Fed Survey: Tighter Credit Card Terms Still Ahead

By Eva Norlyk Smith

Credit card users are likely to face more headwinds ahead. According to a recent survey by the Fed, a majority of card issuers plan on further tightening lending practices in response to the new provisions in the Credit CARD Act. Larger banks are more likely to tighten terms than are other U.S. banks, and people with bad credit will likely be proportionately more affected.

The Federal Reserve Board on Monday released its quarterly survey of the lending practices of the largest banks in the U.S. and branches of foreign banks operating in the U.S. The October survey included a question about the changes in credit card lending banks are anticipating in response to the Credit Card Accountability Responsibility and Disclosure (Credit CARD Act). The survey included responses from 57 U.S. banks and 23 branches of foreign banks.

For credit card holders, the survey results brought little good news. Based on the responses, the current trend towards interest rate increases and lower credit limits on new and existing credit card accounts is likely to continue. Notably, people with bad credit are more likely to be affected. Here are the highlights of the findings:

Interest Rate Increases. If the results of the survey hold true, credit card interest rate increases won’t let up any time soon. For consumers with good credit, 61.1 percent of large banks vs. 47.1 percent of other banks said that they plan to increase the spread of interest rates charged over the bank’s cost of funds (i.e. effectively increasing interest rates). For people with bad credit, those numbers were even higher. A whopping 81.8 percent of large banks and 62.5 percent of the other banks polled planned to raise interest rates for nonprime borrowers.

While the Credit CARD Act will put some limits on card issuers’ ability to increase interest rates on existing balances once it becomes effective, credit card companies can still raise rates on future charges after the cardholder has had the card for a year. They just have to give 45 days notice of rate increases.

Credit Limit Cuts. 55.6 percent of large banks plan further credit limit cuts for prime borrowers; 47.1 percent of other banks said they are likely to cut credit lines more. Again, people with poor credit are more likely to face limit cuts: 63.7 percent of large banks and 50 percent of smaller banks intended to cut credit limits further for nonprime borrowers.

Annual Fees. 60 percent of large banks anticipated tightening the terms for annual fees for subprime borrowers vs. 12.5 percent of other banks. For cardholders with good credit, 35.3 percent of large banks said they were likely to increase annual fees vs. 41.2 percent for other banks.

Higher Credit Score Criteria. Consumers with bad credit may also find it increasingly difficult to get approved for new credit cards. 63.7 percent of the large banks polled said they would tighten the extent to which loans were granted to customers that do not meet credit scoring thresholds. 44.4 percent of large banks and 50 percent of other banks expected to increase the minimum required credit score for credit card approval.

A quarter of the smaller banks also planned on increasing the minimum required percentage payment each month; all large banks planned to leave the minimum payment unchanged.

The one notable exception to tightening credit card terms were penalty fees and the length of the grace period; most banks planned to either leave these unchanged or, in some cases, even ease the grace period slightly. The latter may be in response to the new provisions of the Credit CARD Act, which requires card issuers to give cardholders at least 21 days from the statement closing date to the payment due date.

Finally, the survey indicated that going forward, interest rates may increasingly be linked to the risk profile of the cardholder. About half (51.1 percent) of large banks planned to institute more risk-based interest rate pricing in the future, vs. 35.3 percent of other card issuers. In addition, 47 percent of large card issuers said they were less likely to be giving cardholders a fixed interest rate on credit cards. 87.5 percent of smaller card issuers said they were not planning to make changes to their fixed rate policies.

Most of the banks polled said that they had yet to fully comply with the new credit card law, and that they would not be fully compliant until February 22, 2010 when most of the new law steps into effect.

Published: November 11, 2009