Banks are struggling to make money in the credit card business these days, and consumers are paying the price. Interest rates are going up, credit lines are being cut, and a variety of new fees are being imposed on even the best cardholders.
One recipient of new credit card terms is Anita Holaday, a 91-year-old in Florida, who received a letter last month from Citibank announcing that her new interest rate was 29.99 percent, an increase of 10 percentage points.
"It's outrageous they pursue such a policy," said Susan Holaday Schumacher, Holaday's daughter, who pays her mother's bills. "That rate is shocking under any circumstances."
While the average interest rates charged by banks are lower than Holaday's, her situation is not all that unusual. The higher rates and fees reflect the grim new realities of the credit card industry - the percentage of uncollectible balances has hit a record even as a new law might further limit the cards' profitability.
Banks began raising interest rates and pulling back credit lines about a year ago as delinquencies crept upward and regulators discussed reforms. As banks have become more aggressive in making changes, lawmakers have accused them of trying to impose rate increases before many of the new rules take effect in February.
On Monday, the Federal Reserve provided new evidence of the banks' actions.
- About 50 percent of the banks responding to the Fed's survey said they were increasing interest rates and reducing credit lines on borrowers with good credit scores.
- About 40 percent said they were imposing higher fees.
- The banks also said they were demanding higher minimum credit scores and tightening other requirements.
A study by the Pew Charitable Trusts, released late last month, concluded the 12 largest banks, issuing more than 80 percent of the credit cards, were continuing to use practices that the Fed concluded were "unfair or deceptive" and that in many instances had been outlawed by Congress.
In their defense, banking officials say they have no choice but to raise rates and limit credit. Because of the new rules and the prolonged economic malaise, they say, it is now far riskier to issue credit cards than it was just a few years ago.
"We sell credit; we don't sell sweaters," said Kenneth J. Clayton, senior vice president for card policy at the American Bankers Association. "The only way to manage your return is through the price of the product or the availability."
The nation's largest banks are scrambling to figure out a new business model that fits within the new rules and current economic conditions. Those banks made handsome profits over the last decade by charging high interest rates and penalty fees on a small group of customers who routinely paid late or exceeded their balances.
Already, banks are shifting to a model in which a smaller pool of Americans will be eligible for credit cards, and customers with cards will probably pay more for the privilege through annual fees and higher interest.
Meanwhile, the banks are in the process of shedding customers considered too risky. That means tens of thousands of Americans will no longer be able to splurge on Nike gym shoes or flat-screen televisions unless, of course, they have enough cash to pay for them.
In the modern financing era, credit cards were long a profit center, producing tens of billions in annual profits with a default rate that hovered around 4 percent until the recession.
"We know we are going to lose a lot of money next year in cards, and it could be north of $1 billion in both the first quarter and the second quarter. And that number will probably only start coming down as you see unemployment and charge-offs come down," Jamie Dimon, chief executive of JPMorgan Chase, said in an earnings call last month.
Banking officials said that because the new law limits their ability to reprice credit as a customer's risk profile changes, they will instead have to price for future risk at the start, when a cardholder applies for a new card.
That means fewer applicants will be approved for new credit cards, and those who are accepted will increasingly be charged annual fees or variable interest rates, rather than fixed rates. Currently, about 20 percent of credit cards charge annual fees, a percentage that is rising, said Bill Hardekopf, chief executive of LowCards.com. Current cardholders, too, will be affected.
Asked to explain its rate increases, Citibank issued a statement saying the "actions are necessary given the losses across the industry from customers not paying back their loans and regulatory changes that eliminate repricing for that risk."
Holaday Schumacher did not accept that explanation. She said she haggled with Citibank to try to get her mother's bills forwarded to her house in Washington and, during the process, two bills were inadvertently paid late, resulting in the rate increase.
"How unbelievably unfair for an older person who might not understand what this is all about," she said. Citibank declined to comment on the account.