As credit-card issuers raise rates and fees and lower credit limits, consumers face higher-cost debt -- and more work maintaining their credit score.
In some cases, banks' former darlings -- consumers who paid consistently and on time but let their balances ride -- now are being hit hardest, asked to stomach higher interest rates and fees or try their luck with different card issuers.
For instance, some J.P. Morgan Chase & Co. credit-card customers who have carried a balance for more than two years will be charged a $10 monthly fee starting in January and their minimum payment will rise to 5% from 2%.
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Meanwhile, as many as 10 million Citigroup Inc. customers whose interest rates have not changed in two to three years will receive notice in their November statement that their interest rate is increasing by an average of three percentage points.
And in December, American Express Co. will lob a two to three percentage point interest-rate hike across a broad swath of consumers, plus increase the conversion rate for charges made in foreign countries.
Amid rising unemployment and higher delinquency rates, credit-card issuers are cracking down, particularly on the balance-carriers. "Given the current environment banks are starting to get very scared of the backlog of debt they're owed from their current borrowers who have carried balances," said Greg Larkin, a New York-based senior analyst with Innovest Strategic Value Advisors.
"They're trying to purge them from the rolls of people that owe them money," he said. "Banks right now want to prove their balance sheet is healthy, that their borrowers pay them back on time."
Another potential issue for firms: They have little hope now of packaging consumer debt into securities and selling it off, given that no one's buying. "There's a stronger risk that this becomes the bank's problem, that it doesn't become the problem of the investor who's invested in the securitization pool," Larkin said.
Ironically, rate hikes are occurring in an overall environment of low rates, with the Federal Reserve's federal funds at just 1% currently. Borrowers with great credit and no or low balances can shop around for deals, said Greg McBride, senior financial analyst for Bankrate.com.
Overall, the average variable rate is about 11.25%, down from 14% about a year ago. "The point for consumers is, don't take this sitting down. If you have good credit, there are better terms available. Shop around," McBride said, describing good credit as a score of 700 or higher.
Still, other data show a slight uptick recently: Average credit card rates rose slightly between Oct. 15 and Nov. 1 to 13.81% from 13.75%, according to CardRatings.com, which logged average rates at 15% a year ago.
Credit Score Conundrums
Consumers who don't carry balances, but charge hefty amounts each month also should be checking their statements regularly: As credit-card issuers pull down credit limits, some customers may find themselves unexpectedly topping out. That can bring steep over-limit fees and double-digit interest rates going forward.
Twenty percent of banks said they lowered credit lines for their best card customers, while 60% lowered lines for nonprime borrowers, according to the Federal Reserve's most recent survey of senior bank loan officers in October. Meanwhile, 61% said they are applying stricter lending guidelines on existing credit-card lines.
Given all the changes, "we recommend people look at their APR and their credit limits every month," said Bill Hardekopf, chief executive of LowCards.com.
As long as you are able to keep your balance under it, a lower credit limit isn't necessarily a problem. Still, just the fact of a lower limit may well ding your credit score. Thirty percent of the FICO score is based on "amounts owed," including the ratio of your balance to your available credit, called the "credit card utilization ratio." The more you've tapped your available credit, the worse your score. Read more on Fair Isaac Corp.'s site.
If your lender lowers your credit limit, one way to bring your score up is to pay down your debt. Not everyone is able to do that. Another solution is to increase your amount of total available credit, either by asking for a credit line increase on one of your cards or by applying for a new card.
While applying for new credit can ding your score, that negative mark recedes over time, said Ethan Dornhelm, San Rafael, Calif.-based senior scientist at Fair Isaac Corp., creator of the FICO score.
Depending on one's credit profile, "applying for a single card could have a minor ding on your score," he said, "but as you move to the longer term, the impact of the application for credit wouldn't be so recent anymore and would be outweighed by the fact that you increased your available credit and subsequently decreased your utilization ratio" -- thus upping your score.
Opt Out of Higher Rates
If you carry a balance and your issuer lobs a rate hike on that balance, you can opt-out by either calling the credit-card issuer or sending a letter. Hardekopf recommends sending a letter certified mail for record-keeping purposes.
By opting-out, you agree to pay off the balance owed at your current rate. Often, opting out means you stop charging new purchases on the card. But in Citigroup's recent rate-hike announcement, the company said cardholders could opt out of the higher rate yet still continue to make purchases at the lower rate until the card's expiration date.
Any notice from your issuer which details a rate hike should have information on opting out, including the deadline to do so.
Note that opting out also can ding your credit score: The opting out itself isn't recorded as such by the FICO score, Dornhelm said, but once your balance is paid off and the card is closed, the fact that your overall available credit has decreased could affect your score negatively.
"Consumers often want to retaliate," said Emily Peters, personal finance expert at San Francisco-based Credit.com. "They want to close their accounts but closing your accounts is also damaging for your credit score," she said. "Get the card paid off or transfer the balance, and keep it open. Just don't use the card."
Still, Hardekopf said, some consumers might want to opt out of the rate hike. Though it might hit your score negatively, "having that negative is probably better than having a three percentage point APR increase on whatever balance you had," he said.
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What to Do
In addition to keeping a close eye on any dispatches from your credit-card issuer, the following sites all offer either alerts or news about card changes. They also make it easy to shop around for a new card if need be.
LowCard.com, IndexCreditCards.com, CardRatings.com, CardTrak.com and Credit.com are credit-card comparison sites with plenty of additional consumer news and information. BillShrink.com asks for some information about how you use credit cards and then provides several recommendations of cards that might make good values for you. The site will also email alerts when better deals arise. Similarly, CardHub.com is a card comparison site.
Others sites are useful for keeping track of your finances. And staying on top of your budget can help you reduce your use of credit cards. Mint.com, the free online personal-finance tool, now lets you check your online balances via mobile phone, helping you make sure you don't overdraw your checking account or overspend on your credit card while holiday shopping. Rudder.com is another free, online personal-finance planning tool.
Andrea Coombes is an assistant personal finance editor for MarketWatch, based in San Francisco.