November 2008
Credit card rates that jump overnight
Don't get bitten by sudden changes in terms
Illustration by Christoph Neiman
The economic storm clouds that started with mortgages are now working their way through the credit-card industry in ways that
could hurt all consumers. Card balances are at record highs, and a recent Consumer Reports survey found that 12 million Americans are still paying off purchases from last holiday season. Fearing defaults, many credit-card
companies have changed their terms and rates. Whether you have good credit or bad, Consumer Reports' analysis reveals that now is an essential time to do a credit-card checkup to make sure your accounts haven't changed for
the worse.
To help you do that, from among hundreds of credit cards we found a dozen that are worthy of your consideration (see The best credit cards, available to subscribers). We also identify traps to watch out for.
Consider the case of John Carmichael of Rensselaer, N.Y., who earlier this year saw the interest rate on his Bank of America Visa card triple overnight from around 8 percent to almost 25 percent. He has an excellent credit rating, pays more than the minimum, and never missed a payment or a due date on any of his credit accounts, he says. So why the rate hike? The bank told him that his debt-to-income ratio was too high. His card balance was almost $1,000 below his limit.
Carmichael asks whether banks are altering credit card rates to compensate for their mortgage-related losses. “Is it not possible that the mortgage crisis, not solely caused by consumers, is causing financial institutions to try to bail out on the back of consumers?” he wrote in a letter to Consumers Union, the nonprofit publisher of this magazine.
Analysts say Carmichael is on to something. Several issuers have doubled or tripled credit card rates for some customers in recent months, even though many were current on their bills. Banks rely on credit cards for a large part of their revenue, says Dennis Moroney, research director at TowerGroup, a business consulting company. “When the mortgage meltdown hit, they turned to credit cards to make up for their slacking profits,” he says, “only to scale back this year due to a rising fear of more defaults.
Mixed bag for consumers
Some economists fear that a wave of defaults from overextended credit cardholders is the next shoe to drop in the mortgage crisis. Now mortgages and home-equity loans are tougher to get, and many people are turning to credit cards to cover expenses. Consumers’ credit card balances are up from $825 billion at the end of 2005 to $971 billion as of September 2008. The 30-day delinquency rate is about 5 percent, the highest it’s been since late 2002.
All of this presents consumers with troubling trends:
But there are also some bright spots:
As worries about defaults grow, some card companies are lowering credit limits. If that happens to you, it could bring your
balance dangerously close to its limit and ding your credit score, which could set off similar actions from other creditors.
Lenders often raise finance rates for customers who default on any of their payments or carry too much debt, or simply because
the economy is in the doldrums.
Consumers with tightened credit also face the economic headwinds of rising unemployment and increasing energy prices, complicated by federal rules that increase the minimum payment consumers must make on their credit-card accounts. If you’re behind on card payments by 60 days or more, issuers routinely raise your interest rate to maximize their return in case you default and they can’t collect the balance, making it even more difficult to dig out. It’s not surprising that collection actions are up some 20 percent this year.
Even when an account goes to a collection agency, the credit-card industry still tries to make a buck. Some debt-collection agencies buy unpaid accounts and try to entice debtors to take out new cards onto which their old debt will be transferred. The company might even forgive part of the debt as a teaser. Some of those cards are among the worst. For example, Resurgent Capital Services issued a Visa card to a debtor with a 19.9 percent annual rate and a scant $50 credit limit that could easily be crossed with a single purchase, triggering a $19 over-limit fee. The $35 annual fee charged at the end of the first year also could increase the chance of going over the limit, unless the credit line is raised.
To help you do that, from among hundreds of credit cards we found a dozen that are worthy of your consideration (see The best credit cards, available to subscribers). We also identify traps to watch out for.
Consider the case of John Carmichael of Rensselaer, N.Y., who earlier this year saw the interest rate on his Bank of America Visa card triple overnight from around 8 percent to almost 25 percent. He has an excellent credit rating, pays more than the minimum, and never missed a payment or a due date on any of his credit accounts, he says. So why the rate hike? The bank told him that his debt-to-income ratio was too high. His card balance was almost $1,000 below his limit.
Carmichael asks whether banks are altering credit card rates to compensate for their mortgage-related losses. “Is it not possible that the mortgage crisis, not solely caused by consumers, is causing financial institutions to try to bail out on the back of consumers?” he wrote in a letter to Consumers Union, the nonprofit publisher of this magazine.
Analysts say Carmichael is on to something. Several issuers have doubled or tripled credit card rates for some customers in recent months, even though many were current on their bills. Banks rely on credit cards for a large part of their revenue, says Dennis Moroney, research director at TowerGroup, a business consulting company. “When the mortgage meltdown hit, they turned to credit cards to make up for their slacking profits,” he says, “only to scale back this year due to a rising fear of more defaults.
Mixed bag for consumers
Some economists fear that a wave of defaults from overextended credit cardholders is the next shoe to drop in the mortgage crisis. Now mortgages and home-equity loans are tougher to get, and many people are turning to credit cards to cover expenses. Consumers’ credit card balances are up from $825 billion at the end of 2005 to $971 billion as of September 2008. The 30-day delinquency rate is about 5 percent, the highest it’s been since late 2002.
All of this presents consumers with troubling trends:
- At-risk borrowers are facing tightened credit lines and higher interest rates.
- Periods for teaser rates are becoming shorter, and balance-transfer fees are becoming standard.
- Fixed rates on cards are as high as ever, despite Federal Reserve rate cuts that have reduced banks’ cost of borrowing by
4.25 percentage points since September 2007.
- Variable interest rates have come down a bit, making the best cards especially attractive and providing relief for people
who carry a balance.
- Consumers with excellent credit scores can earn lower rates, higher credit limits, and good rewards, particularly for gas
and cash-back cards.
- Some card issuers have eliminated onerous fee structures and interest/finance charges ahead of proposed federal legislation
and banking rule changes that if adopted would curtail or eliminate many of these gotchas.
Consumers with tightened credit also face the economic headwinds of rising unemployment and increasing energy prices, complicated by federal rules that increase the minimum payment consumers must make on their credit-card accounts. If you’re behind on card payments by 60 days or more, issuers routinely raise your interest rate to maximize their return in case you default and they can’t collect the balance, making it even more difficult to dig out. It’s not surprising that collection actions are up some 20 percent this year.
Even when an account goes to a collection agency, the credit-card industry still tries to make a buck. Some debt-collection agencies buy unpaid accounts and try to entice debtors to take out new cards onto which their old debt will be transferred. The company might even forgive part of the debt as a teaser. Some of those cards are among the worst. For example, Resurgent Capital Services issued a Visa card to a debtor with a 19.9 percent annual rate and a scant $50 credit limit that could easily be crossed with a single purchase, triggering a $19 over-limit fee. The $35 annual fee charged at the end of the first year also could increase the chance of going over the limit, unless the credit line is raised.
Posted: September 2008 — Consumer Reports Magazine issue: October 2008
