It pays to be rich if you need a credit card.
A year after sweeping credit card regulations upended the industry, banks are showering perks and rewards on big spenders with sterling credit scores. And they're socking customers with spottier histories with higher interest rates, lower credit limits and new annual fees. In some cases the riskiest customers are being dropped altogether.
"When you look at the regulations, it's a net positive for consumers," says Peter Garuccio, a spokesman for the American Bankers Association. "But there have been some trade-offs."
The widening differences between how customers are treated is largely the result of new constraints on card issuers. The Credit Card Accountability, Responsibility and Disclosure Act, or the CARD Act, was signed into law with great fanfare at a time when borrowers across the country were struggling to make payments. It swept away several practices that for years had grated on cardholders.
A key change is that issuers can no longer hike rates on existing balances or in the first year an account is open. The penalty charge for late payments is also capped at $25 per violation. And monthly statements must also clearly spell out the projected interest costs of making only minimum payments.
The regulations are already transforming the cards on the market. To make up for the drop in revenue, banks are imposing new annual fees and hiking interest rates — but mostly for those with the lowest credit scores. The best customers are more prized than ever.
Here's how credit card offers are changing for consumers in three credit brackets:
The A-list (excellent credit)
A clean payment history and a healthy appetite for spending put these customers at the top of the credit pyramid.
And the courtship of this group is intensifying. Prior to the recession, 44 percent of all credit card offers were mailed to this group. Now they receive 64 percent of all mailings, according to market researcher Synovate.
The terms are getting sweeter too:
- Customers can earn rewards at five times the standard rate with a premium card being tested by Bank of America. The acceleration applies to select purchases, and the $75 annual fee is waived for those who have at least $50,000 with the bank.
- Generous balance transfer options abound. Think 0 percent interest for up to a year on new purchases, and as long as 18 months on transfers.
- Foreign transaction fees are a source of annoyance for the well-to-do, who travel abroad more often. American Express, Chase and Citi have all announced they're doing away with the fees on select cards marketed to their wealthiest customers.
In other cases, banks are going all out with enhanced perks. With Citi's new ThankYou Prestige card, customers who book airline tickets get one complimentary ticket for a companion each year. The card's annual fee is $500. That underscores another attractive trait among these customers — the willingness to pay handsomely for premium services.
This group's propensity to spend is also attractive because issuers collect fees of 1 to 2 percent from merchants whenever their cardholders make purchases.
The B-list (good to fair credit)
The next swath of consumers have solid credit histories, but may have more modest spending habits or make an occasional late payment. Many of these customers are seeing an uptick in offers for rewards cards, but the terms aren't dramatically different.
A few rungs down the credit ladder, however, are those with spottier records. These customers make late payments often enough to raise red flags or regularly carry balances close to their credit limits. They may not be financial disasters, but they're not entirely reliable either.
Most of these B-listers still won't have any trouble getting approved for a new credit card, but they'll have to agree to higher interest rates and annual fees, even for plain-vanilla cards.
Consider the following:
- A new $59 annual fee is being imposed on select Bank of America customers. Notice of the fee was mailed out this month to cardholders who fit certain risk profiles, such as carrying a balance close to their credit limit or regularly making late payments. Customers were also targeted if they didn't have any other relationship with the bank, such as a checking account or mortgage.
- The move by Bank of America isn't unusual. Most credit cards marketed to this group now have annual fees of about $39 to $59. A year ago, the same customers could easily find similar cards with no fees.
- The average interest rate offered to those with merely fair credit scores is 22.57 percent, up from 19.07 percent about a year ago, according to CardHub.com.
The higher prices make sense in light of the new limits on penalty fees and rate hikes, which make these B-list customers far less profitable.
Consumer advocates say knowing the costs upfront is nevertheless an improvement to the bait-and-switch tactics employed before the regulations took effect. In the past, introductory interest rates could quickly escalate and catch cardholders off guard.
The prices are simply more transparent now, says Ruth Susswein of Consumer Action.
The D-List (poor credit)
For the riskiest consumers with an established streak of defaults and late payments, the recession isn't the only reason the options have dried up.
The CARD Act means banks can no longer freely raise rates or impose fees to manage their default risk, says Dennis Moroney, a credit card analyst with TowerGroup. So when they issue cards, "they have to have their ducks in a row from a risk point of view."
There's no doubt the riskiest customers have become toxic in this environment. In 2009 alone, banks wrote off a record $83.27 billion in credit card debt.
It's no wonder that card issuers have slashed available credit overall since 2007 by nearly a third, or $1.5 trillion, according to TowerGroup.
With bigger issuers such as Capital One the choices for customers with tarnished credit are pretty much limited to secured credit cards. These cards are intended to help borrowers rebuild credit, but require deposits and offer small credit limits. There are often activation fees as well.
Another telltale sign of the industry's growing reluctance to wade into this market? First Premier, a long-time player in the subprime credit arena, is no longer offering new unsecured lines of credit.
After the CARD Act took effect, the bank tested a card that charged $75 in first-year fees for a $300 credit line. It had a 79.9 percent interest rate. Those terms apparently haven't been a success.
It's unclear whether First Premier will resume offering unsecured credit cards. If not, consumer advocates say the disappearance of such easy-to-get, high-cost cards wouldn't be such a terrible development for those struggling to dig out of debt.