Squeeze coming for best cardholders?

By DAVID LAZARUS

May 20, 2009 12 AM PT

Leave it to the banks to try to turn passage of credit card reform legislation Tuesday into bad news for many cardholders.

Here’s the deal: Banks are basically saying that because they’re going to have to change some lending practices to comply with the bill, they’ll be facing greater risk.

To cope with that risk, they say, they’ll have to turn the screws on their best customers -- the ones who manage their finances prudently and pay off their bills on time -- by possibly raising interest rates, scaling back rewards and imposing annual fees.

“Those who have managed their credit well and currently have very good credit card deals will find that card companies are limited in their ability to distinguish between them and those that have credit problems,” Edward Yingling, president of the American Bankers Assn., said in a statement.

“The result will be some subsidy from those that manage their credit well to those that have problems, affecting negatively the terms the former will receive.”

That’s a fancy way of saying the squeeze will be put on good customers to compensate for the banks lending to bad ones.

“The big issue is how much revenue they’ll lose by treating credit card customers fairly,” said Ken McEldowney, executive director of Consumer Action in San Francisco. “Fee income has been huge for the card companies.

“If they can’t screw people who don’t pay on time, they’ll try to get the revenue from somewhere else.”

The Senate on Tuesday followed the House in approving legislation that would, among other things, prevent card issuers from jacking up rates unless a cardholder was 60 days behind in making a payment.

It would also require that the old rate be restored if a cardholder pays his or her bills on time for six months, and better notification in general before rates can go up.

Differences between the House and Senate versions of the reforms are expected to be reconciled quickly. President Obama has said he’ll sign the final bill into law.

Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a watchdog organization, said it’s possible that banks will go after their good customers for extra cash if they can’t make as much money from bad customers.

But he predicted that any increases in rates or higher fees would be short lived. One or two lenders would eventually break from the pack and once again offer cards with lower rates or no annual fee, Mierzwinski said, forcing others to follow suit if they want to compete.

“This would be an opportunity for banks that treat consumers fairly to gain greater market share,” he said.

Congress, the Federal Reserve and the president are clamping down on card issuers because banks have become so shameless in hosing cardholders. Sky-high interest rates, shrinking credit limits and constantly changing contract terms have gotten so out of hand that officials have been all but forced to act.

The list of recent shenanigans on banks’ part has been plentiful. For example, Capital One told many cardholders that their interest rate was nearly doubling because of “changes in the credit environment.”

Citibank told cardholders that their rate could jump to almost 30% if they missed a single payment.

Meanwhile, major card issuers account for more than $100 billion in bailout cash from taxpayers.

The banks say they’ve been forced to take drastic steps in the face of record defaults by cardholders. Some are reporting that more than 10% of cardholders can’t pay their bills.

Obviously this reflects reckless behavior on the part of some consumers. But it also indicates that the runaway rates charged by banks have made it impossible for many to keep up with payments.

If you ask me, the problem here isn’t that the banks now face greater risk. It’s that they’re greedy and they’re not choosy enough about who they give plastic to.

Want to reduce risk? Don’t make dumb loans. It’s that simple.

Pistol whipping the rest of us would be foolish. It would only prompt people to cancel all but one or two cards, and to start using debit cards instead for purchases.

Is that what the industry wants?

Of course not. It wants as much plastic as possible in circulation in hopes that, every now and then, we’ll screw up and miss a payment, opening the door to higher rates and late fees.

According to a new study by a UC Davis researcher, the typical U.S. household pays $500 a year in credit card fees and interest. The 10% of households with the highest debt loads pay more than $3,000 annually.

That’s not something the banks want to jeopardize.

I spoke late Tuesday with Ken Clayton, managing director of card policy for the American Bankers Assn. He insisted that the reforms approved by Congress represent “a new business model” that requires lenders to get tough even with good customers.

So is it inevitable that cardholders in good standing will be slapped with annual fees?

“It’s not that we want to do this,” Clayton replied. “We want to price things so everyone gets a fair deal.”

Sure.

Banks may get away with annual fees and higher rates for a little while. But good sense -- and some good old-fashioned competition -- will ultimately prevail.

Rates will go down and annual fees will disappear as these bozos realize that many of us can do just fine without their piles of plastic, thank you very much.

Besides, Congress, the Fed and the president have made it very clear that they’re not in the mood for business as usual from these guys. Do they really think another bill won’t be introduced requiring fair treatment for good customers?

Enough with the bluster. Clean up your act, fellas. Then you can begin the long and arduous process of earning back our trust.

David Lazarus’ column runs Wednesdays and Sundays. Send your tips or feedback to [email protected].