New squeeze on credit cards

Credit card companies are slashing credit limits and imposing new fees to survive the economic downturn. American consumers, long accustomed to high limits and low rates, are feeling the squeeze.

Last fall’s financial meltdown drove credit card companies to tighten the terms of consumer cards. The changes continue: On July 1, Citigroup sharply raised interest rates on 15 million accounts. But while an industrywide balance-sheet cleanup by card companies might strengthen financial markets, it will shake up the budget for millions of American families.

Companies’ actions have been hurried by fears about restrictions in the Credit Card Accountability, Responsibility and Disclosure Act, signed by President Obama on May 22 and set to take effect Feb. 10. The act will outlaw retroactive rate changes on balances, require parental consent for card users younger than 21 and restrict the use of “teaser” introductory rates. The act, called the “credit card bill of rights,” is giving card companies the incentive to change account structures early for users like JaWanna Henry, 25, a personal trainer in the District.

“They treated me really badly,” Ms. Henry said. “I had to explain to them they had told me I was a good customer before this all happened.”

In February, she tried to pay her credit card bill online using the account number from her credit union. But the Web site wouldn’t accept the submission. The company charged her a fee, and “let” her try twice more — charging again each time the payment was denied.

Ms. Henry eventually had to pay with cash, but it was too late to save the terms of her account: The interest rate on her $9,000 balance went up from 11.2 percent to 25.9 percent, and her minimum monthly payment jumped from $200 a month to the $400 to $600 range.

“They refunded me some of the fees, but they said I needed to pay the money to them so they could refund it later,” Ms. Henry said. “It was hard.”

Such harsh fees and quick actions have come as a surprise for American credit card users, who for years have depended increasingly on their cards as a convenient source of funds. According to the Federal Reserve, Americans hold about $2.52 trillion in credit card debt, although that amount has fallen since last year’s economic meltdown.

Ms. Henry said she expected the late fees, but the methods recently used by the companies — high and rapid interest rate increases, vicious account limit cuts and rising minimum payments — seem to have been caused by the upcoming restrictions.

Consumers and analysts have noticed.

“I absolutely believe these changes are because of the new law. They are proactively modifying these contracts because it’s legal and easy to do now,” said John Ulzheimer, president of consumer education at Credit.com. “I don’t see anything in the card act that will be retroactive, so the government can’t go back” to give users relief from changes made now, he explained.

“This is a pocket of time when the credit card companies are still in the midst of their reign of terror,” Mr. Ulzheimer said.

Some analysts said it’s unprecedented for people with good credit to find their cards cut so quickly — even people in their 50s and 60s with credit scores approaching 800.

“Your card represents a lot of money,” said Bud Hibbs, a consumer advocate for radio station KRLD in Dallas. He explained that because companies securitize the debt they hold, lowering credit limits allows them to offer more money to more customers. But that puts a squeeze on existing ones.

“I think there will be a backlash because consumers are more savvy,” Mr. Hibbs said.

Story Continues →