Downturn brings big changes to card industry

Allison Linn Senior writer • Profile • E-mail

Julie Hamman knew she had too much credit card debt.

Hamman and her husband, Jerry, had even cut up most of their credit cards in 2007, putting the remains in a Mason jar. It was a daily reminder of what they were trying to do: pay off, rather than add to, the $87,000 in debt they’d amassed from medical bills, vacation expenses, vehicle costs, insurance payments and other items.

Still, Hamman was unprepared for how the recession would thwart her plans. Over the past year, she said, many of her credit card companies have raised her interest rates substantially, tripling her total minimum monthly payments to about $2,300, while also lowering her credit lines. She said the changes have come even though she has made all her payments on time.

“I have been trying to pay them off, but it gets more difficult and more difficult,” said Hamman, 62, who lives in Peru, Ind. “The payments keep going up and up and up.”

The recession has had a dramatic effect on the credit card industry, which has racked up billions of dollars in losses amid a sharp increase in the number of people who can’t pay their bills because of a job loss or other financial hardship. That, in turn, has had a ripple effect even on some credit card customers who have always paid their bills on time.

“The game has changed dramatically. If you do anything — and I mean anything — to show that you’re a higher financial risk right now, you will, the next month, get an increase in your (annual percentage rate) or a decrease in your credit limit,” said Bill Hardekopf, chief executive officer of lowcards.com, a credit card information Web site.

In a one-year period from 2007 to 2008, credit card issuers raised their interest rates on nearly one-quarter of all cardholder accounts, according to the Pew Safe Credit Cards Project, which cites data the banks provided as part of government discussions about new credit card regulations.

In the first quarter, the delinquency rate for bank-issued credit cards rose to 1.32 percent, from 1.19 percent a year ago, according to TransUnion, which compiled the data from randomly sampled credit reports in its 27 million-strong database.  

The regulations, known as the Credit Card Bill of Rights, will make a number of changes aimed at protecting customers from unexpected fees, and will make it much more difficult to raise interest rates without notice. The new rules don't go into effect until next year.

Credit card issuers have always assigned people an interest rate and credit limit based on the potential risk they pose to default.

The formulas credit card companies use to determine risk are closely held, but experts say a change can be triggered by anything from a missed payment on another card or bill to a sudden increase, or decrease, in credit card usage. Only making the minimum payments can also be a red flag to credit card companies, Hardekopf said, as can simply having high credit card debt.

‘We’ve done everything right’
Many credit card customers say the unexpected changes to their bills have crimped their budgets when they could least afford it, making them less likely to be able to pay their bills and more likely to give up on credit cards altogether.

“We’ve done everything right. We’ve paid our bills, we’ve been responsible … and yet we’re being penalized because other people aren’t paying their bills,” said Laura Kolb, who is working to pay off $50,000 in credit card debt, mostly amassed during a difficult divorce.

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Kolb, 42, said she has recently seen the interest rates on several of her cards double and even triple. The Ballwin, Mo., resident, who remarried last September, has cut back sharply on everything from clothes for her kids to shoes for herself as she tries to pay off the debt.

“We’ve just totally changed our lifestyle until we can get out of this,” she said.

She and her new husband also have vowed that they are “done with credit cards.”

“We seriously have said, OK, it’s a no-credit policy,” Kolb said. “Unless there’s a catastrophe and we really need something, it’s cash. And once those cards are paid off, we don’t see any reason to give them business again.”

Consumer advocates say that reaction has become more widespread.

“What’s happening now is consumers are so scared. They don’t trust their banks at all,” said Robert D. Manning, author of “Credit Card Nation.” “Instead of going shopping or going out to dinner, they’re trying to pay down their debt as much as possible.”

Card companies try to contain losses
Credit card companies say they are trying to adapt to the drastically changed economy.

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“The economy took a huge nose dive, and banks that issue credit cards obviously weren’t immune to that,” said Peter Garuccio, a spokesman for the American Bankers Association, the industry’s trade group.

Bank of America recently raised rates on customers who had an annual percentage rate under 10 percent and were carrying a balance, spokeswoman Betty Riess said.

“The increase in rates on those accounts reflects current economic conditions, where our costs of providing credit have significantly increased,” she said.

Overall, the cost of borrowing money has declined sharply over the course of the recession, but the rising rate of credit card defaults has left many credit card companies coping with higher-than-usual losses.

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