Queen Elizabeth II of England in 1992 immortalized the term annus horribulus, in describing the year in which all her three children faced breakup of their marriages, and her son Prince Charles became the first Prince of Wales ever to break with decorum and initiate divorce proceedings.
Tiger Woods, for one, will recognize the Queen’s sentiments and happily wave good riddance to 2009. And so will credit card users, for whom this became the year when that Latin phrase gained unwelcome significance. Sky-rocketing interest rates, slashed credit limits, closed credit card accounts—these are just a handful of the tightened credit card terms, which for cardholders made 2009 an annus horribulus in its own right. Most card users stopped just one step short of outright divorcing their credit card company. As near-break-ups go, it has been a messy affair indeed.
For consumers and credit card companies, the honeymoon is long over. Now, like a couple that has discovered that they cannot live with each other and they cannot live without each other, consumers and credit card companies are left to sort out their irreconcilable differences; at least now with all the cards, so to speak, on the table.
And so, it is with joy that credit cardholders wave goodbye to 2009, and look towards the New Year. But will 2010 be any better?
That, of course, is anybody’s guess. However, there are already several indications of how things might shape up for credit card users in 2010. Not surprisingly, there is good news and bad news.
The good news is that on February 22, 2010 most of the provisions of the new Credit CARD Act step into effect, and thereby many of the new consumer protections that consumer activists and key Democrats fought long and hard for in 2009. Come February, many deceptive and abusive credit card practices will be outlawed. Most notably, that includes the loathed Universal Default clause, under which credit cards could go into default interest rates if the cardholder was late paying his or her cell phone bill.
In addition, credit card payments for less than the full balance due can no longer be applied to the balance with the lowest interest rate. With the new credit card law, any payment above the minimum payment due has to be applied first to the balance with the highest interest rate. Among other welcome news are clearer disclosures on credit card statements and new age limits on student credit cards.
And now for the bad news: While credit card interest rate hikes may have peaked, 2010 is not likely to signal the end of them. The new credit card law does include limits on card issuers’ ability to raise credit card interest rate retroactively on existing balances. However, those limitations apply only to fixed rate cards, not to variable rate credit cards, which are tied to the prime rate.
This fact has not been lost on credit card companies. In 2009, fixed rate credit cards became an endangered species, if not practically extinct. More than nine out of ten credit card offers (94 percent) mailed out between July and September were for variable rate credit cards, compared to 67 percent of offers in 2007, according to market research firm Mintel. In addition, many cardholders with existing fixed rate cards have seen their credit cards shifted from fixed to variable rate cards.
The prime rate, at 3.25 percent, is at historic lows, and it has nowhere to go but up; as the prime rate begins to climb, so will credit card interest rates. Moreover, in the new post-credit card reform world, what goes up, may not necessarily come down. That’s courtesy a new type of variable rate credit card, which puts a floor on how low the interest rate can drop. According to a recent study from Pew Charitable Trusts, more than one third of the largest credit card companies have introduced a minimum interest rate on their variable rate cards. That’s compared to only 10 percent of card issuers in December of 2008.
Like Tiger Woods, cardholders in 2009 learned the painful truth that relationship trouble often comes with a high tab. 2009 became the year when card issuers repriced their risk and consumers paid the price.
Will 2010 be any better? More than ever, it depends on the choices each cardholder makes. The era in which credit cards came with easy access to inexpensive credit is long over. The sooner we as consumers fess up to this fact and go back to using credit cards as the convenient payment instruments they were originally intended to be, the better 2010 will be.
