Credit-Card Users Feel Pain as U.S. Banks Reap Gain
By Elizabeth Hester and Ari Levy
Credit-card companies, facing an increase in defaults and a decline in consumer spending, are raising some rates, adding fees and cutting credit lines as the Federal Reserve makes the most sweeping changes to the industry in 30 years.
The provisions, approved by the Fed today and effective July 1, 2010, may curtail lenders’ ability to raise interest rates on current balances, require they apply payments to charges with higher interest rates first and extend the time customers have to pay bills before incurring late fees. The Office of Thrift Supervision, which regulates savings and loans, and the National Credit Union Administration approved the rules today.
The new rules come on the heels of a $700 billion federal bailout of the financial system, including $125 billion invested in the nine largest U.S. banks. Recent moves by JPMorgan Chase & Co., Citigroup Inc. and other firms to add charges and decrease the amount of money cardholders can borrow at the same time they’re taking taxpayer dollars have angered some customers.
“People are totally confused,” said Mark Zandi, chief economist at Moody’s Corp.’s Economy.com. “The taxpayer is essentially a big owner in JPMorgan, Bank of America and Citigroup, and these are the folks who make credit-card loans. Many are asking, ‘So why is it that my credit-card loan got pulled? Why am I being charged a higher rate?’”
A decline in spending by consumers and a rising number of defaults are leading Citigroup, JPMorgan and other lenders to increase fees and interest rates for some customers and cut the amount others can borrow. The changes are intended to reduce risk and raise revenue.
Among the new charges are those for transferring balances from one credit card to another. Many lenders cap the amount they charge for this service. Now some are doing away with that limit and charging a percentage of the total, said Bill Hardekopf, chief executive officer of Lowcards.com, a Web site for consumers. Some banks are increasing fees for making purchases abroad.
Financial institutions also are expected to slash $2 trillion in credit-card lines in the next 18 months, Oppenheimer & Co. analyst Meredith Whitney wrote in a Nov. 30 report.
The changes are angering customers like Craig Marx, who has had a Chase card for 10 years and recently saw his minimum monthly payments climb to 5 percent from 2 percent and a monthly $10 service charge added to his bill. The bank also raised his rate from 3.99 percent above prime to 7.99 percent for the next two years, after which time it would become variable.
“I’m incensed,” the 52-year-old Palo Alto, California, resident said. “I feel like they’re making a calculated decision to make me go away as a customer.”
Stephanie Jacobson, a spokeswoman for JPMorgan’s card unit, declined to comment on a specific customer. In general, the situation Marx described involved a choice of either accepting the rate change or the service fee, she said.
JPMorgan, which received a $25 billion capital infusion from the Treasury Department in October, says its credit-card lending increased by 3 percent in the third quarter from the previous quarter. CEO Jamie Dimon, 52, said in a Dec. 11 interview on CNBC that the company was using government money to “do exactly what they want us to do, make more loans, help the economy grow.”
Citigroup spokesman Samuel Wang said in an e-mailed statement that the bank is adjusting rates for customers who haven’t been repriced in at least two years and that cardholders can choose not to accept the changes. If they do so, the bank can take the card away when it expires.
The Fed rules, proposed in May, were offered in response to criticism from Congress that the central bank was neglecting its authority to prevent abusive lending and strengthen consumer protections. It mirrors congressional efforts to curb practices that lawmakers say are harming consumers. Plans have been introduced by Senate Banking CommitteeChristopher Dodd and Representative Carolyn Maloney, a New York Democrat. Chairman
Rules curtailing some of the lending practices could hurt bank performance. Although many banks have other sources of revenue, a decrease in credit-card income “would seriously weaken a bank’s ability to absorb other shocks,” Gregory Larkin, senior banking analyst at Innovest Strategic Value Advisors in New York, wrote in an October 2008 research report.
“Fees are a very, very important part of how issuers make money,” Hardekopf of Lowcards.com said. “Issuers make over a third of their money on the fees that are charged.”
Innovest said that credit-card charge-offs could hit $18.6 billion in the first quarter of next year, and $96 billion by the end of the year, forcing banks to search for other ways to generate revenue from customers.
Delinquencies tend to follow unemployment, which were 554,000 first-time claims in the week ended Dec. 13, near a 26- year high reached the week before. Net worth for U.S. households and nonprofit groups fell $2.81 trillion from July to September, the most since tracking began in 1952. That means consumers are more strapped for cash, contributing to a slowdown in spending, which accounts for two-thirds of the economy.
“Banks are getting hit on several fronts right now from the losses in their investments, losses around mortgages and even generally from a consumer-confidence perspective,” said Eva Weber, an analyst at Aite Group LLC in San Antonio who follows bank regulatory and compliance issues. “Banks will need to reconfigure their business strategies and their risk-management strategies to account for the losses that they’re going to incur from the rules on interest rates and fees.”
Cardholders had $962 billion in unpaid balances on general purpose and proprietary cards at the end of 2007, an 8.6 percent increase from the previous year, according to the Nilson Report, an industry newsletter. That figure is expected to climb to $1.2 trillion by the end of 2012, or $6,373 per cardholder.
“Credit card rules, which we all understand address consumer concerns, the Fed recognizes that it will decrease the amount of credit available,” Edward Yingling, chief executive officer of the American Bankers Association, said in an interview yesterday.
Three analysts in the past week have recommended selling shares of American Express Co., while only four of 24 analysts have “buy” ratings, according to Bloomberg data. Friedman Billings Ramsey & Co. analyst Scott Valentin lowered his share- price target on Dec. 16 and reiterated his “underperform” rating, in part, he wrote, because of a “regulatory burden from increased oversight.”
American Express spokeswoman Joanna Lambert said that while the new rules will have an impact on the company’s business, only 20 percent of its sales come from interest on loans. Most of its revenue is generated by fees from transactions between consumers and merchants and from commissions, which aren’t being addressed by the Fed.
“We are in a better position than many of our competitors because we are less reliant on the credit end of our business,” Lambert said in an interview.
Some say the Fed rules will be good for credit-card companies as well as consumers.
“It will force them to be smart about who they make credit available to,” said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which oversees about $550 million, including shares of JPMorgan, Citigroup, America Express, Capital One Financial Corp. and Advanta Corp. “It should, over time, create fewer nonperforming assets, fewer charge-offs.”