Banks tighten credit; consumers hard-hit
7/2/2009NEW YORK - Credit card reform may be looming in the headlines, but for now, the fine print is hitting consumers hard.
Banks keep raising minimum payments, interest rates, and fees, continuing the credit tightening that began last year, even as cardholders fall further behind on payments.
The rate at which banks are writing off card debt as unpaid leaped to 10.6 percent in May, up more than 65 percent in a year and the highest rate since 1989, according to Moody's Investors Services.
"Clearly, households are under duress and are having trouble paying back their credit card balances," said William Black, a Moody's senior vice president.
They likely will continue to have a hard time as the economy struggles. Moody's expects the charge-off rate to continue climbing, peaking at about 12 percent around this time next year.
Meanwhile, Citi, Chase, and Bank of America - three of the six largest card issuers - have hiked the costs for using credit in the past few months.
Citi has boosted interest rates on some cards to as high as 29.99 percent, according to a Credit Suisse report. Chase raised rates as high as 23.99 percent, and also increased balance transfer fees to 5 percent of a transaction with a $10 minimum, from 3 percent with a $5 minimum, the report says. Capital One has kept rates steady for now, but warned consumers they will increase over the next year.
"We expect purchase APRs to continue to trend higher ahead of the recently passed Credit Card legislation, slated to go into effect February, 2010," Credit Suisse analyst Moshe Orenbuch wrote.
The credit card reform bill signed by President Obama in May restricts the changes banks can make on certain fees and charges. Still, since its passage, consumers also have been hit with higher minimum payment requirements, decreased rewards points values, higher penalty fees for things like over-limit purchases and late payments, and higher fees for things like cash advances.
Indeed, Citi alone is taking in about $500 million a quarter in new revenue from increasing interest rates, according to Richard Bove, a banking analyst with Rochdale Securities. "The company clearly needs revenues, there's no question about that," he said. "From the standpoint of the company, it's perhaps necessary. From the standpoint of the consumer, it's not particularly desirable."
Mr. Bove said banks also may expect further restrictions on their practices from the proposed Consumer Financial Protection Agency, which some fear may bring back restrictions in interest rates, along with limiting other charges. "I think the banks are trying to position themselves ahead of that bill," he said.
The Obama Administration sent proposed legislation to Congress Tuesday to create the agency and give it broad authority over credit cards, mortgages, and bank accounts.