What's up wth all the CC Apr increases here lately ?

[tmac01]

I have had 5 CC co. send me letters stating " due to the economic hard times we are raising the apr of your CC to yahdi yahdi yahdi !!!! " I have good credit a good salary and no lates on my CR and they first lower my CL's now they are raising APRs ? WTH I mean when is enough enough from these Banks !!!!! Anyone else having this happen to them ?

[jq26]

tmac, you can thank Congress. This is a result of the new rules being implemented on banks. The simple fact is that most users of credit cards are not very profitable if you pay on time and pay off your balance. The banks were depending on many with less than stellar credit and payment histories to subsidize those who are great credit customers.

Now banks are forced to eliminate much of the fees and interest they depended on. In return, banks are jacking up rates.

IMO, there are going to be wholesale credit card account closures in the near future. So just hang onto what you have as long as there are no annual fees. And make sure that you don't carry balances!!

[tmac01]

yeah I have a few CC's with balances but the only CC that has not jacked me around was my CU ! Thanks jq26

[thomassl]

Last week I also received a letter from my Citicard stating the same thing about the economy and they will be raising my interest rate to 29.999% starting on November 30th of this year! My account is not delinquent and just about two months ago, I had to battle them over their error which sent my rate up from 11% to 24%! They fixed the problem only to come back two months later with this "economy" excuse. I don't ever plan to use this card at this rate and will opt out of it. There was just a recent article on MSN Money last week about the banks starting this before the changes hit in February!

[deep-n-debt]

So is there nothing that can be negotiated with the credit card company to lower the rate? My daughter, which DID fall far from the tree (me, lol) has always been very responsible with her money. She is almost 25, works a full time job and is a full time student. She is using these cc's a little bit to fill the gap when her job doesn't meet her financial needs. Now they have jacked her rate up to almost 30%. She is going under , and FAST. This is ridiculous. She can't keep up with this and maintain her studies, job, regular monthly expenses....etc.

Does anyone know if she were to address them in writing to lower the rate, if that does any good. I suppose if it did, everyone would be doing that right? Well there has to be something she can do to fight these rate increases.

Does anyone have solid advice??

Thank you in advance.

[jq26]

You can typically opt out of the increase. The card will no longer be able to be used and payments would be made at the current apr until paid off.

I'd call the credit card company and explain the situation. They do not want to see a default either. I've heard of them working with customers and even dropping interest rates to avoid defaults. But she'd probably have to agree to close the card to receive special rates.

[tmac01]

Originally Posted by deep-n-debt

So is there nothing that can be negotiated with the credit card company to lower the rate? My daughter, which DID fall far from the tree (me, lol) has always been very responsible with her money. She is almost 25, works a full time job and is a full time student. She is using these cc's a little bit to fill the gap when her job doesn't meet her financial needs. Now they have jacked her rate up to almost 30%. She is going under , and FAST. This is ridiculous. She can't keep up with this and maintain her studies, job, regular monthly expenses....etc.

Does anyone know if she were to address them in writing to lower the rate, if that does any good. I suppose if it did, everyone would be doing that right? Well there has to be something she can do to fight these rate increases.

Does anyone have solid advice??

Thank you in advance.

I saw a great documentary about this called Maxxed Out and these CC Co's go right at students who they know can't pay once they raise that interest rate. They thrive off of late payment fees and do what they can to squeeze every penny out of these students. It's really sad because some students have to quit school and even some committed suicide over this. I'm not trying to say your daughter would do this but if she needs a CC and her rate is going up I would recommend like jq 26 said to opt out then have her deal only with a CU as they have the best rates and will not jack her around....Good Luck

[jq26]

There is an element of truth to that. By the time I graduated college, I had an affiliated platinum card with a $12,000 limit, no job, and no way to pay back the $7000 that was on it. I carried that growing balance until BK at age 26.

Not sure who was more of an idiot- the alumni squeezing their future graduates for what probably amounted to a hundred dollar kickback into the alumni fund OR me for taking my "free" beach towel in exchange for years of debt service.

[Bigwoodystyl]

Originally Posted by deep-n-debt

My daughter, which DID fall far from the tree (me, lol) has always been very responsible with her money. She is almost 25, works a full time job and is a full time student.
...

She is using these cc's a little bit to fill the gap when her job doesn't meet her financial needs.

Those statements are contradictory. Using credit cards to "fill the gap" is terribly irresponsible. The sooner she realizes that, the better off she'll be.

This is the precise reason why her APR must be raised immediately (because as she continues to "fill the gap" her risk score depreciates with an alacrity that few borrowers realize until it's already too late).

Originally Posted by deep-n-debt

Does anyone have solid advice??

There is no great secret.

Live beneath your means, save the excess and get off the debt treadmill.

[Bigwoodystyl]

Originally Posted by jq26

tmac, you can thank Congress. This is a result of the new rules being implemented on banks. The simple fact is that most users of credit cards are not very profitable if you pay on time and pay off your balance. The banks were depending on many with less than stellar credit and payment histories to subsidize those who are great credit customers.

Now banks are forced to eliminate much of the fees and interest they depended on. In return, banks are jacking up rates.

I disagree with that. Banks are not raising the rates on less than prime borrowers in order to subsidize the accounts of prime borrowers. Instead, they are raising rates on subprime borrowers out of necessity in order to account for the cost of doing business with them in the first place. Further, they are doing so out in front of legislation which will soon make dealing with less than prime borrowers hugely unprofitable. Very soon, if you don't have perfect credit, you will not be able to own a credit card. Many who have been working to restore their credit will not find credit limits slashed or rates raised, but instead will find their accounts have been permanently closed.

Contrary to popular belief, banks would rather have every customer PIF by the due date. Zero risk means less capital necessary to back credit card bonds. And, it also means AAA paper they can sell at higher rates. Further, it would eliminate a lot of the cost of doing business of Collections, Recovery, Legal, etc. Smart (read: good) underwriting downgrades risk. Further, credit cards were once looked at only as a tool to further strengthen customer relationships. It wasn't that long ago that one had to have a deposit account at an institution in order to even think about applying for a credit card there.

Banks do turn a profit on their good credit card customers and at almost zero level of risk. In theory, banks could have an unlimited number of these customers and they would always turn a profit.

Several years ago, in a practical, real-world sense, the profitability of subprime credit card lending evolved. There were/are those who are financially illiterate and are willing to carry a balance month-to-month, letting that balance rise ever closer to the limit, treating the credit account as an extension of their income, or as a "plastic loan". These accounts are headed to charge off and everyone knows it months before it happens except the customer who is usually in denial. The only way banks can hope to make any money off these people is by really raising up their fees in the hopes that the customers will continue to make minimum payments long enough that the cost of doing business with them breaks even. You can argue that this rate-jacking is what causes the customers to charge off in the first place, but you'd be wrong. These are the types of customers who will borrow every penny they can, b/c they have no discipline. If the banks didn't raise the fees, these cardholders would continue to make the minimum payment and rise ever closer to the limit still, and they would charge off anyway, albeit about a year later. The evolution came when banks decided to study these customers' behaviors intensely in the hopes of profiting from them, instead of discarding the customers altogether, which had been the previous business model. [Note: the previous business model was always successful at much less risk and that is the direction they are heading back to today.]

In so doing this, there are others in the above-mentioned class of account holders who live for years teetering on the edge of dispair, but always carrying a balance and always paying hundreds of dollars per month in interest. These are the customers who made credit card lending insanely profitable. These are the customers who will get an occasional fee-waiver or be given the opportunity to "skip-a-payment". These are the customers who when they threaten to close their accounts are given slightly better terms to stick around. The banks do love these customers, but only b/c they have to given the remaining demographics of their account holders.

From an underwriting perspective, one can't predict who will do this. And, extending credit to customers who aren't worthy borrowers in the hopes of uncovering one of these above-mentioned profitable customers is absolutely shoddy underwriting and a poor way to manage risk. That has been borne out in the subprime debacle.

Banks are paying for this now, and have started the process of rectifying this poor underwriting by lowering limits and raising rates. Soon, their accounts will be wholly closed as well. It's only a logical step, considering the pending legislation that essentially punishes banks for trying to do business with less than prime borrowers.

[Bigwoodystyl]

Banks, especially in today's market, would really prefer that every customer have perfect credit and that every customer PIF and that nobody ever defaulted.

Prime borrowers and large transactors who PIF have quickly become the most coveted market segment.



Rewards programs are now seen as the panacea to attract top customers.

A lot of credit card rewards programs across the board have been significantly increased on the higher-end products. Chase introduced Sapphire, Slate, Ink and Freedom Plus, which are all designed specifically for consumers making over $200K per year. Each of the rewards programs were increased on these accounts, at the same time that Chase reigned in rewards programs on their lesser products.

AMEX has increased benefits on their high-end platinum cards, while dropping benefits on their Blue and Clear cards, which were marketed toward the non-traditional AMEX customer.

Last month, I received a $100 bonus check in the mail as a thank you for being a loyal Citi cards customer (I didn't realize they had cash to burn, lol). If transactors who don't pay finance charges were as unprofitable as you think, then card issuers wouldn't be increasing their competition to gain their marketshare...

[Amerikaner83]

I disagree.

Banks (for the sake of argument let's loop ALL CC issuers in this category) make their cash off of the people who carry a balance, and thus, pay the interest. People who do NOT pay interest make ZERO money for the banks (or CC issuers). Plain and simple. People carry high balances are GOLD for CC issuers...no question. Why...? Because they pay the interest!

[Bigwoodystyl]

It's really not that simple. You have the issuers being ostensibly crammed on four fronts and then being prodded in the back about data security so as not to draw to much national attention to the issue of cyber crime.

1. Regulatory pressures from the CARD Act, which aim to cut down on allegedly "abusive" credit card practices that prolong cardholder debt.

This bill itself makes subprime credit card borrowers a liability instead of an asset. Essentially, the costs of doing business with these types of individuals, including, but not limited to collections, recovery and legal, can no longer be offset by interest and fees. Worse, it becomes harder to change the terms of the agreements on borrowers, even when the borrowers' economic situations change. Their risk portfolio is not static; however, the terms of their credit card agreement will become "stickier".

The only thing to do with these poor customers is to slash their limits, raise their APR and/or close their accounts... now! before the changes can take effect. Don't kid yourself, banks no longer want customers who don't PIF. They are not "GOLD".


2. Economic conditions driving net chargeoffs higher while at the same time reducing interchange revenues.

Economic conditions are reducing credit card issuers’ revenues from interchange as borrowers transact less on credit cards. The inability of borrowers to meet their obligations and pay their outstanding balances pushes credit card issuers to review their underwriting policies and tighten up their lending policies, weeding-out those who are considered high risk. Further, it creates even more demand for high-end transactors. Low-end transactors have all but disappeared.


3. Interchange Scrutiny

The government is also looking at regulating interchange through the Credit Card Fair Fee Act. This act seeks to give merchants the possibility to negotiate interchange fees instead of following a grid established by the card networks (Visa/MC, AMEX, Discover, Blackhawk, etc.).

Interchange is of course the fees charged to merchants when accepting a credit card transaction and paid to credit card issuers. The fees are quite high for smaller merchants and incredibly high for those merchants who don't invest in card scanners. "keyed in" transactions can cost as high as 10% of the transaction amount plus an additional $5-$10.


4. Merchant lobbying.

The largest merchants in the country have banded together in recent months and have successfully lobbied for lower interchange rates and fees directly from card networks. The next group of largest merchants is now lobbying. This is expected to take a large amount of revenue away.



Other:

These top challenges are intertwined with a plethora of other challenges that card issuers face, such as data security issues and possibility of sensitive data compromise from hackers and cyber-criminals, identity theft and in many cases, obsolete PCI Compliance protocols.




Right now, customers who don't pay interest but do use their cards frequently make a staggering amount of money for the banks in terms of interchange fees. It's a heck of a lot more than "ZERO". (In fact, it's more money per capita than banks make on interest and fees... there are just less of these high-end transactors than there are subprime borrowers).

Exploiting the interchange fees and keeping and attracting these valuable customers is the industry's only hope in the short-term, while at the same time, cutting bait with those who carry balances and pay interest... no matter how profitable you might think these customers, they simply aren't worth the risk.

In order to attract high-end customers, you may have seen increased product placement for top of the line credit card products and you may have seen more advertisements in Forbes, Money, Kiplinger's, US News for these types of products. Also, local bank branches and wealth management offices, where many high-end customers turn to for advice. These are the channels in which these products will be featured. There won't be heavy Internet promotion and there won't be massive direct mailings. They only want to pick the ripe apples this time; they don't want every apple.



In any event, my impetus in writing all of this is that it's important to note that these subprime customers have never once subsidized the accounts of those who don't pay interest or fees. That's just not how the credit card business model ever functioned. The class of transactors has always been profitable by itself and with a lower cost of doing business. Subprime borrowers only ever subsidized other subprime borrowers and later this market segment became profitable in and of itself. But, don't forget that credit cards were profitable before subprime and, depending on market factors, they can be profitable after subprime.

[jq26]

Originally Posted by Bigwoodystyl

Their risk portfolio is not static; however, the terms of their credit card agreement will become "stickier". The only thing to do with these poor customers is to slash their limits, raise their APR and/or close their accounts... now! before the changes can take effect. Don't kid yourself, banks no longer want customers who don't PIF. They are not "GOLD".......

.....In any event, my impetus in writing all of this is that it's important to note that these subprime customers have never once subsidized the accounts of those who don't pay interest or fees. That's just not how the credit card business model ever functioned.....

Excellent information on what became a great thread. The first portion of the quote above I always agreed with. Which is part of my objection to these new intrusive laws. Risk portfolios are not static but now Congress has forced bankls to treat them as such. They're going to shut down cards in large numbers imo.

The second portion about subsidizing prime borrowers- I suppose I have been brainwashed by many posters on this site (which tend to fall over themselves to be highly "anti-bank" and "pro-borrower"). I just couldn't comprehend how a borrower with a $5000 credit line with no annual fee who makes one purchase per year, pays the balance the next day, and receives a cash back check for doing so can be profitable when you factor in overhead. I suppose the truth is that this particular prime customer may not be profitable, but since the pool of prime customers don't all manage their spending and balances monolithically, this particular prime customer isn't of any concern so long as they don't poison the pool by defaulting.

[Bigwoodystyl]

Originally Posted by jq26

Excellent information on what became a great thread. The first portion of the quote above I always agreed with. Which is part of my objection to these new intrusive laws. Risk portfolios are not static but now Congress has forced bankls to treat them as such. They're going to shut down cards in large numbers imo.

The second portion about subsidizing prime borrowers- I suppose I have been brainwashed by many posters on this site (which tend to fall over themselves to be highly "anti-bank" and "pro-borrower"). I just couldn't comprehend how a borrower with a $5000 credit line with no annual fee who makes one purchase per year, pays the balance the next day, and receives a cash back check for doing so can be profitable when you factor in overhead. I suppose the truth is that this particular prime customer may not be profitable, but since the pool of prime customers don't all manage their spending and balances monolithically, this particular prime customer isn't of any concern so long as they don't poison the pool by defaulting.

1.
I'm not sure what will happen. Closing the accounts wholesale is what makes sense from an underwriting perspective, but that may have negative consequences. Most of the largest card issuers are owned by bank holding companies that rely on those same customers in other lines of business. Would you want to get a mortgage, car loan, insurance or deposit product from a company who just rudely closed all your credit accounts?! Also, most of these holding companies recently took billions in TARP funds. Nevermind that the majority of banks are paying it back in full + dividends, taking a line of credit from the feds, courtesy of Joe Taxpayer, and then closing Joe Taxpayer's personal credit cards leaves a sour taste in the mouth.

Maybe some of the banks can spin off their card issuing subsidies and claim they were never closely affiliated, leaving the new companies free to assess risk in the most logical way possible.




2.
Well, even if the pool of prime customers did manage their accounts monolithically, the issuers still make money. As long as customers are using their cards, the issuers make money. It doesn't matter if the balance is paid back the very next day, Interchange isn't returned. Also, the customer you mentioned who uses his credit card only once per year and immediately pays the balance, costs next to nothing to maintain outside of the sunk costs of initially establishing his account. [there aren't many issuers who give cash back for making only one purchase per year] This customer isn't hugely profitable, but he doesn't cost anything either. Also, having a portfolio full of these types of customers, makes selling the bonds/debt much more attractive as a fixed value investment.

However, to clarify, when I say high-end transactors, I mean transactors who make many purchases and/or make purchases for large amounts and then don't pay finance charges. I don't necessarily mean borrowers with good credit (although most prime borrowers are a subset of high-end transactors)...

[Bigwoodystyl]

Going forward:

Right now, there are a lot of subprime credit card borrowers carrying a large amount of debt. Historically, a high percentage of these borrowers have charged off as uncollectible. We all know that some accounts are sold for pennies on the dollar. Some accounts are kept in internal Recovery for years where either a CA is assigned to collect or a law firm is assigned to file suit or sometimes nothing, depending on which way the wind is blowing; arbitration was nice while it lasted. Contrary to what the brainwashers may believe, chargeoff isn't a magic trick whereby no principal is lost by the issuer due to tax advantages. There are real losses incurred in the hundreds of millions; however, these losses were always subsidized by other subprime borrowers who were willing to pay double digit variable interest rates (that changed as their risk score changed) and $40 late fees and over the limit fees.

Closing accounts and raising interest rates in front of legislation are both solid ways to manage future risk, but the fact remains there is a likelihood that a good number of accounts that look OK today will result in chargeoff, which, this time, will not be subsidized by future interest and fees. Even accounts that are effectively assessed, managed and closed at today's balance are still subject to chargeoff if they don't pay. The ROI on assigned CA's is not good and the issuers know this. In fact, CA's are only hired so as to invoke a bit of fear in their other borrowers. Without fear of reprisal, issuers have always felt the rest of the profitable [but uneducated and unsophisticated] subprime borrowers would join their brethren and default. Hiring a CA is rarely profitable; there were always ulterior motives in doing so.

Therefore, ironically, due to their inefficiencies, collection agencies will likely be left on the outside looking in at a time when collection is most needed. If that's not irony, I don't know what is.

The point is: something will need to be done to make up for the losses incurred by future chargeoffs. Ultimately, I don't know what will happen, but I doubt issuers will take the upcoming losses lightly. An increase of lawsuits filed by the OC (like Citi used to do) would be logical, but that too comes with unintended consequences and its expensive.


My $0.02
That's where the crux of the problem with the reform is. Card issuers merely followed the law to make profits and now, due to changing laws, it's conceivable that they'll be on the hook for tomorrow's liabilities, which were yesterday's assets. Destroying someone's future business prospects is one thing, but taking their money via Congressional fiat is something else entirely. It doesn't get much more unamerican.

[jq26]

Originally Posted by Bigwoodystyl

Destroying someone's future business prospects is one thing, but taking their money via Congressional fiat is something else entirely. It doesn't get much more unamerican.

I agree to a degree, but almost all law prospectively affects businesses. It happens all the time. The argument is more of one of degree. One shining example of this is the Tax Reform Act of 1986. It demolished S&Ls and wiped out many law abiding tax paying real estate investors.

Going a bit further, the Supreme Court addressed at what point a law becomes an unconstituional "taking" in 1992 in Lucas v. South Carolina. The case has to do with limitation of real property rights, but the diminution of value of the property, whether it be wetlands or credit card accounts, to the owner is quite similar.

http://www4.law.cornell.edu/supct/html/91-453.ZS.html

[Bigwoodystyl]

Re: 1986
Point taken, but I'd argue the S&L were overleveraged into risky investments with insufficient capital. They were likely to collapse regardless.


Re: Lucas
Interesting reading... I especially like Scalia's writing style and I also like the way he refers to Blackmun in his opinion. Hilarious.

I'm not a lawyer, but I tend to feel that privately owned real land is a good bit different from commercially owned credit card receivables.

If I've read correctly, Lucas won... it was determined the taking of Lucas' land was compensable, primarily because his economic interest had been diminished 100%? This, even though, the property Lucas bought was essentially a tidal wetland that had been covered in water several times previously and as late as only a few years before he bought it. [My opinion: he should have had some common sense and not paid 1 million dollars for 2 lots in the midst of a swamp!]


Re: Lucas contrasted to CARD Act.
There was a purpose in the state taking Lucas' property, i.e., to prevent erosion on the beach of the Isle of Palms. I don't see a purpose in stopping credit card issuers from effectively managing risk. IMHO, it's political grandstanding at the expense of a profitable enterprise. It's incredibly intrusive and it's still unamerican whether or not there is a precedent for this sort of thing.

[tmac01]

In the end what is fair is fair ! If you have been a loyal customer for years and have never had any lates then why be penalized and punished for that ?

[Bigwoodystyl]

Originally Posted by tmac01

In the end what is fair is fair ! If you have been a loyal customer for years and have never had any lates then why be penalized and punished for that ?

Even if you've been a great customer previously, if your risk profile changes, it's time to slash your limit, raise your APR or close your card or all 3. Even loyal customers become risky when their situation changes. If you want fair, you need to go to The Fair. Eat a funnel cake for me.