The small print looms larger
Time to stop tossing those notices about your credit cards

By Ylan Q. Mui
Washington Post Staff Writer
Sunday, November 8, 2009

Clear out the holiday catalogues, the Christmas cards and the coupons, and your mailbox may look less than festive. Now that the credit card industry is required to warn you about any changes they're planning, you should be scrutinizing what you think is only junk mail.

When you open that mail, you may discover that your interest rates are rising, or switching from fixed to variable. In addition, some card issuers are instituting higher balance-transfer fees and raising teaser rates -- or eliminating them all together. The warnings come courtesy of sweeping reforms required by a law enacted this spring that is being phased in over the next year.

"We would urge everyone to read that mail," said Ellen Bloom, director of federal policy for the advocacy group Consumers Union. "Check twice."

The new law puts strict limits on how and why issuers can raise interest rates and impose penalties. One of the first provisions took effect in August and required credit card companies to notify customers 45 days before any rate increase and give them a chance to cancel the card and pay off the balance at the existing rate.

That's what happened to Mary Lynn Slayden, 58, of Haymarket. She has used the same card for more than a decade -- it was a lifesaver when her husband was stationed in Australia as a naval officer, she said -- and made payments on time. But last month she got a letter alerting her that the rate on her balance of roughly $15,000 would increase from a fixed 5.9 percent rate to a variable 9.9 percent in December. The notice cited the new federal regulations.

"I've been very concerned about this," Slayden said. "We are so not a risk to them."

She said she doesn't want to cancel a credit card she's had for such a long time and is worried about the impact closing the account could have on her strong credit score, which she said is in the 800s. She has thought about transferring the balance to a card with a lower interest rate but would incur a fee of about 3 percent.

"To indicate that federal legislation is responsible for these new terms for our credit card is in my view financial propaganda attempting to absolve this institution from making a purely business decision," Slayden wrote in a letter to her issuer.

The banking industry had warned lawmakers that the new regulations could result in rate increases because they restrict issuers' ability to adjust rates for riskier customers. For example, starting in February, the law will prohibit credit card companies from increasing interest rates because a cardholder has missed payments on other accounts, a practice known as universal default.

While that helps protect some consumers from what regulators say were excessively punitive measures, the industry said it also means that customers in good standing will see their rates rise. In addition, some cards have reportedly raised annual fees for users who do not carry a balance.

"We basically socialized the bearing of the risk," said Ken Clayton, managing director of card policy for the American Bankers Association, a trade group. "That's why good customers sometimes have to bear the cost of the risk that others pose."

Issuers say that customers' financial strain has also taken a toll on the industry's business: Credit card bills are often the first to go unpaid when money is tight. According to the ABA, bank card delinquencies -- payments that are at least 30 days overdue -- rose to a record 5.01 percent of all accounts during the second quarter of the year. Issuers must raise rates for paying customers to help recoup those losses, the group said.

A study by the Pew Charitable Trusts released last month found that advertised rates on about 400 credit cards this summer had jumped as much as 23 percent. In addition, the study reported that many issuers were shifting customers from fixed to variable rates, which would ease some of the notification requirements.

"It's difficult to say why this is happening," said Nick Bourke, manager of the Safe Credit Cards Project at Pew. "I think it's clear that issuers are responding to the continued difficult economic times. . . . I think it's also possible that the timing has something to do with getting these changes into place before the new law takes effect."

The sour economy and the new legislation have also cut down on promotional offers from card companies. According to research firm Mintel, direct mail from issuers in the third quarter fell 71 percent compared with a year earlier, to 391 million letters. The company also found that the promotions that were mailed were not as attractive.

The average promotional interest rate was 12.53 percent, up about one percentage point from the first quarter, Mintel said. About 16 percent of the offers included a balance-transfer fee of 4 or 5 percent, which the company said was all but unheard of a year ago.

Mintel also found that the length of introductory offers is getting shorter. A year ago, about half of issuers touted introductory rates that lasted 13 months. Now, that number has shrunk to 5 percent. About 21 percent offer six-month introductory rates, the minimum time that will be required by the new regulations.

But the ABA said estimates of the rate increases are overblown because many people pay off their balances early, resulting in a lower rate. According to the Federal Reserve, which tracks interest rates based on consumer payments, the average rate during the third quarter was 14.9 percent, up from 14.43 in the previous quarter.

Still, some consumer groups have accused card issuers of hiking rates to take advantage of the final months before the next round of reforms take effect. Last week, the House voted to speed up the deadline for those reforms, but the proposal still must clear the Senate. Meanwhile, Sen. Christopher J. Dodd (D-Conn.) introduced legislation recently to freeze interest rates on credit cards temporarily.

Credit issuers oppose such legislation. Clayton said that people can cancel their cards if they are unhappy with their rates. Under the new legislation, they may opt to shut down their cards if the rate is increased and pay off any balances at the original rate.

"I would say that consumers should just say no and vote with their feet," Clayton said. "Credit card companies continue to want consumers' business. They can't stay in business if they don't meet the needs of their customers."

But consumer advocates say the legislation was intended to relieve the pressure on consumers by forcing issuers to follow tougher rules.

"The burden is on the consumer that way," said Bloom of the CFA. "We would like to flip that."

Beth Biedronski of Rockville said she is shopping around after the interest rate on her two credit cards shot up from less than 10 percent to close to 20 percent in recent months. She said she charges $4,000 to $5,000 on her card each month but pays off the entire balance with each bill. She said the fact that she doesn't pay finance charges makes her even more frustrated that her rate increased. Biedronski has used Web sites such as BillShrink, which helps consumers compare cards, to find a better offer.

"It penalizes the good users and it rewards the at-risk individuals," she said. "We will definitely be investigating other cards."

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