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by Sid Kirchheimer, AARP Bulletin, April 15, 2009
Bob Carr and American Express go back to 1967, when the now 75-year-old accountant got his first credit card.
For four decades, AmEx benefited from a customer who frequently used its cards, always paying on time and paying enough of his balance to keep his credit score in the “excellent” range. Carr benefited from unsolicited and continued offers for new cards, better rewards and increased credit lines—using that plastic on even everyday purchases to generate rewards for hotel discounts and other perks in his frequent travels.
Then came October, when Carr’s combined credit limit on four AmEx cards was slashed by nearly $37,000—about 60 percent—and the Pennsylvanian felt he was on the losing end of that previous “win-win” relationship. “With that reduction, my credit score suddenly dropped by 40 points,” he says. Three months later, AmEx cut his credit line by another 20 percent. “What bothers me is that AmEx said the second cut was made because my balance at the time was too close to my credit limit from the first credit line reduction … a situation they created.”
For Velma Courtney, 72, the punishment came from Chase in January: a $10-per-month user fee imposed on some 400,000 of its customers, which, she says she was told, “was required if I wanted to continue to use my Chase card.” Facing a class action lawsuit, JPMorgan Chase agreed in late March to cancel that monthly fee and refund $4.4 million in already collected funds. But “the timing and the principle” of the fee still anger the Iowa resident.
“I had lost my job in December, when the furniture store I worked in as a clerk closed due to the economy, and everyone advised me to go into bankruptcy. But I couldn’t do that in good conscience. So I tried to do the right thing: I used my savings and money from an inheritance to pay off all my debt. Then this fee came out of nowhere—when I had a zero balance on my card and living on $700 in Social Security.”
Can card companies do that?
Times are hard … and so are the feelings toward credit issuers from traditionally “good” cardholders. Like Carr and Courtney, hundreds of other AARP members have written Ask Sid with complaints of higher interest rates, reduced credit limits, the closing of underused accounts, and other penalties imposed in recent months—after years or decades of never making a late payment, exceeding their limits or encountering other problems with their credit. Many say they will never use those credit cards again. And most ask, “Can they do that?”
In a word, yes. At least for now.
Currently, most credit card user agreements dictate that “terms and conditions can be changed at any time for any reason.” And by changing those terms with interest rate hikes on existing balances, user fees and other penalties, credit card companies generate a lot of revenue—quickly—and appear more fiscally sound amid rising defaults. For a long time, credit card divisions were among the most profitable divisions of banks.
But that began changing in early 2008, and with last fall’s economic fallout, banks really started to tighten the credit reins—first, on customers with “black marks,” such as those who made late payments or those who perhaps used their plastic too freely. “When that didn’t raise enough revenue, they began to tighten the thumbscrews on everyone else,” treating good customers as if they were bad, says consumer advocate Ed Mierzwinski, who has tracked credit card practices for 20 years for U.S. PIRG, a federation of state Public Interest Research Groups.
It’s working. In 2009, credit card issuers—many of whom already received billions of dollars in federal bailout assistance—are expected to generate a record $20.5 billion in penalty fees. Last year, these fees, which also include late and over-the-limit penalties, produced $19 billion.
New rules in 2010
More than 60,000 cardholders have complained to the Federal Reserve about such penalties. New protections are scheduled to take effect in July 2010 that will limit what some consumer advocates deem “abusive” practices, such as credit card issuers suddenly raising rates, cutting credit lines without reason and imposing new maintenance fees. Under the new rules, for instance, interest rate hikes will require a 45-day advance notice, and rates cannot be raised on existing balances unless a payment is more than 30 days late.
Credit card companies deny that penalties on traditionally good customers, which began last year but have gone into full swing since October, are connected to the new federal regulations. “It’s a response to the increased cost of doing business in a weaker economy,” says AmEx spokeswoman Mona Hamouly. “It’s not related to any legislation.”
Chase spokeswoman Stephanie Jacobson, who declined to be interviewed or answer specific questions via e-mail, said in a written statement: “When necessary, we make changes to pricing, terms or credit lines based on borrower risk, market conditions, and the costs to us of making loans. We recognize that some of these decisions can have an impact on some customers, and we make these decisions with great care.”
What should you do?
You have choices to make, especially if you have always been a reliable credit cardholder.
* Curtail but don’t cancel. Your first reaction to recent penalties may be to close your account and take your business elsewhere. “But that could backfire and hurt your credit score—at least in the short term,” says Careen Foster, spokeswoman for FICO, a company that computes credit scores. “Opening new accounts is a sign of increased credit risk, especially in today’s economy.” And closing existing accounts, especially long-held ones, reduces your credit worthiness by increasing your debt-to-available-credit ratio. It’s better to use existing cards periodically, and forget about generating rewards, which are harder to redeem these days anyway.
* Keep balances below one-third of your limit. Just because you have a high credit limit doesn’t mean you should use it, notes Mierzwinski. “It’s no longer enough to just pay on time; your balance shouldn’t exceed one-half your credit limit, and, ideally, it should consistently be one-third or less of that.”
* Don’t consolidate. Another temptation may be to move all your existing balances to a low-rate “teaser” card. But that account can quickly max out, hurting your credit score. Your credit score will fare better if you instead pay down existing cards. If you’re making partial payments, pay off the card with the highest interest rate first while making the minimum payments on the others. That way, you minimize the amount of money you’re paying in interest.
* Complain … nicely. Credit card issuers are less likely than in the past to remove already issued restrictions, but they still do—especially for customers with a sterling past who go up the chain of command. When Citibank suddenly issued a double-digit interest rate hike on Mierzwinski, he complained to a supervisor that he always pays his balance in full and well before the due date, and was issued an interest rate lower than his previous one.
Sid Kirchheimer covers consumer and health issues for the AARP Bulletin.
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