As banks stick even good customers with higher rates and tighten up on credit lines and balance transfers, you need to think about protecting yourself.
The notice would have been easy to dismiss as junk mail, since Bank of America's name wasn't on the envelope. But former banker LaShana Jefferson of Portsmouth, Va., recognized the return address as a Bank of America processing center, so she took the time to open the letter.
Inside, she found a notice that the 8.79% interest rate on her credit card was about to soar to 24.99%. At first she thought there was a mistake.
"I've never paid late. I haven't opened any new accounts or made any big purchases," said Jefferson, who used to be a project manager in Bank of America's government-cards division and says her credit scores are in the mid-700s. "There's nothing adverse that would explain this."
- Talk back: Has your card company jacked up your rate?
Jefferson didn't realize at the time that she was among a fleet of Bank of America customers whose rates had been jacked up recently as the lender, along with other credit card issuers, struggles with higher delinquencies and fallout from the credit crunch.
The new world of not-so-EZ credit
Bank of America customers haven't been the only ones affected. Issuers that last year ravenously pursued folks with troubled credit and proffered 0% rates to people with good credit have made abrupt changes in course, including:- Sharply raising rates and lowering credit limits for customers with no obvious blotches on their credit.
- Making balance-transfer offers less generous, with higher rates, shorter terms and bigger fees.
- Shutting down accounts that haven't been regularly or recently used.
- Throttling back direct-mail solicitations and becoming pickier about extending credit.
Direct-mail solicitations for credit cards dropped 14% in the fourth quarter of 2007, according to research firm Synovate. Washington Mutual trimmed its mailings by 73% from a year earlier, and Citibank cut back by 52%.
WaMu and HSBC, which cut its mailings by 34%, were once among the most aggressive pursuers of subprime borrowers, said Andrew Davidson, the vice president of competitive tracking services for Synovate's financial-services group. Discover, which trimmed solicitations by 50%, and Citi suffered setbacks because of the subprime-mortgage crisis.
Healthy and determined to stay that way
Credit card issuers aren't experiencing the same meltdown that afflicted the mortgage market, however. For example:- Delinquencies (accounts paid late) and charge-offs (accounts written off as uncollectible) are below long-term averages, according to Moody's research.
- Credit card issuers are still able to package and sell their debt to investors. In fact, Moody's reported that card issuers set a record in 2007 for such sales of asset-backed securities.
And not all issuers are trimming their sails. Chase, which had less exposure than many of its competitors to subprime-market losses, has stepped up its solicitations dramatically, mailing out 62% more offers in 2007's fourth quarter than it did a year earlier. One out of four offers received by the average household at the end of last year, Davidson said, came from Chase.
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Even that company has tweaked its approach, however. Chase has cut back on low-rate offers made to "gamers," those folks who routinely bounce balances from one low-rate card to the next.
In the words of Chase spokeswoman Megan Stinson, the issuer is "targeting special offers to individuals who are more likely to be engaged customers with us."
In fact, getting a sweet low-rate balance-transfer offer is getting tougher all around as issuers tighten up. Offers under 4% still exist, said Curtis Arnold of CardRatings.com, but may last for only a few months or come with fees that have high or nonexistent caps. That contrasts sharply with the "fee-free, 0% for the life of the balance" offers that once were prevalent, he said.
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Issuers are also boosting the credit scores needed for their better offers, Arnold said, as well as closing unused accounts and lowering credit limits for borrowers deemed to be higher risk.
The squeeze is on
Many of these changes are designed, Arnold said, to slide under the radar of customers and regulators. Lower limits, for example, are less likely to prompt outrage than shutting an active account entirely."They want to squeeze folks as much as they can without making them so mad they write to their congressman," Arnold said. "Credit card companies are under the gun right now."
In 2007, Congress conducted hearings on issuers' most controversial practices, including "any time, any reason" rate increases and "universal default" penalties, which allow issuers to increase rates if they discover a borrower was late to pay another lender. In February, Rep. Carolyn Maloney, D-N.Y., introduced a bill that would ban those practices and require 45 days' notice of any changes in rates or terms. (Issuers can now change virtually anything about a credit card agreement with just 15 days' notice.)
- Talk back: Has your card company jacked up your rate?
Not all issuers have managed to stay under the radar, however.
Bank of America, for example, drew attention by doubling and even tripling interest rates on some customers who haven't been late or otherwise suffered serious deteriorations in their credit profiles. An article on the issue by BusinessWeek (and republished by MSN Money) drew scores of affected customers to the Your Money message board.
The number of customers who received the rate increase notices is unknown, although Bank of America spokeswoman Betty Riess said 94% of the issuer's cardholders over the past year had rates that stayed the same or were lowered.
The rate increases that did occur weren't arbitrary, she said, and were "based in part on the credit profiles of individual customers."
"When we review individual accounts for risk," Riess said, "we take into account a customer's performance with us as well as external credit criteria, such as taking out numerous loans, using substantially all the credit available to them or defaulting on loans to other lenders."
How to protect yourself
Jefferson said she doesn't fit that description, although she was initially told her rate had been increased because her credit reports showed she was using too much of her available credit.At the time, her balance of $4,000 equaled about 62% of her available $6,500 limit. She had three other credit cards with limits totaling $7,500, but "all the others have a zero balance," said Jefferson, who now is a project manager for a publishing company. "So (the phone representative) was basically telling me that the rate increased because I was using their card."
Video on MSN Money
How to improve your creditMSN Money columnist Liz Pulliam Weston offers simple tips for boosting your credit scores.
Jefferson's story had a relatively happy ending. She had the cash to pay off the card, and did. Bank of America then offered to change her rate to 8.99%, only slightly higher than her original rate.
But the experience left her soured on the company.
"I know times are hard and they've lost a lot of money recently," Jefferson said, "but to penalize good customers is not good business."
If you're carrying a balance on any credit card, you'd be smart to watch the mail (or your e-mail, if you've gone paperless) for notices of any changes. If you get one, consider the following game plan:
- Don't accept a rate increase or other change as final. Call the issuer to ask why the increase happened and whether anything can be done to reverse it.
- Check out your options. If the issuer won't back down, check with your other credit card companies to see if you can transfer your balance at a low rate. If not and your credit is good, you may be able to land a better balance transfer deal by opening a new account. MSN Money, CardRatings.com, Bankrate.com and LowCards.com are places to check for offers.
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- Opt out. If you can't transfer your balance, inform the issuer in writing that you want to close your account and pay it off under the old terms.
- Stop playing the game. Carrying credit card balances not only costs you money, but it leaves you vulnerable to the changing whims of card issuers. Resolve to win the game the best way you can: by not carrying balances or paying interest.
Liz Pulliam Weston's new book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Published Feb. 28, 2008
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