Downturn brings big changes to card industry

Image: Jerry and Julie Hamman
The picture window of Jerry and Julie Hamman's new fifth wheel camper frames their modest Peru, Ind., home. The Hammans have more than $80,000 in credit card debt.Jon Sweeney / Special to MSNBC

Julie Hamman knew she had too much credit card debt.

Hamman and her husband, Jerry, had even cut up most of their credit cards in 2007, putting the remains in a Mason jar. It was a daily reminder of what they were trying to do: pay off, rather than add to, the $87,000 in debt they’d amassed from medical bills, vacation expenses, vehicle costs, insurance payments and other items.

Still, Hamman was unprepared for how the recession would thwart her plans. Over the past year, she said, many of her credit card companies have raised her interest rates substantially, tripling her total minimum monthly payments to about $2,300, while also lowering her credit lines. She said the changes have come even though she has made all her payments on time.

“I have been trying to pay them off, but it gets more difficult and more difficult,” said Hamman, 62, who lives in Peru, Ind. “The payments keep going up and up and up.”

The recession has had a dramatic effect on the credit card industry, which has racked up billions of dollars in losses amid a sharp increase in the number of people who can’t pay their bills because of a job loss or other financial hardship. That, in turn, has had a ripple effect even on some credit card customers who have always paid their bills on time.

“The game has changed dramatically. If you do anything — and I mean anything — to show that you’re a higher financial risk right now, you will, the next month, get an increase in your (annual percentage rate) or a decrease in your credit limit,” said Bill Hardekopf, chief executive officer of, a credit card information Web site.

In a one-year period from 2007 to 2008, credit card issuers raised their interest rates on nearly one-quarter of all cardholder accounts, according to the Pew Safe Credit Cards Project, which cites data the banks provided as part of government discussions about new credit card regulations.

In the first quarter, the delinquency rate for bank-issued credit cards rose to 1.32 percent, from 1.19 percent a year ago, according to TransUnion, which compiled the data from randomly sampled credit reports in its 27 million-strong database.  

The regulations, known as the Credit Card Bill of Rights, will make a number of changes aimed at protecting customers from unexpected fees, and will make it much more difficult to raise interest rates without notice. The new rules don't go into effect until next year.

Credit card issuers have always assigned people an interest rate and credit limit based on the potential risk they pose to default.

The formulas credit card companies use to determine risk are closely held, but experts say a change can be triggered by anything from a missed payment on another card or bill to a sudden increase, or decrease, in credit card usage. Only making the minimum payments can also be a red flag to credit card companies, Hardekopf said, as can simply having high credit card debt.

‘We’ve done everything right’
Many credit card customers say the unexpected changes to their bills have crimped their budgets when they could least afford it, making them less likely to be able to pay their bills and more likely to give up on credit cards altogether.

“We’ve done everything right. We’ve paid our bills, we’ve been responsible … and yet we’re being penalized because other people aren’t paying their bills,” said Laura Kolb, who is working to pay off $50,000 in credit card debt, mostly amassed during a difficult divorce.

Kolb, 42, said she has recently seen the interest rates on several of her cards double and even triple. The Ballwin, Mo., resident, who remarried last September, has cut back sharply on everything from clothes for her kids to shoes for herself as she tries to pay off the debt.

“We’ve just totally changed our lifestyle until we can get out of this,” she said.

She and her new husband also have vowed that they are “done with credit cards.”

“We seriously have said, OK, it’s a no-credit policy,” Kolb said. “Unless there’s a catastrophe and we really need something, it’s cash. And once those cards are paid off, we don’t see any reason to give them business again.”

Consumer advocates say that reaction has become more widespread.

“What’s happening now is consumers are so scared. They don’t trust their banks at all,” said Robert D. Manning, author of “Credit Card Nation.” “Instead of going shopping or going out to dinner, they’re trying to pay down their debt as much as possible.”

Card companies try to contain losses
Credit card companies say they are trying to adapt to the drastically changed economy.

“The economy took a huge nose dive, and banks that issue credit cards obviously weren’t immune to that,” said Peter Garuccio, a spokesman for the American Bankers Association, the industry’s trade group.

Bank of America recently raised rates on customers who had an annual percentage rate under 10 percent and were carrying a balance, spokeswoman Betty Riess said.

“The increase in rates on those accounts reflects current economic conditions, where our costs of providing credit have significantly increased,” she said.

Overall, the cost of borrowing money has declined sharply over the course of the recession, but the rising rate of credit card defaults has left many credit card companies coping with higher-than-usual losses.

The Bank of America unit that includes credit and debit cards lost nearly $1.8 billion in the first quarter of 2009, compared with earnings of $867 million in the same period a year earlier.

In general, she added, the company periodically reviews customer accounts and may reprice an account if a person is deemed riskier than in the past.

A spokeswoman for JPMorgan Chase declined a request for an interview but said in a statement that the company has worked to better manage potential losses as a result of the recession. Chase posted a $547 million loss in its card services division for the first quarter of 2009, compared with earnings of $609 million in the comparable year-earlier period.

“Chase is continuously evaluating whether our customers’ credit lines are most appropriate for the customer and his or her need and ability to repay, and will make adjustments accordingly,” the statement said.

The climate today is a stark about-face from just a few years ago, when many people routinely received several credit card offers a week, each with a higher credit limit than the next, and each offering enticingly low introductory interest rates.

“The era that we’re coming out of … was an era where credit was freely given,” Hardekopf said. “There were all sorts of people who applied for a credit card, and got one, that probably shouldn’t have had a credit card.”

About 46 percent of U.S. families were carrying a credit card balance in 2007, according to the Federal Reserve’s most recent Survey of Consumer Finances. The median balance for those with credit card debt was $3,000, a 25 percent increase over just three years earlier. However, because some Americans are holding extremely high levels of debt, the average balance was $7,300, an increase of about 30 percent over 2004.

Pieces of 20 shredded credit cards fill a Ball mason jar in the living room of Julie and Jerry Hamman's Peru, Indiana home. The Hamman's collected $87,000 in credit card debt and paid more than $18,000 in interest in 2008.Jon Sweeney

Overall, Americans are now carrying about $930 billion in revolving debt, a type of debt that is almost entirely made up of credit card balances, according to the most recent data from the Federal Reserve. As of March, credit card holders were paying an average interest rate of 13.08 percent on that debt, up from a recent low of 11.87 percent in May 2008, according to the Federal Reserve.

In retrospect, many say the era of easy credit and copious credit card offers made it all too easy to build up high-cost debt.

“You don’t realize how fast it’s racking up on you and then all of a sudden you sit back and you go, ‘Oh, God,’” said Janice Doyon, 48, who owes about $30,000 in credit card debt, mostly from home improvement expenses.

Doyon and her husband, who earn about $160,000 a year combined, also have seen their interest rates raised and credit limits lowered in the past year, even though she said they are longtime customers who have paid their bills on time and have not seen their circumstances change. She said she’s had little luck renegotiating with the companies.

“What’s frustrating is we’re not deadbeats,” said Doyon, who lives in Winder, Ga. “We are all good people who have tried to do the good thing in life.”

Medical bills and motorcycle expenses
The Hammans, in Indiana, had carried some credit debt for years, but their balances began to increase substantially beginning in late 2005, when Jerry, now 68, had to have surgery for kidney stones. Because the couple has very little health insurance, and Jerry wasn’t yet eligible for Medicare, they ended up putting about $30,000 in medical bills on their credit cards.

They also charged a used car on one of their low-interest credit cards, figuring it offered a better rate than a car loan, and built up debt with other items such as car and home insurance premiums, income taxes and vacation and motorcycle expenses.

Still, between income from their jobs, Jerry’s pensions and his Social Security, the couple makes about $109,000 a year — enough, Julie Hamman said, that they were in no danger of missing their payments.

But now, facing such steep increases in their credit card bills, the Hammans think their best hope is to refinance their house and fold the credit card debt into her mortgage. Still, a mortgage refinance is proving difficult since Hamman said her credit score has suffered.

Even if they can refinance, it won’t solve the couple’s financial problems completely. Hamman has found out that she needs surgery on both her knees, at a likely cost of more than $50,000, and her insurance will likely cover only a small portion of it. But Hamman said she is so determined not to put the costs on her credit cards that she’s even considering waiting three years until she turns 65 and qualifies for Medicare.

“I’m still walking. I’m not in a wheelchair, and I’m not using a cane,” she said. But, she conceded, “It’s very painful.”

As more credit card customers grow disgruntled, some experts say they’re seeing credit card companies become more willing to negotiate with individual cardholders.

Arnab Gupta, chief executive of the consulting firm Opera Solutions, which has worked with some credit card providers, said he thinks credit card companies initially took a “blunt instrument” approach to the recession, raising rates on a wide swath of people who might stop paying their bills because so many people in similar circumstances had.

Now, he said, he’s seeing some credit card companies look more closely at individual card holders’ records, and try to find a more workable solution.

“Some institutions are doing a much better job than others, but they’re all beginning to come to the realization that the blunt instrument approach is not (working),” he said.

Other changes are on the horizon, including the new Credit Card Bill of Rights.

The American Bankers Association has warned that the new law will mean that less credit is available, and what credit is available will come at a higher price.

“The new rules are a sweeping change (and they) will have an impact for consumers, not all of which can be good,” said Garuccio, the organization’s spokesman.

Others say such concerns are overblown. Nick Bourke, project manager with the Pew Safe Credit Cards Project, said the new laws will allow consumers to make more informed decisions about how much credit card debt they want to take on, because they will have a more concrete idea of the long-term costs and terms.

“I’m not worried that these rules are going to make it more expensive to use credit cards, or make it less available,” Bourke said.

Still, between the new regulations, changes in the banking industry and a potential change in consumer spending habits as a result of the recession, some wonder if Americans will ever go back to the type of environment that allowed so many people to easily run up high credit card debt.

“People say, ‘Oh, in three or four years we’ll be back to where we were,’” said Manning, the “Credit Card Nation” author. “I say, ‘Oh, we’ll never be back there.’ ”