Credit card companies, facing an increase in defaults and a decline in consumer spending, are raising some rates, adding fees and cutting credit lines as the Federal Reserve is poised to make the most sweeping changes to the industry in 30 years.
The provisions, to be announced by the Fed today, may curtail lenders’ ability to raise interest rates on current balances, require they apply payments to charges with higher interest rates first and extend the time customers have to pay bills before incurring late fees.
The new rules come on the heels of a $700 billion federal bailout of the financial system, including $125 billion invested in the nine largest US banks. Recent moves by JPMorgan Chase, Citigroup and other firms to add charges and decrease the amount of money cardholders can borrow at the same time they’re taking taxpayer dollars have angered some customers.
“People are totally confused,” said Mark Zandi, chief economist at Moody’s Corp.’s Economy.com. “The taxpayer is essentially a big owner in JPMorgan, Bank of America and Citigroup, and these are the folks who make credit-card loans. Many are asking, ‘So why is it that my credit-card loan got pulled? Why am I being charged a higher rate?”
A decline in spending by consumers and a rising number of defaults are leading Citigroup, JPMorgan and other lenders to increase fees and interest rates for some customers and cut the amount others can borrow. The changes are intended to reduce risk and raise revenue.
New Charges
Among the new charges are those for transferring balances from one credit card to another. Many lenders cap the amount they charge for this service. Now some are doing away with that limit and charging a percentage of the total, said Bill Hardekopf, chief executive officer of Lowcards.com, a website for consumers. Some banks are increasing fees for making purchases abroad.
Financial institutions also are expected to slash $2 trillion in credit card lines in the next 18 months, Oppenheimer analyst Meredith Whitney wrote in a November 30 report.
The changes are angering customers like Craig Marx, who has had a Chase card for 10 years and recently saw his minimum monthly payments climb to 5 per cent from 2 per cent and a monthly $10 service charge added to his bill. The bank also raised his rate from 3.99 per cent above prime to 7.99 per cent for the next two years, after which time it would become variable.
“I’m incensed,” the 52-year-old Palo Alto, California, resident said. “I feel like they’re making a calculated decision to make me go away as a customer.”
Saying No
JPMorgan, which received a $25 billion capital infusion from the Treasury Department in October, says its credit-card lending increased by 3 per cent in the third quarter from the previous quarter. CEO Jamie Dimon, 52, said in a December 11 interview that the company was using government money to “do exactly what they want us to do, make more loans, help the economy grow.”
Stephanie Jacobson, a spokeswoman for JPMorgan’s card unit, said in an e-mailed statement that the bank is “working hard to provide consumers affected by these changes with alternatives.”Citigroup spokesman Samuel Wang said in an e-mailed statement that the bank is adjusting rates for customers who haven’t been repriced in atleast two years and that cardholders can choose not to accept the changes. If they do so, the bank can take the card away when it expires.
Fed Rules
The Fed rules, proposed in May, were offered in response to criticism from Congress that the central bank was neglecting its authority to prevent abusive lending and strengthen consumer protections.
It mirrors congressional efforts to curb practices that lawmakers say are harming consumers. Plans have been introduced by Senate Banking Committee Chairman Christopher Dodd and Representative Carolyn Maloney, a New York Democrat.
Rules curtailing some of the lending practices could hurt bank performance. Although many banks have other sources of revenue, a decrease in credit-card income “would seriously weaken a bank’s ability to absorb other shocks,” Gregory Larkin, senior banking analyst at Innovest Strategic Value Advisors in New York, wrote in an October 2008 research report.
“Fees are a very, very important part of how issuers make money,” Hardekopf of Lowcards.com said. “Issuers make over a third of their money on the fees that are charged.”
