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It’s a new day for credit cards

February 21, 2010 at 2:53 AM 10 comments

By JENNIFER WATERS

For the first time in three years, credit-card issuers are ramping up their mailbox solicitations. But don’t expect to see your father’s credit-card appeals. Variable interest rates, higher annual fees and a host of new charges will be hidden in the fine print of these offers.

With new consumer protections in the Credit Card Act (officially called the Credit Card Responsibility and Disclosure Act) set to take effect Monday, the nation’s largest credit-card issuers upped their direct-mail solicitations to consumers by more than 45% in the fourth quarter from the prior quarter, according to two leading market-research firms.

Tom Bloom

But a new credit card these days will cost you. The average annual percentage rates, which climbed steadily most of last year, are now at the highest level in five years. Some 35% of cards now have annual fees and a number are raising or imposing new charges for balance transfers and inactive accounts.

“Issuers are looking for ways to recoup potential lost revenues from the new regulations,” says Andrew Davidson, senior vice president at Mintel Comperemedia.

In the fourth quarter, the average annual percentage rate stood at 13.5%, well above the year-ago rate of 11.8%, according to Synovate Mail Monitor. Last week’s average APR, according to CreditCards.com, was about 14.2%, up from 12.1% just six months ago. Interest rates for subprime borrowers were significantly steeper at 24.9%, compared with 14.3% six months ago.

It’s also worth looking at the spread between the prime rate, currently at 3.25%, and the variable interest rate the issuer applies to the credit card, says Anuj Shahani, director of competitive tracking for Synovate’s financial-services group.

The prime rate is three percentage points above the Federal Reserve’s target rate for fed funds, which now is 0% to 0.25%. Variable rates are tied to the prime rate, meaning that as rates change, the APR on a variable-rate card changes, too.

The gap between the prime rate and the average APR of 13.51% is 10.26 percentage points, the widest variance in 10 years. In 2007, the spread was less than half that, at 4.8 percentage points.

As the economy recovers, the Fed will eventually raise interest rates, which will then raise the variable rate on those types of credit cards, no matter what your credit history is. For example, if the Fed raises interest rates by a quarter of a percentage point, that average APR from CreditCards.com’s 14.1% rate would rise to 14.4%.

“We’re expecting APRs to average in the high teens by 2010 and expecting them to touch 20% and higher by 2011,” says Mr. Shahani, who is assuming the Fed will raise rates this year. There are others, however, who believe the Fed won’t do so till 2011.

If Mr. Shahani is right, people who now have variable rates at 29.9% — and many do — will be looking at rates that top 30% when the prime rises. “It does sound crazy and shocking, but if you think of it, some of those subprime folks can be looking at 35% or more this year,” he says.

Meanwhile, many customers will see the return of annual fees. In the fourth quarter, 35% of cards charged an annual fee, the highest level in the past decade, according to Synovate, which expects more issuers to tack on annual fees in the coming months. That could come back to haunt some card issuers. A recent Synovate study found that three out of every four credit-card holders will either cancel or consolidate cards that carry an annual fee.

Here are the things you need to watch out for should you be tempted by any of the credit-card offers you receive:

Average annual interest rates: They will be higher than you’re used to and could get higher yet. Most, if not all, credit cards will offer an attractive introductory rate for 12 months before it shoots up to something not so pretty. Make sure you know what you’re getting into.

Rate increases: The new law prohibits card issuers from escalating rates during the first year. Rates cannot increase without a 45-day notice — and the opportunity for you to opt out and cancel the card. But it you’re more than 60 days late on payments, all bets are off.

Annual fees: Yes, they’re back, but not on every card. If you’re the type who pays off credit cards every month, then consider this the credit-card issuers’ payback for not contributing to top-line sales. Of course, you can choose another card or consolidate on another household charge account.

Application fees: These are new to most people. It’s a charge for the opportunity to apply for a card, whether you get the card or not. Annual and application fees cannot exceed 25% of your credit limit. But don’t get fooled by them. They can represent another form of interest on your account.

Hybrid cards: Synovate’s Mr. Shahani expects to see innovation take over the card space as issuers look for new ways to raise money. Watch out for low-fee cards that could have other high-interest charges or fees.

Late fees: They haven’t gone anywhere and could now come in different packages. Many issuers are looking at tiered payments such as $29 for balances below $500 and $35 for those above $500.

Over-limit fees: You have to let the card issuers know you’re willing to pay a fee should you go over your limit. If you don’t, you’ll be turned down at the cash register. Some issuers such as American Express and Discover have done away with over-limit fees.

Write to Jennifer Waters at jennifer.waters@dowjones.com

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