Some credit cardholders had a rough ride in 2008. As banks grappled with rising charge-offs and default rates, many reined in risk by restricting access to credit and adjusting existing accounts.
In fact, around 60 percent of domestic banks say they tightened lending standards on credit cards during the previous three months, according to the October senior loan officer survey from the Federal Reserve.
Unfortunately, the credit forecast is mixed. For 2009, experts predict mostly cloudy skies with a chance of silver lining.
Keith Leggett, senior economist with the American Bankers Association, says “2009 is not going to a pretty year.” With the employment rate expected to rise, he believes issuers will remain risk-adverse.
“I think what you’re going to see (are) tighter standards being applied to get new credit,” Leggett says. “You will see lenders continuing to scale back their exposure to existing lines of credit.”
“Underwriting is a moving target,” says Curtis Arnold, founder of CardRatings.com. A year ago, Arnold said consumers needed FICO scores of 700 or better to get the best credit cards rates and limits; now he says a 730 is the new minimum. “That target is going to continue to change and tick up, going into the first half of next year.”
At the lower end of the spectrum, “folks that may have qualified this year or last year for a subprime card with a 575 or 600, this time next year may not qualify for a card at all.”
According to the Federal Reserve’s senior loan officer survey, about 50 percent of domestic banks indicated they had raised the minimum credit score needed for credit cards, and nearly 60 percent approved fewer applications for people who didn’t satisfy the credit scoring requirement.
Your best money move: Take steps to improve your credit scores. Check your free credit reports at www.annualcreditreport.com and dispute errors that may be weighing down your score. Apply for credit only as needed.
Arnold expects some credit-card reform measures to pass as early as the end of 2008 or early 2009, because President-elect Obama has made them part of his agenda.
The bills pending in Congress and the proposed rules before the Federal Reserve Board would bar some of the more egregious industry practices, such as universal default. Under this policy, if you pay any of your creditors late, the credit card company can raise your rate to the default APR.
Arnold fears that such added regulation may bring about the end of zero percent balance-transfer offers and teaser rates on credit cards if issuers react by making credit more expensive for everyone.
Promotional offers already aren’t as generous as they were a year ago. “I’m predicting in 2009 that this trend will continue, and it could exacerbate to the point that we just never see any zero percent offers anymore, for example,” Arnold says.
We also may see some fees change and new ones implemented under the new regulations, says Ken Paterson, director of the Credit Advisory Service at Mercator Advisory Group, a research firm for the consumer payments industry in Maynard, Mass.
Your best money move: If promotional offers do go extinct, Arnold suggests trying balance transfer cards that offer a low rate for the life of the loan. Another option is getting a card from a smaller bank or credit union, which tend to offer more consumer- friendly terms. Use our comparison tool to find the best credit card.
“I think credit lines are going to continue to be cut,” Arnold says. “I think that’s a trend that’s going to continue as issuers try to hedge their risk.” He predicts that issuers will also keep raising rates, closing unused accounts and increasing underwriting standards.
As of Nov. 19, the average interest rate charged on all cards was 12 percent for fixed-rate cards and 11.27 percent for all cards. However, banks aren’t hesitating to raise rates on those with imperfect credit. Major card issuers indicated to Bankrate in October that they are placing applications and existing accounts under heavier scrutiny for risk and closing inactive accounts deemed too risky.
Around 60 percent of U.S. banks reported slashing lines for nonprime borrowers during the past three months, and 20 percent reduced limits for prime cardholders, according to the senior loan officer survey.
Having lower credit limits can make cardholders appear more maxed out because the balance uses up more of the available credit. The result can be a lower credit score, which can invite changes to other accounts and make loans more expensive.
On a positive note, smaller credit lines may help curtail spending temptations.
Your best money move: Don’t invite scrutiny. Pay on time, reduce debt and keep statement balances below 30 percent of the credit limit. Use emergency-only cards once every six months to keep them active and pay them off. Read every mailing from your issuer and complain if you notice an adverse adjustment. If you plan to retaliate by closing an account, understand what canceling a card does to your credit score.
While rewards programs are expected to stick around, issuers may scale back rebates to consumers if legislation passes that would reduce interchange fees collected on transactions. Interchange fees are paid by a merchant’s bank to a customer’s bank when someone uses a payment card. They help fund the rewards programs of card issuers.
“I do think there’s going to be some tinkering around the promotional categories, maybe scaling back on some of the cash-back categories where, say, gasoline or some other purchase has been incented higher,” Paterson says.
He says the worst case scenario would be a situation where issuers start devaluing points, just like airline rewards programs have done with miles. Consumers would have to spend more to earn the same rewards. But it’s too early to tell whether that will happen with non-airline rewards cards.
Your best money move: If you have points or miles you can cash in, do so sooner rather later. As a consumer you have little recourse if the issuer decides to abolish the rewards program or to change the terms.
Consumers are expected to receive 1 billion fewer credit card solicitations this year than in 2007, according to projections from Mail Monitor, a credit-card acquisition tracking service from Synovate, the market research arm of Aegis Group plc.
Happily for consumers who find themselves annoyed or tempted by credit card offers, economist Leggett expects the downward trend to continue. “This is not the right time to be going out aggressively pursuing customers,” he says.
As many as 70 percent of issuers are scaling back efforts to acquire cardholders, according to a July 2008 report from Javelin Strategy & Research in Pleasanton, Calif.
Consumers might still get offers from banks where they already have accounts.
Paterson speculates that banking relationships may take “a more important role in securing credit cards.” Banks have more information on existing customers and may be more willing to extend credit to them.
Banks are already stepping up efforts to communicate with their customer base, albeit for other reasons. They sent 42 percent more direct-mail solicitations to their customers in the third quarter of 2008 versus the second quarter, according to a report from Chicago-based Mintel Comperemedia.
Your best money move: If you don’t want to receive credit card offers, opt out of them at OptOutPrescreen.com. You can opt out for five years, or permanently if you mail in a form.
Build a savings cushion. Financial crises happen. Don’t let a job loss or vehicular breakdown send you reaching for your credit cards. They’re an expensive way to finance emergencies and issuers may penalize you for piling on thousands of dollars in debt all of a sudden.
Pad your safety net by saving three to six months’ worth of living expenses in a liquid savings account. If that goal sounds unrealistic, try this suggestion: “Start by socking away 10 percent of each paycheck. You’ll really never miss it and yet at the end of a year you’ll have a little more than one month’s income in the bank,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, or NFCC, in Silver Spring, Md.
- Don’t wait to get help. If you are falling behind on your payments, get help sooner rather than later.
A temporary financial problem, such as a job loss, is a good reason to contact your issuer if you’re struggling to make payments. Most have in-house help programs that can lower your interest rate or waive fees for a short period of time — usually three to six months.
Cunningham says if consumers are experiencing a long-term financial problem, such as a divorce or major medical expense, then consumers might want to contact a credit counseling agency for help. Visit the NFCC’s Web site to find a counselor.