Araby certainly wishes the new rules had taken effect earlier. The 30-year-old resident of Martinez, in Northern California, said he was notified by Bank of America in April that his card rate would increase to 15.75% in June from 6.5%. He decided to stop using the card and pay off the balance of about $6,000 over time.
Araby said the card had helped buy supplies for his wife's dance studio. Now that affordable financing tool is gone.
"We're stuck in a bind," he said. "We just don't know where to go."
BEGIN TEXT OF INFOBOX
Key provisions of the credit card law that go into effect today:
* Bills must be mailed 21 days before the due date;
* Companies must warn customers 45 days before making significant changes in conditions;
* Consumers can reject changes, close the account and pay off the balance at the existing rate within five years.
Los Angeles Times