Banks Get Picky on Credit Cards

After years of mailing cards out to just about anybody, banks are suddenly freezing out all but the most creditworthy customers.

Those who do get cards have to jump through more hoops, such as sending in copies of their pay stubs. And they're being hit with higher rates and fees.

Banks always tighten credit standards in an economic slowdown. But the recently passed Credit Card Act of 2009 is forcing the industry to rewrite the play book it has used for years. The new legislation aims to limit fluctuating interest rates, ban some controversial practices and arm consumers with more information on their debts.

Banks have until February 2010 to comply with the act's key provisions, although some parts of the law have earlier deadlines. This month (August 09), for example, issuers have to start mailing bills at least 21 days before the due date and provide at least 45 days' notice before changing any significant terms on a card.

The result: Many banks are tightening things up now before many of the restrictions go into effect.

In recent months, banks including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., have raised interest rates and fees, switched customers with fixed rates to variable ones, and dropped credit lines and closed accounts.

Tighter LimitsBanks' response to legislative and economic changes include:

• Tightening standards for credit-card applicants, rejecting more people and offering smaller credit lines.
• Raising interest rates and fees and switching customers with fixed rates to variable ones.
• Enhancing rewards programs for a few customers but adding more fees.

Repricing Accounts

A spokeswoman for Bank of America, declined to comment on an individual account, noting that the bank periodically reviews individual accounts and may reprice an account for risk, based on the individual's performance and external credit-risk factors.

For consumers, this means that not only will it be harder and more expensive to get credit, but the average credit line that gets assigned up front will be less generous. That would have been true in any economic slowdown, but the legislative changes are exacerbating those trends. For example, the percentage of credit applications that are getting a "human look" is increasing, he says. Discover Financial Services, for one, says it has been doing more manual underwriting of new applications due to the economic environment.

In the short term, banks will focus on making up for lost revenue by getting existing customers to spend more mainly by offering targeted reward programs. Annual fees, including fees to redeem rewards points, will go up.

Chase's new rewards program, for example, features two cards: the Chase Freedom card, a no-fee card that earns 1% cash back on all purchases (with quarterly bonus opportunities), and a Sapphire Preferred card with enhanced rewards benefits for a $95 annual fee.

The Chase Freedom card also comes with an upgraded feature that lets customers earn a fixed 3% bonus for spending in grocery, gas and fast-food categories for a $30 annual fee.