Beware of what may be lurking in your mailbox this fall.
This is the annual credit-card season, when issuers mail millions of offers in hopes of tempting consumers to open or switch accounts before the holiday season.
But more so than in a half-decade, credit-card issuers are promoting Jekyll-and-Hyde credit cards that look handsome at first glance but turn ugly because of short-lived “teaser” rates, reduced rebates, hidden fees and other fine print, consumer advocates warn.
“We’re still seeing offers, but they are nowhere near the level of value in the past five years,” said Robert B. McKinley, president of RAM Research Group, which tracks the credit-card industry from Frederick, Md.
And even if you find a valuable card, there’s no guarantee it will stay that way. Over the years, the rankings of credit cards have read like a Billboard music list, with the top cards changing regularly as issuers come and go with offers. There’s always the risk that today’s enticing issuers will overhaul their terms if they discover months from now that all those new customers don’t help the bottom line. That makes sifting carefully through your credit offers more essential and trickier than ever.
Having a legalistic mind and a magnifying glass won’t always be enough, however. Issuers legally must disclose certain significant terms and charges when you apply. But many other fees initially go unmentioned because disclosure isn’t required under the Fair Credit Reporting Act or because an issuer adopts them after you get your card. (That’s why you shouldn’t casually toss away credit-card amendments that come stuffed with your monthly bill; sometimes they contain costly changes.)
“Choosing the right credit card is like walking through a minefield,” said Gerri Detweiler, author of “The Ultimate Credit Handbook.” “There are some good offers out there, but you really have to take the time to sort through to find out what might be best for you.”
Neil Schebetta takes a more cynical view. The Fremont, Calif., man, who co-hosts an America Online chat room on how to cope with credit-card debt, says he always opens credit-card offers over his garbage can. When he sees issuers hawking low introductory rates on the envelopes themselves, he lets gravity take over.
“For someone who is in the know,” he says, “that (blurb on the envelope) means, `Watch out for what’s inside.’ “
Many consumers use such offers to their advantage, simply switching from one card to the next when the low introductory rate expires. But this fall those teaser offers will be harder to find and generally last shorter periods, experts predict.
The reason is the industry is feeling a pinch as consumers have slowed their charges, their balances have leveled off and more customers are paying late.
“The focus in the past was on getting more customers,” Detweiler said. “The focus now is on moving toward bottom-line profitability from each customer.”
Among the tactics some issuers are employing:
– Annual fees. Such charges aren’t new. But some cards are charging for the first time, others are raising their fees, and still others are getting more innovative in assessing them. For instance, rather than charge more if you upgrade from a standard card to a gold card, Banc One TravelPlus Visa levies a fee that rises along with your credit limit. And last year General Electric imposed a $25 fee on some Mastercard customers who paid off their bills to avoid interest charges.
– Scaled-back rebates. Issuers can–and do–change their rebate programs. One reason is the number of “convenience” customers who pay off their bills each month. (Issuers still typically charge merchants 1 to 4.5 percent of everything convenience users ring up, but they profit more when they can levy interest charges, too.)
“They’re called `deadbeats’ and `freeloaders’ in the business,” McKinley said. “Bankers get after me when I use those words, but it’s true. Their dream customer is someone who charges the maximum and pays the minimum.”
To stem the flow of giveaways, last year General Motors cut its rebate in half, and all big-name airline frequent-flier cards raised the threshold for free tickets to 25,000 points, up from 20,000. More drastically and more recently, NationsBank and Blockbuster stopped issuing rebates on their Visa card as of Aug. 31, and Ford Motor Co. announced that after Dec. 31 users of its Citibank card will no longer earn the 5 percent rebate that could be applied toward purchases of Ford vehicles.
– Account closing fees. Typically, you simply cancel your account if you find a sweeter deal or don’t like your card’s amended terms. But First Union Bank and Advanta made that painful this spring by levying a fee to bail out. First Union backed off its $10 fee, but Advanta still charges $25 if you balk at its interest rate increase, McKinley said.
– Dormancy fees. Blockbuster Visa and some other issuers charge a fee if your card stays tucked in your wallet, untouched, for too long.
– Trash fees. It’s increasingly common for issuers to charge double-digit fees if you pay your bill late or charge more than your credit limit. But First Premier Bank now even charges some customers $1 a month if they ask too frequently for account information about such things as their available credit, their last payment or their account balance.
– Vague interest rates. While most credit offers hawk a specific interest rate, Providian Bank’s credit applications are “fuzzy,” McKinley said, because they promise only that your rate will fall between 13 and 25 percent depending upon how strong your credit is.
– Veiled tricks. Citibank offers a 5.9 percent introductory rate that’s good for a full year, but there’s a catch: You don’t get that rate until you transfer a balance from another card, McKinley said. “You can’t just charge it up for Christmas.”
In addition, teaser rates on some cards apply only to transferred balances or cash advances, but not to new charges you ring up.
– Mistakes are penalized. If you pay Citibank even a day late during the first year, the issuer can raise your rate to more than 20 percent. “If you do the teaser rate, you have to play by the bank’s rules,” McKinley said. “Banks are quick to pull the trigger.”
– Repricing. Many banks periodically review their customers’ creditworthiness. If they find customers shouldering more debt than before, they sometimes jack up the interest rate. Detweiler figures that’s why she recently received a flurry of complaints from First USA platinum card-holders who, despite paying their bills on time, had watched their rate skyrocket from 12.89 percent to more than 20 percent.
– Redefining “preapproved.” Detweiler worries that some issuers will take advantage of relaxed rules under the Fair Credit Reporting Act that took effect Oct. 1. Before, an issuer had to grant you credit if you mailed back an application for a preapproved credit offer, barring significant events in the interim such as a bankruptcy. The new rules, however, allow issuers to rescreen–and potentially reject–applicants.
“For consumers, it is going to be a big caution that `preapproved’ really doesn’t mean `preapproved’ anymore,” Detweiler said. “Those offers will be getting more deceptive.”
