This is a guest post from Jim Sloan.
If your mailbox is filling up these days with zero percent balance transfer offers and other goodies from credit card companies, consider yourself among the elite.
Credit card companies, stung by new federal regulations that are preventing them from making money through punitive interest rate increases and penalty fees, are redoubling their efforts to court only the best customers with the best credit cards… The ones who don’t mind paying fees for services now and then.
According to the Associated Press, consumers who have excellent credit scores – earned by paying their bills on time and keeping their credit card balances a fair distance from their credit card limits – are receiving two out of every three mailers sent out with offers for such things as zero-percent-APR credit cards and no-fee balance transfer offers. Before the recession, these so-called A-list spenders received less than half of the offers.
Is this a dubious advantage of being wealthy? Some of the things the credit card companies are doing to lure this elite group include:
- Zero percent interest for up to a year on new purchases and no interest for up to 18 months on balance transfer credit cards
- Accelerated rewards
- Waived annual fees for maintaining a certain balance – in the case of one Bank of America premium card, the required balance is $50, 000
- A free companion ticket once a year when you purchase airline tickets. This offer is from Citi’s new ThankYou Prestige card, which carries an annual fee of $500
- No foreign transaction fees, such as in offers from American Express, Chase and Citi
Why all the interest in the wealthy?
Credit card companies still have bitter memories of 2009, when they had to write off more than $8 billion in unpaid credit card debt. This has prompted them to reduce the amount of credit available to their customers. According to the Associated Press, the industry has cut its overall credit line to $1.5 trillion – about a third less than what it offered in 2007.
That $8 billion write-off has also convinced them to make those of us with fair to middling credit scores pay for it. We B-listers have our finances more or less under control, but we make an occasional late payment and frankly we’re not big spenders. We can still get credit cards and do a credit card balance transfer, but we should expect higher interest rates and annual fees.
According to The Grand Rapids Press in Michigan, even the best credit cards offered to second-tier cardholders come with annual fees of $39 to $59 a year. Last year, we weren’t being asked to pay any annual fees. Bank of America recently slammed members of this group – particularly those who carried a balance close to their card limits or who had been late a few times – with a new $59 annual fee. If you didn’t have any other accounts with Bank of America, such as a mortgage or a savings account, you also got a letter about the new fee.
Life under the new law
But wait a minute. Isn’t there a law about randomly imposing new fees?
The Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, prevents companies from raising rates on existing balances, bumping the interest rate on your card during the first year, and charging more than $25 in penalties when you make a late payment.
These kinds of now-banned acts are what made the second-tier cardholders somewhat profitable for credit card companies, even with that walloping write-off.
But with those revenue streams now pinched off, the card companies are just, well, raising fees and raising interest rates. The average interest rates being offered to second-tier consumers is 22.57 percent, up from 19.07 percent just a year ago. The new law didn’t say credit card companies couldn’t raise rates. It just said they had to be more open about it.
And some banks are offering cards that reward customers who pay on time with reduced interest rates. For instance, TD Bank, a New Jersey unit of Toronto-Dominion Bank, gives customers a 50-percent reduction in their interest-rate-based finance charge when they pay at least 10 percent of their outstanding balance. And Capital One has a card that offers 1-percent cash back on purchases when the customer pays on time. The card is marketed to college students and typically carries a low credit limit.
Did all the credit card marketing people just come from Coca Cola? Their marketing mix is sharp, timely, and adaptive. They have people sitting around like Nasa, just thinking sh#t up. How can we make more money, let’s target the rich?
Ah, life as we knew it before Providian!
It may be hard to believe but most of what contributed to the electorate’s anger towards credit cards, thus the CARD Act despite the powerful bank lobby, were all innovations of the last 15 years. My dad had to co-sign on for me n my first card (with a $500 credit limit and $20 annual fee) because banks didn’t just give out credit to just any one. In some ways it was a status symbol, before the day teenagers had their own.
Somehow, I think the future of credit cards will look more like the last decade than the ’80’s & ’90’s. However at the moment there is a huge pulling back, which will probably last for a few years before the banks loosen consumer credit again. As banks figure out their “new normal.” Thankfully most of the established retailers maintained layaway programs even in the ‘credit card crazed’ phase, so “B-listers ” or below still have access for larger purchases.