Bank of America told thousands of its cardholders in recent weeks — even those with good payment histories — that they faced a rate hike from 9 percent to as high as 28 percent if they didn't pay off their balances at the old rate and stop using their cards. The bank, the largest credit card issuer, since its 2006 acquisition of MBNA, says it's all part of its "periodic" review of customer credit risk.
Consumer advocates cried foul. It's one thing for card companies to raise rates on customers who are behind in their payments or whose credit scores decline greatly, but quite another for on-time customers with no apparent black marks against them to be put in the higher-rate camp.
Bank of America gives card holders the chance to opt out of the higher rate by paying the account off, but such a request must be made in writing. "Consumers need to be aware of what is going on," says Curtis Arnold, founder of cardratings.com.
Whoa. Just a few years ago, card companies were stumbling over each other to woo new accounts, offering all sorts of incentives, like zero-interest periods and lavish rewards programs, to get people to sign up.
Then again, so were mortgage brokers.
Fierce competition in the credit card business and a wave of huge mergers concentrated the industry in the hands of a few major players: Citigroup, JPMorgan Chase, Bank of America, Capital One Financial and American Express.
Discover is also in the mix, spun off from Morgan Stanley last July. These survivors are reverting back to business models that include healthier profit margins — from the difference between what it costs them to borrow funds and what they charge for lending to consumers.
Smaller banks are no different. Some of the worst-offending cards are those targeted to borrowers with weak credit, the most vulnerable group. The New Millennium card, issued by New Millennium Bank of New Brunswick, N.J., is a secured card with a $59 annual fee, higher than is typical. Adding up the other costs to open an account, cardholders have to fork over $140 just to have access to money they put on deposit with the bank to back their spending on the card. It's basically like paying money for access to your money.
Millennium card also has no grace period, meaning a 19.5 percent interest rate on charges kicks in as soon as a charge is made. "That's unheard of," Arnold says. The account is secured with the borrower's own money. "There's no risk for the issuer."
Chris Van der Stad, president of New Millennium Bank, says the card offers a "good value" and a chance for borrowers to rehabilitate their credit ratings by paying on time and being responsible. As for the lack of a grace period, he says, "It's very expensive to process a low-balance card. That's why we have no grace period."
Unsecured cards can be just as unattractive. HSBC markets the American Dream card, which, for a 14.99 percent annual percentage rate, offers cardholders the chance to enter a cash lottery for every purchase. This links two favorite American hobbies: shopping and gambling. But consumer advocates find the link "disturbing," Arnold says.
A spokeswoman for HSBC said, "The American Dream Card is but one of many credit card products HSBC offers. Consumers should choose a card that meets their individual needs."
Then there are the high-fee, low-limit cards, which have gotten some issuers in trouble with regulators. First Premier Bank of South Dakota paid $4.5 million last summer to settle charges with the New York State attorney general over deceptive marketing, but its offer for a gold MasterCard remains pretty much the same: a catchy 9.9 percent interest rate but $256 of fees on an account that opens with a limit of $300.
Like First Millennium, First Premier is not selling access to large lines of credit, counters Chief Executive Dana Dykhouse; it is offering the chance for people with poor credit histories to rehabilitate themselves.
Dykhouse says the marketing practices the New York attorney general objected to, which were industry practice, have been eliminated. He likens his business to the high-risk auto insurance business. "People we provide service to have speeding tickets in their credit."
There are many iterations on this type of card. Another, the Total Visa card by Plains Commerce Bank, also of South Dakota, offers a tantalizing (ha!) 19.92 percent interest rate and fees of $200 for an initial credit line of $250.
Not surprisingly, the over-limit fees for such cards are high, too. In both these examples, it's $29.
Rewards programs also seem to offer a lot, but the card holder gives up much in return. Three such cards have rates of nearly 30 percent for borrowers who fall behind on their payments, including the Marathon Platinum reward card and the Speedway SuperAmerica Platinum MasterCard, both issued by JPMorgan Chase, and the Citgo Preferred Visa, issued by Citigroup.
A spokeswoman for Chase says, "We pride ourselves on having an extensive array of products so customers can find one that fits their needs."
Of course, this is also playing out against a backdrop of declining spending and rising delinquencies. Bank profits have been hard-hit by subprime mortgage exposure. At Bank of America, just to continue the example, fourth-quarter profits were down 95 percent over the previous year, after write offs for credit exposures, trading losses and rising credit costs.
Credit card revenues for all of 2007 were up 4 percent, to $25 billion, but profits were down 35 percent on rising credit costs.
What better way to get things back on track than to cull your customer base and increase rates where you can get away with it?
And since rising delinquencies are an industry-wide problem, the other major credit card issuers are acting the same way.
"The only thing they can do is raise rates," says David Robertson of the Nilson Report, who sees rates climbing — even for responsible borrowers — into the 20 percent range and above.
If rate hikes are unavoidable, consumers should look at other card features to decide which one to choose, says Arnold at cardratings.com. Penalty fees, for starters, grace periods and other details. Try to ignore the hype about the perks of the cards, Arnold says. "It is often the fine print that kills."