This is a guest post from Mr Credit Card of www.askmrcreditcard.com. Here, he talks about how he thinks credit cards will evolve in the future.
SpendOnLife asked me to share my views on how credit cards will evolve in 2010. I decided to approach it this way. I think there are two things that are going to happen (or already have happened). Firstly, credit cards are going to have to comply with the new CARD Act. Secondly, they would have to react to the economic climate. I will first touch on the first point on how credit card issuers will (or already have) reacted to the CARD Act. But first, we have to understand some of the new rules:
Allocation of payments – From 22nd February 2010 onwards, credit card issuers have to allocate payments to balances with higher interest rate first. That means folks who have transferred their balances over to balance transfer credit card offers will have payments in excess of minimum payments allocated to those with higher interests if they indeed charge other items to the card.
Double Billing Cycle will no longer be allowed – As far as I know, most credit cards no longer use the double billing cycle method to calculate interest charges. But come February 2010, they will not be permitted by law to do so.
Rules on retroactive interest rate increases – Credit card issuers will no longer to able to increase the rate they charge over prime rate on existing balance. The other exceptions are when a balance transfer offer period expires, when cardholders agree to a debt repayment plan, or if the cardholder is more than 60 days late (in which default rate will kick in).
Consumers have to opt-in on over the limit fees – This one is interesting. Consumers now have to “opt-in” to be charged a over-the-limit fee if they exceed their credit limit. If not, their transaction will be rejected.
Pay to pay – Credit card issuers cannot charge extra fees if customers choose to pay over the phone, by mail etc.
The real big changes
The real big changes in my opinion is the requirements for fees and sub-prime credit cards, which are essentially credit cards for people with bad credit, and the marketing of student credit cards for college students. For sub-prime cards, or “fee harvesting” cards as they call it, the upfront fees that they charge cannot be more than 25% of the initial credit. This will have really important implications for sub-prime card issuers because up front fees are a decent chunk of the profits they make. Already, some issuers like First Premier Bank are already experimenting by mailing out offers with lower upfront fees but charging a whopping 75% interest! Turns out that response was “not too bad” according to them!
College students who are not 21 years of age need a co-signer to get a credit card. If not, they will need to show proof of income to get a credit card. They would need to get parents, guardians (essentially their co-signers) permission to increase credit limit. Credit card issuers are also not permitted to provide things like free pizza, t-shirts on school campus to market their credit cards. In fact, marketing contracts with colleges and alumni have to be fully disclosed to the FED as well!
Will credit cards start charging annual fees?
One of the main worries of consumers is that given all these clamp down on what credit card issuers can do or cannot do, will this affect folks who have always paid their bills in full (since they have always been considered deadbeats!). Another worry is that consumers will be charged a fee for not using their credit cards. Here is my opinion. I think we will not see a rise in annual fees from credit card issuers. The problem is that the credit card market is simply too competitive. And I think what we have seen so far from credit card issuers confirms my views. For example, Chase and Bank of America have both introduced a new line up of cards, most of which do not have any annual fees. Chase introduced their new Slate, Freedom and Sapphire cards with a feature called BluePrint which lets consumers calculate how long it takes to pay off their balance. Bank of America has also introduced and rebranded their basic credit cards. They are now called BankAmericard! Once again, these new cards comply with the new rules that the CARD Act requires.
I think the main changes in credit cards have already taken place. And that was a response to the credit crisis and credit card issuers being too generous with their rewards. For example, cash back credit cards have seen their rewards scaled down tremendously. Not all cards scaled back though. Cards like Discover and American Express kept their cash rebates unchanged because their cards were profitable, unlike some of the over-generous cards from Chase and Citi. The biggest change that we saw was in balance transfer credit cards. Pre-crisis, cards were offering 0% deals for 12 months and even waived the balance transfer fees. But once the wheels started coming off, introductory periods were scaled back, balance transfer fees were introduced and they are now higher. But this is a response more to the fact that customers did not remain loyal once the introductory period ended, but instead switched to another card!
In my opinion, the biggest change will come in the marketing of credit cards to students and in the sub-prime card sector. These are all mandated by the new CARD Act and it can only get better. No longer will ignorant students simply get a card and spend like there is no tomorrow. I think a long term result will be that there will be less students who graduate with credit card debt. I do not know what the impact is going to be on the sub-prime sector. Yes, upfront fees will go down, but rates will go up. Longer term, will it discourage lending to sub-prime consumers (whom you could argue should not have any credit card?). Perhaps there will be a further pick up in debit card issuance? That is already happening.
For folks who pay their balance in full or carry only a small balance, or have charge cards and airline credit cards with annual fees, I think you will not be impacted by any changes that credit card issuers make. Folks who do not have great credit will find it harder to get credit. College students who are less than 21 years old will have to jump through an extra hoop to get a credit card. And sub-prime borrowers will face higher interest rates but lower up front fees. I think overall the CARD Act is a good thing and will clean up many of the more predatory practices by credit card issuers.