Fed expects higher interest rates for consumer credit cards
Filed under: Credit, Credit Cards
Banks continue to take advantage of the waiting period for the CARD Act to lower credit limits, increase interest rates, and raise the minimum credit scores required for a credit card during the past three months, according to the quarterly survey released this week by the Federal Reserve. This survey of loan officers also found 75% of banks that make credit card loans do not expect to be compliant with the provisions of the legislation until February 2010, the month these reforms go into effect.
The Fed conducted its survey in October and included loan officers at 57 U.S. banks and 23 U.S. branches of foreign banks. The survey asked loan officers about the impact of the Card Act and here's what they found:
- 54% of banks have already increased or are planning to increase the credit card APR on their good (prime) customers.
- 74% of banks have already or will increase APRs on those with poor credit (subprime).
- Just over half of the banks have cut or will cut the credit limits of their credit card customers.
- It's tougher to be approved for a credit card today. 47% of the loan officers said they have or will raise the credit score requirements for prime customers qualifying for a credit card. That number jumps to 53% for subprime customers.
- Almost 40% of the banks had increased or will increase the annual fees on credit cards.
And this report only looks at past actions. We're still seeing changes on a weekly basis with Bank of America this week joining the ranks of credit card companies that are testing the addition of annual fees for some of its customers ranging from $29 to $99 after telling both Sen. Chris Dodd (D-CT) and Rep. Barney Frank (D-MA) that it would stop re-pricing its existing credit card customer base.
"These new annual fees are unethical and contradictory to the promise the bank made to both lawmakers and to its customers," Odysseus Papadimitriou, CEO of Cardhub.com, wrote in his column at Walletblog.com. "Additionally, it is our belief that if Bank of America moves forward with its plans to raise membership fees on existing customers into 2010, it will be breaking the laws mandated under the CARD Act, which is slated to take effect in February of next year."
A Bank of America spokesperson told Papadimitriou that it's plans to increase annual fees on existing credit card accounts into 2010 would not be a violation of the CARD Act.
But Papadimitriou says that, "it is precisely because of the lack of explicit language in the bill that Bank of America could find itself in trouble. Whether or not the increase of annual fees on existing credit card accounts is illegal under the CARD Act will be left up to regulatory interpretation."
Papadimitriou believes that a 1996 Supreme Court case involving CitiBank (Smiley v. Citibank) proved that it was the opinion of the General Counsel of the FDIC that the term interest includes "numerical periodic rates ... annual fees, cash advance fees, and membership fees." Using this case, Papadimitriou contends that interest rates and annual fees are linked by regulatory definition.
Banks are continuing to play games to find ways around the CARD act. Congress made a huge mistake giving the banks so much time before the act took effect. With all the changes in interest rates, credit limit cuts and now the addition of annual fees, the banks will likely have made all the changes they want before the act takes effect and no one is stopping them. Can't the Federal Reserve, as the primary agency with consumer responsibility, act to protect consumers more quickly?
Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."
Reader Comments (Page 1 of 1)
11-12-2009 @ 5:27PM
J said...
Its simple don't use their credit cards and/or cancel your cards and take your business elsewhere, if all banks take on the same path then you know what ? That will simply create competition which then will make one bank take the path that many banks are not going to take and give us back the apr rates we once had without fees. Nevertheless as for me and my household we shall simply cancel every card we have, I'm sure that will start a chain reaction.
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11-22-2009 @ 6:56AM
"o" said...
The remedy to these unfair increases may not be easy but it can be very effective. For starters, pay off most of, if not all of the balance that you presently have now. Remember, the lending institutions are attempting to make more money off of the balance you are presently carrying, that is why they are raising the rates. Don't let them do this especially if you are a customer that has a good history/standing with your institution. Secondly, what ever you do, don't cancel the cards you have lowered or eliminated balances with. Cancelling cards in good standing will lower your credit score ( Along with other items, less positive information they have to assess you ). Thirdly, try to get into the habit of actually spending cash or using your debit card (less dependency on the credit card). Finally, if you do zero that balance, throw a little jab of you own, add five or ten dollars extra, that monthly statement with a credit that they have to spend money on should eat them up a little. Win! win! you learn better money management, the credit cards companies make no money off of you, and, if everyone does this, they just may have to lower those rates!
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