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U.S. Constitution Title: Credit cards get their licks in now before consumer law takes effect Rate hikes, fees take effect before new law Customers such as Dannie Decker, 55, of Lebanon are accustomed to getting good treatment from their credit card company. Decker pays his bill on time each month. He has good credit. Normally, when JP Morgan Chase raised the interest rate on his credit card in years past, he'd simply complain and the company would back down. Not this time. "This time, they said it was non-negotiable,'' Decker said after getting a September letter from Chase saying his interest rate would go from a fixed rate of 7.99 percent to a variable rate of 13.24 percent. "They aren't even going to let you negotiate based on your excellent track record." Related How to improve your credit score List of free or low-cost debt counselors in the Nashville area Credit card companies are raising rates for many customers and adding fees, even on customers with solid credit histories, as they get ready for sweeping changes in federal consumer protections set to go into effect in February. Congress gave the industry nearly a year to comply with most of the provisions of a major new law enacted in May that will outlaw most controversial industry practices, such as raising rates on existing balances. But the credit card companies are using the delay until 2010 to make immediate changes to stem losses caused by existing delinquent customers. Nashville-area cardholders of major lenders may be surprised to see what is about to arrive in the fine print in the mail. A survey by the Federal Reserve published last month found that 50 percent of banks plan to raise interest rates on prime borrowers, those with the best credit. A number of customers have already received such notices here. A recent report by the Pew Health Group found the lowest advertised interest rates climbed 23 percent from December to July, to 12.24 percent. But some existing customers with good credit are seeing their rates jump well above the 20 percent mark. Charles Pugh, 63, a truck driver in Crossville, said he plans to cancel his card after Citibank, Citigroup's credit card division, raised his rate from 15 percent to nearly 24 percent. He said he canceled the card to avoid the higher rate and will take a few months to pay off the $700 balance. We're paying for the people who are not paying their bills,'' Pugh said. "They have to make their money off somebody. The only way you can deal with it is not use their credit cards." Fees unless you spend Some companies also are introducing annual fees. Citigroup, for instance, started charging certain customers $30 to $90 annual fees if they didn't spend at least $2,400 a year on the card.Bank of America is introducing annual fees to a few customers in a "test." Others are reducing credit limits or canceling cards outright. Many of those actions were threatened by the industry as it lobbied against the Credit Card Act earlier this year, and now many of those threats are coming to pass.The credit card industry also blames the economy, with unemployment averaging 10 percent of the U.S. work force, for its difficulties. Related How to improve your credit score List of free or low-cost debt counselors in the Nashville area Customers who do pay are having to cover "the losses, to some extent, when other borrowers don't pay,'' said Peter Garuccio, a spokesman for the American Bankers Association. Some banks are losing billions of dollars in their credit card divisions. Bank of America lost $4.5 billion in the first nine months of this year in its credit card division, according to Fitch Ratings. JP Morgan Chase lost $1.9 billion in the same time frame. JP Morgan Chase last year bought the failed Washington Mutual, whose credit card losses served as a drag on profits. Lots of bad borrowers Many of the major banks also offered cards to people with less than stellar credit. In some cases, 20 percent to 30 percent of credit card portfolios are made up of customers with poor credit, said Fitch Ratings' senior director of financial institutions, Meghan Neenan. A spokeswoman for JP Morgan Chase's credit card division, Gail Hurdis, said the bank has to "constantly evaluate the risks and costs of making loans." "Although we may not be able to lower a customer's interest rate, if the customer is experiencing financial difficulty, we can work to find another solution,'' she wrote in an e-mail. Decker is one customer with little sympathy for the banks' predicament. "For a decade they've been filling people's mailboxes up,'' he said. "They issue credit cards to people in school. The fact they have some defaults shouldn't be a surprise to anyone, including themselves." Despite his anger, Decker plans to keep his Chase card. He feels safer using a credit card than a debit card online or when traveling abroad because if his card number is stolen, he can dispute the charges before he pays. But Bill Bank, another local consumer, is livid. Related How to improve your credit score List of free or low-cost debt counselors in the Nashville area Bank, 72, of Bellevue canceled his card a few days after he got a notice last month saying his interest rate was going from 13 percent to 29.9 percent. He said he paid his balance every month. "It will have no effect on me,'' he said. "It will affect Citibank." A Citibank spokesman, Samuel Wang, said the rate increases were necessary given the doubling of credit card losses across the industry and because of the new federal law. He said the bank is working with customers to reduce rates, particularly those who do a lot of business with the bank. Industry analysts say the Credit Card Act is a big factor in the recent run-up in interest rates and other changes. For instance, the Pew study found a massive switch from fixed rates to partially variable interest rates among major credit card companies. Under the law, credit card companies can't increase interest rates for existing balances unless the rate increase is tied to a publicly available interest rate, such as the prime rate or the 10-year Treasury bill. In December of last year, fully one-third of advertised offers were for cards with a fixed rate. By July, that number had shrunk to less than 1 percent. The drawback is that customers don't see much of a benefit when interest rates fall, because the credit card companies tack on a fixed amount, such as 9.99 percent, to those variable rates, said Nick Bourke, manager of the Safe Credit Cards Project for The Pew Charitable Trusts. Still, he thinks the new law will be good overall for consumers. "The prices you see advertised are going to more closely reflect the real price you pay," he said. But for some time to come, consumers can expect higher rates and less access to credit, analysts said. Those with poor credit will have an even tougher time getting or keeping a credit card. "This is the way things are going to be for a while,'' Fitch Ratings' Neenan said. "The solid customers are going to help subsidize for some of the underperforming" customers. "You're not going to see a lot of those low rates ever again. Teaser rates are going to be limited. The card act is really driving a change in the way the business is run."
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#1. To: borntoweardiamonds (#0)
Do credit card companies actually have real money? Is their money unlimited? Is it possible for so many people to charge something on their credit card that the companies don't have money to pay the money to stores where purchases were made? If not where does this money come from.
#2. To: A K A Stone (#1)
Money is not created in a credit purchase. Credit is created and debt is created. Money then pays back the debt. Banks can issue credit on money they do not possess.
http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx
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