Holding on to a credit card with a low annual percentage rate is becoming even harder.
Citigroup has increased interest rates for as many as 15 million U.S. credit-card accounts, according to an article published late Tuesday in the Financial Times, citing anonymous sources. It is still unclear how high the new hike will leave customers' rates or whether all card-holders will be affected equally. Citi did not return a call seeking comment.
The rate increases were revealed just months before the new consumer-protection rules in the Credit Card Accountability Responsibility and Disclosure Act are scheduled to go into effect. The law, which was signed by President Obama in May, aims to shield consumers from unfair practices and improve transparency associated with sudden changes in their credit-card companies' policies.
Citigroup has increased interest rates for as many as 15 million U.S. credit-card accounts, according to an article published late Tuesday in the Financial Times, citing anonymous sources. It is still unclear how high the new hike will leave customers' rates or whether all card-holders will be affected equally. Citi did not return a call seeking comment.
The rate increases were revealed just months before the new consumer-protection rules in the Credit Card Accountability Responsibility and Disclosure Act are scheduled to go into effect. The law, which was signed by President Obama in May, aims to shield consumers from unfair practices and improve transparency associated with sudden changes in their credit-card companies' policies.
Citi isn't alone. In April, Bank of America notified fewer than 10% of its customers of a rate increase, which went into effect on their June statement, says BofA spokeswoman Betty Riess. Some of those increases were the result of the bank's periodic reviews of individual credit risk, which examine how individuals use all of their credit and whether they've defaulted on loans to other creditors, she says. Discover says the firm increased interest rates on a small number of cardholders who were paying late or not paying at all. American Express spokeswoman Desiree Fish says the company notified some card holders in June that it is increasing interest rates by two to three percentage points effective July. “From time to time we have to make changes to adjust to the economic environment," she says.
Spokespersons for Bank of America and American Express say their firms haven't announced policy changes that are specifically associated with the credit-card legislation. Wells Fargo and Discover spokespersons declined to comment on future strategies.
Interest rate hikes are part of a long-term trend that started before Congress passed the new legislation, says Ken Lin, CEO of CreditKarma.com, which offers free credit scores and free tools to help consumers improve their scores. And consumers can expect to see more rate increases over the next few months, he says.
Spokespersons for Bank of America and American Express say their firms haven't announced policy changes that are specifically associated with the credit-card legislation. Wells Fargo and Discover spokespersons declined to comment on future strategies.
Interest rate hikes are part of a long-term trend that started before Congress passed the new legislation, says Ken Lin, CEO of CreditKarma.com, which offers free credit scores and free tools to help consumers improve their scores. And consumers can expect to see more rate increases over the next few months, he says.
Here is a quick update on rate hikes and how they might affect you and your credit:
What did Citi do?
Citi increased interest rates on between 13 million and 15 million U.S. credit-card accounts that are co-branded with retailers, according to the FT.
After Citi became aware of the FT story, the firm issued the following statement: “We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles.”
Before the most recent hike, Citi credit-card holders of co-branded cards who were carrying a balance saw their rates increase by an average of three percentage points between January and April, the largest increase among the top card issuers for that period, according to a Credit Suisse report cited by the FT.
Citi increased interest rates on between 13 million and 15 million U.S. credit-card accounts that are co-branded with retailers, according to the FT.
After Citi became aware of the FT story, the firm issued the following statement: “We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles.”
Before the most recent hike, Citi credit-card holders of co-branded cards who were carrying a balance saw their rates increase by an average of three percentage points between January and April, the largest increase among the top card issuers for that period, according to a Credit Suisse report cited by the FT.
Why is Citi doing this?
Citi said in its statement that these changes reflect the rising cost of doing business in the credit-card industry.
Citi and other credit-card issuers' actions were triggered in part by a rise in the number of consumers unable to pay their debt, an increase in the cost of extending credit and a shrinking number of opportunities to securitize loans, says Travis Plunkett, the legislative director at the Consumer Federation of America. Securitization involves packing loans into securities and selling them to investors; with the economy still in decline, fewer investors are willing to buy these assets because they don't expect a healthy return.
Card issuers are also making policy changes in an effort to undo their own errors, Plunkett says. In the run-up to the credit crisis, issuers were extending credit to high-risk individuals who may not have been able to afford their own borrowing habits. Consumers' ability to repay their debts has worsened as the unemployment rate has climbed, Plunkett says.
Could other credit-card issuers plan similar moves?
Card holders can expect more card issuers to change their terms, particularly by increasing interest rates, before the new credit-card legislation goes into effect, says Linda Sherry, a spokeswoman for Consumer Action, a nonprofit consumer education and advocacy organization that studies credit trends. Some parts of the law will go into effect as early as August.
The law is designed to make it more difficult for card issuers to engage in risk-based pricing, which includes increasing interest rates for risky behavior, like making a late payment on another lender's credit card, Lin says. “Historically, credit-card companies have had leeway to determine their own risk indicators and charge based on that, but with this legislation it'll be harder for them to do that,” he says. “They're trying to get ahead of the curve now.”
One way card issuers could beat the system is to spread higher interest rates among most credit-card holders, not just the risky ones, Lin says. That could mean higher rates for individuals who pay on time and have stellar credit histories. “The net effect is that everyone's pricing will go a little higher,” he says.
Citi said in its statement that these changes reflect the rising cost of doing business in the credit-card industry.
Citi and other credit-card issuers' actions were triggered in part by a rise in the number of consumers unable to pay their debt, an increase in the cost of extending credit and a shrinking number of opportunities to securitize loans, says Travis Plunkett, the legislative director at the Consumer Federation of America. Securitization involves packing loans into securities and selling them to investors; with the economy still in decline, fewer investors are willing to buy these assets because they don't expect a healthy return.
Card issuers are also making policy changes in an effort to undo their own errors, Plunkett says. In the run-up to the credit crisis, issuers were extending credit to high-risk individuals who may not have been able to afford their own borrowing habits. Consumers' ability to repay their debts has worsened as the unemployment rate has climbed, Plunkett says.
Could other credit-card issuers plan similar moves?
Card holders can expect more card issuers to change their terms, particularly by increasing interest rates, before the new credit-card legislation goes into effect, says Linda Sherry, a spokeswoman for Consumer Action, a nonprofit consumer education and advocacy organization that studies credit trends. Some parts of the law will go into effect as early as August.
The law is designed to make it more difficult for card issuers to engage in risk-based pricing, which includes increasing interest rates for risky behavior, like making a late payment on another lender's credit card, Lin says. “Historically, credit-card companies have had leeway to determine their own risk indicators and charge based on that, but with this legislation it'll be harder for them to do that,” he says. “They're trying to get ahead of the curve now.”
One way card issuers could beat the system is to spread higher interest rates among most credit-card holders, not just the risky ones, Lin says. That could mean higher rates for individuals who pay on time and have stellar credit histories. “The net effect is that everyone's pricing will go a little higher,” he says.
What can consumers do to protect themselves?
One option for most Citi card holders it to take advantage of the issuer's “opt out” option, which allows them to dodge a scheduled interest rate increase on their card on the condition they stop using it after its expiration date. Card holders can continue to pay off their balances after that. While this option helps avoid a higher interest rate, it means that you'll have one less credit card to use. Moreover, once the card expires, it could lower your credit score.
Another option is to call the card issuer and work out a personalized plan to pay off your balance. In some cases, issuers will allow holders to retain their original interest rates, provided they pay off their balances immediately, Plunkett says.
In general, card holders can transfer the existing balance on a card that gets hit with an interest rate hike to a new card that offers 0% APR on balance transfers from a few months to a year. (Typically, this requires a one-time fee of around 3% to 5% of the balance amount you’re transferring.) However, these offers have been disappearing over the past year and are given only to borrowers who are considered creditworthy, Plunkett says.
In any case, try to pay off balances as soon as possible. One of the last rules of the new law is that card issuers won't be able to raise your interest rate on an existing balance – just on purchases going forward, Sherry says. However, this part of the law isn't scheduled to take effect until July 2010, she says. That's why card issuers are putting rate hikes in place now, while they can make money off your existing balance.
One option for most Citi card holders it to take advantage of the issuer's “opt out” option, which allows them to dodge a scheduled interest rate increase on their card on the condition they stop using it after its expiration date. Card holders can continue to pay off their balances after that. While this option helps avoid a higher interest rate, it means that you'll have one less credit card to use. Moreover, once the card expires, it could lower your credit score.
Another option is to call the card issuer and work out a personalized plan to pay off your balance. In some cases, issuers will allow holders to retain their original interest rates, provided they pay off their balances immediately, Plunkett says.
In general, card holders can transfer the existing balance on a card that gets hit with an interest rate hike to a new card that offers 0% APR on balance transfers from a few months to a year. (Typically, this requires a one-time fee of around 3% to 5% of the balance amount you’re transferring.) However, these offers have been disappearing over the past year and are given only to borrowers who are considered creditworthy, Plunkett says.
In any case, try to pay off balances as soon as possible. One of the last rules of the new law is that card issuers won't be able to raise your interest rate on an existing balance – just on purchases going forward, Sherry says. However, this part of the law isn't scheduled to take effect until July 2010, she says. That's why card issuers are putting rate hikes in place now, while they can make money off your existing balance.
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