Monday, July 6, 2009

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 “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.

Ann Marie Liberati of Springfield, Pa., said she made one or two late payments in the 20 years she had her Citibank MasterCard. She unintentionally made a payment one day last month. The payment was due at 5 p.m., but although she clicked it in before that, the company’s network failed to process it until 6:38 p.m.

The results weren’t pretty.

Mrs. Liberati and her husband Joe, a mechanic, had negotiated their interest rate from 12.9 percent down to 7.9 percent because of their good credit history; within a week of the “late” payments, the company jumped it to 25.9 percent. The Liberatis usually paid $100 over their monthly minimum payment of $300, but they’re now asked pay almost $1,000 every month. Their credit limit was lowered to $20,000, leaving their existing balance $287 in excess. That prompted a one-time fee of $365.

“They won’t even let us use the card for a year, or they’ll turn us in to the credit bureau,” Mrs. Liberati said. After being laid off from retailer David’s Bridal Inc., she starting to get some hours again. But $8 an hour isn’t much, she said.

“It’s so hard. My husband’s on a strict commission. I hate Citibank now.”

Samuel Wang, vice president for consumer affairs at Citibank, said adjustments to cards like the Liberatis’ are essential in today’s economy.

“This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles,” Mr. Wang said. “These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit.”

Mary Craig and her husband, Sean, of Ashburn, Va., were surprised to face plummeting credit availability just as they cleaned up their balance sheet. The couple has been arguing with American Express since Nov. 7, when the corporation cut their credit limit from $11,300 to $7,900. Mrs. Craig said the cut came just as they were ready to pay off some personal loans.

“We wanted to kill the debt,” she said. “Over the last summer, we paid it down. We never made purchases on [the card], so I guess we were a prime target to be cut.”

On March 7, the couple’s wedding anniversary, American Express lowered their limit again to $5,900. They watched the resulting decline in Mr. Craig’s credit score from 720 to 680, from excellent to fair.

Mrs. Craig, who is 27 and works for NBS Enterprises in Leesburg, Va., said she and her husband have had to cut back on their family budget. She even blames these surprise increases for the debt that keeps them from having another child.

“It’s ridiculous what they’re doing, and we can’t do a … thing about it,” Mrs. Craig said. “The companies are increasing and tightening before they have to deal with these new laws.”

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