Credit card reform

Posted by admin On May - 25 - 2009

(By Christina Rexrode, crexrode@charlotteobserver.com) New rules about credit cards, signed into law Friday and cheered by consumer watchdogs, won’t be good for everybody. The rules’ unintended consequences are already starting to appear, as banks lower the lines of credit extended to many cardholders.

Mostly, the new laws will protect riskier borrowers – the ones who spend over their limit or carry big balances from month to month. Normally, those borrowers are a treasure trove for the banks, who can charge them interest rates of 30 percent or more.

But the new laws will make those customers less lucrative for the banks, and that means the banks will probably try to recoup their losses by putting the squeeze on the not-so-risky borrowers. In addition to decreased lines of credit, analysts predict banks will start charging more annual fees or slimming down rewards programs, which hurts
even the most responsible cardholders.

Eric Stevens, an administrative assistant for The Duke Endowment in Charlotte, was upset when Bank of America recently chopped his card’s limit to about $1,900 from $3,000, a cut that crimped his plans for getting the brakes fixed on his 2005 Nissan Altima. Stevens, 45, usually carries a balance but said he always pays on time, usually more than the minimum requirement.

When he called the bank to complain, the customer representative “started telling me how a lot of people in the recession aren’t paying their bills,” Stevens said. “I stopped him right there. I said, ‘I pay my bills. I’m not in that category.’”

The card issuers don’t specify how they pick which customers get their limits lowered, instead saying they are re-evaluating accounts to make sure each customer has an “appropriate” line of credit.

Charlotte-based Bank of America, the country’s No. 2 credit-card issuer, may adjust customers’ lines up or down “based on the risk profile and performance of the account,” said spokeswoman Betty Riess. In letters to cardholders, the bank says it periodically reviews accounts “to ensure we are offering each cardholder the most appropriate credit line. In some cases, we discover we have extended customers more credit than they are likely to use or need.”

Curtis Arnold, founder of CardRatings.com, said issuers such as American Express may use “behavioral targeting,” in which they flag consumers whose spending habits change: for example, a Macy’s shopper who begins patronizing Wal-Mart instead. The banks also might consider a person’s location, clamping down on customers in the states with the highest unemployment rates or the biggest housing declines, Arnold said.

“The thing that bothers me,” he added, “is that someone with good credit who hasn’t missed a payment, is carrying a balance but has been paying it religiously – traditionally that customer was the bread and butter of the industry. But now that’s what represents a liability.”

In the Federal Reserve’s most recent lending survey, 54 percent of banks said they had lowered credit lines on consumer credit cards. Bank analyst Meredith Whitney estimated in March that more than $2 trillion of available credit card lines will be cut this year – about 40 percent of the total.

Robin Blackwood, who works for a public-relations firm in Greenville, S.C., was surprised when she recently got a letter from American Express saying her card’s limit had been hacked to $6,000 from $12,000.

“I remember thinking it was weird, because I didn’t have anything extra going on with my finances, as far as other credit cards or a home or a car loan, that would raise a red flag,” Blackwood said.

Blackwood, 35, didn’t bother to call the company, since she didn’t want the $12,000 limit to begin with. But she doesn’t like how American Express has been able to raise or lower her limit whenever it pleased. Issuers give themselves broad leeway in credit-card contracts to change the terms of most customers’ cards.

“It would be nice if it made a little more sense, or if you just knew what to expect,” she said. “Am I going to get a letter one day that says ‘Your credit card has been closed’ and I have no access to money?”

Like Blackwood, many consumers and analysts acknowledge that ramping down credit lines isn’t entirely bad for the economy: In recent years, banks doled out credit cards to borrowers who didn’t really deserve them, or who don’t need the temptation of a giant credit line.

And for cardholders who carry a balance – about 60 percent do – a decrease in their credit limit is probably more palatable than an increase in their interest rate. It’s difficult to measure how many consumers max out their cards or are close to it; but Whitney estimates that overall, consumers are using less than 20 percent of all available credit-card lines.

The clampdown on credit cards is also being driven by the economy. Banks, already burned by defaults on mortgages and home-equity loans, are worried that credit cards will be the next big wave of loan losses.

Bank of America charged off $1.6 billion in credit-card loans in the first quarter, up 69 percent from the same period a year ago. The bank’s credit cards accounted for less than 8 percent of total loans and leases but 23 percent of charge-offs, or loans the bank doesn’t expect to collect on. Analysts expect defaults at virtually all banks to continue increasing as unemployment rises.

Stevens, the credit-card user from Charlotte, said he understands that banks are eager to cut their exposure to credit cards, since so many people have abused them.

He just doesn’t want to be lumped with them.

Stevens said he paid for all purchases in cash until a couple of years ago, when a teller at Bank of America informed him that he qualified for a credit card. Now, he still pays for most things in cash, but he likes the peace of mind that the credit card brings: “So if something does happen, I don’t have to wait till payday to do something about it,” he explained.

“I really thought I was getting ahead in the world,” he added. “I think that’s why it hurt so much.”