by Bill Hardekopf
The LowCards.com credit card prediction for 2010 is no surprise: cardholders will pay more for credit card loans. The cost of credit cards will continue to increase for consumers even though the major provisions of the CARD Act go into effect on February 22. Cardholders could see increases in both their interest rates and existing fees, as well as the introduction of new credit card fees.
Credit card issuers have lost billions of dollars in credit card loans during this economic downturn. Now they are staring at these new provisions of the CARD Act that will limit their ability to make revenue. They are coming up with ways to generate additional revenue and it obviously comes at the expense of the cardholder. This means that cardholders will continue to pay more for credit card loans. Cardholders who pay their balance in full every month may eventually see the end of 'free' credit card loans as we know them.
Here are some 2010 predictions for the credit card industry:
1) More Cards with Annual Fees
According to the LowCards Complete Credit Card Index, which tracks the rates and fees of 1000+ credit cards, only about 20% of the credit cards in the United States currently have an annual fee. But that number should increase in 2010. Some credit card issuers have already made the first moves to test annual fees on a small percentage of cardholders or offer cards with annual fees that build customer loyalty.
Bank of America has been test marketing the effects of adding an annual fee to some of their existing customers. In October, the issuer notified a small percentage of customers that it is adding an annual fee of $29 to $99 on their accounts beginning in February 2010. Only a few customers (0.5%) received the notice but the outcry against this annual fee was loud, even from consumers who were not affected.
Chase is using premium rewards to encourage customers to select or upgrade to cards with annual fees. They introduced the Sapphire Preferred card with an $85 annual fee and enhanced benefits and earning potential.
Bank of America and Chase are the first major issuers to test the traditionally unpopular annual fees. If other issuers think this is working, they will also add annual fees. Issuers use each other for market research.
American Express recently introduced the new Zync card with a twist for annual fees. It is a charge card aimed at people in their twenties. The annual fee is $25 per year and includes participation in Membership Rewards.
It also offers packs of benefits that can be purchased for an additional $20 per pack per year. For example, enroll in the Go Pack and receive twice the Membership Rewards on airfare.
Issuers are trying to find ways to change the dynamic of the credit card market. They want to 'mainstream' annual fee cards and provide enough value to attract the consumers with good credit," says Hardekopf. "Right now the majority of consumers do not want to pay an annual fee for their credit card. Consumers shouldn't have a card with an annual fee since 80% of the cards currently do not have one. Some issuers may force the annual fee, but others will find creative ways to encourage consumers to accept a card with an annual fee.
2) Fixed Rate Cards Changed to Variable Rates
In 2009, issuers switched many fixed rate cards to variable rates, making rate increases for everyone almost inevitable. Variable rates rise and fall with the prime rate. The rate is currently at 3.25%, the lowest level since the 1950's. As the economy recovers, the rate is expected to rise. As it does, cardholders will see increases in their APR.
Issuers will continue to move the remaining fixed rate cards to variable rates. Fixed rate cards are almost extinct, and if your card still has a fixed rate, expect it to be switched to a variable rate in the next month," says Hardekopf. "Issuers are switching cards to a variable rate that have the prime rate as their base so that interest rate increases can be passed on to the cardholders even after interest rate provisions of the CARD Act take effect.
3) Increases in Interest Rates
Even though the CARD Act limits the issuers' ability to raise rates "at any time, for any reason," expect issuers to find loopholes and create opportunities to raise rates. In addition, since the CARD Act limits interest rate hikes during the first year for cardholders, issuers are likely to increase the advertised APR so the cardholder is locked in at a higher interest rate.
4) Increases in Existing Fees
The CARD Act does not limit fees, so expect issuers to increase the existing fees. An example is the balance transfer fee. A year ago, the industry standard for balance transfer fees was 3%, meaning if you transferred $10,000, you would incur a $300 balance transfer fee. But Bank of America increased their balance transfer fee to 4% in the summer of 2009 and a Chase increase to 5% takes effect this month. Expect other issuers to follow these increases. The same increases might occur with cash advance fees.
5) Introduction of New Fees
Issuers can also be expected to add new fees to credit cards. This is already being tested by several issuers.
Firth Third Bancorp recently added a $19 inactivity fee if your card is unused for a twelve month period. In August of 2009, Citi informed some of its cardholders that they will be charged an annual fee of $30 to $90 unless they spend at least $2,400 per year. Some retail cards are adding a $1 monthly processing fee should you request a printed credit card statement each month.
Since fees represent such a cash cow for issuers, expect aggressive increases in existing fees as well as some brand new fees on your credit cards in 2010.
6) Decreased Rewards on Some Cards, Increased Rewards on Others
Rewards sound generous in advertising for credit cards, but the points formula can be complicated and subject to change. Expect issuers to play musical chairs with rewards in 2010.
Issuers will cut costs by reducing rewards for some cardholders, especially those who do not pay an annual fee and pay off their balance each month.
Reduced rewards could come in several different forms: (a) a cutback in the payouts of cash back cards; (b) higher tiers required for consumers to receive the same level of rewards; or (c) more miles or points needed for that free airline trip or hotel stay.
However, rewards will likely be used as an incentive for cardholders to accept a credit card with an annual fee. Bonus offers will be more generous for cardholders that pay the annual fee.
7) Government Regulation
The CARD Act goes into effect in February, but that may not be the end of government regulations. Credit card reform is a hot issue and some Senators and Representatives think that the CARD Act didn't go far enough. For example, Congress may try to force issuers to lower the interchange rate they charge to merchants. If this passes, it will reduce an important source of revenue for issuers and consumers will likely have to pay more to make up the loss.
Government reform sounds good and scores political points for the lawmakers who push it, but it often results in higher payments for the people it is trying to help. If you place limits on issuers, they will find ways around them because they have to make money on these loans to stay in business. Credit card companies are not philanthropic organizations.
Bill Hardekopf is CEO of LowCards.com, a site dedicated to simplifing the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories, such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1060 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for nine years.