Recent surveys have found that cardholders with higher FICO scores and higher incomes have been rewarded with increased credit limits. They still are getting balance transfer offers, albeit ones with shorter terms of 6-18 months rather than earlier ones given “for life.” A new trend started by Chase is a shift toward higher balance transfer fees, which also dilutes the value of such offers.

Still, those that are demonstrating that they are the most valuable clients with the least risk are being rewarded with these higher credit limits. While card issuers may be under pressure to increase available credit, they are consistently steering this new credit to those borrowers demonstrating the highest levels of creditworthiness.

Higher Risk Cardholders Suffering

While things might smell rosy for the preferred borrowers, those who are facing financial difficulties are finding that their credit card accounts are becoming more difficult to manage on their own. Their credit limits are being slashed, often times to the point where recent purchases can cause them to exceed their credit limits.

Most card issuers are increasing interest rates on large numbers of accounts. Also, many accounts including those held by preferred borrowers are quietly converting from fixed rate to variable rate accounts. While this may not cause an immediate increase in finance charges, it does leave the door open for these card issuers to match increases in the prime rate with their own interest rate increases. Come February 2010, this will be the only way they can raise rates unless the card issuer falls more than 60 days delinquent.

Some cardholders that took advantage of amazingly low interest balance transfer offers are finding that while the rate may be “for the life of the balance,” the minimum payment calculation may change. Chase increased the minimum payment calculation for more than a million cardholders from 2% of the balance to an industry-high 5%. This effectively increases the amount due by 150%, leaving many cash-strapped borrowers unable to keep up with the higher monthly payments.

The market has allowed for risk-based pricing as a way for extending credit to riskier borrowers while allowing lenders to charge higher fees to counter higher default rates. The Card Act of 2009 severely restricts the punitive measures that card issuers may take for perceived changes in a cardholder’s risk. These changes may include missed payments and higher credit utilization among other things.

The banks cannot react as quickly or with as much action under the new Act. Therefore, they have to shield themselves from losses from higher risk customers. The result is a shift in focus from gaining moderate and high risk customers to spending more money attracting the lower risk borrowers. To do this, they can  either market heavily or they may simply raise credit limits for their least-risky borrowers.

It may take a couple of years for the market to settle into the new Act. For now, expect tighter lending standards, higher rates of interest for most cardholders and corrective measures by creditors to reduce their risk exposure. Risk-based pricing is far from dead, but it may need to be tweaked based on the new restrictions.

Hardship

Chase, like other credit card issuers does provide an in-house hardship program. Traditionally, this has been a 6 month temporary reprieve on distressed cardholders that gives them the chance to catch up when a life event has caused financial problems.

However, the Proactive Solutions Department takes a different role. While it is true that the department handles an increasing number of phone calls from cardholders that have faced an actual hardship such as job loss or reduced income, another cause is the source of a high number of calls.

When Chase increased the minimum payment requirement from 2% to 5%, many cardholders saw their minimum payments rise by 150%. Some of these cardholders did face hardships, which made the change even more difficult to handle. For these cardholders, this department may be able to help. You must tell the representative that you are “facing a hardship” and that you expect to be able to repay the debt if they will help you bring the payment back down.

If you are successful, you may be able to repay the debt over a period of 5 years at a slightly higher interest rate. While this may not be as good as your original terms, it may be better than the alternative, which is to fall behind and eventually default.

Here is a description for a Department Team Manager job posting found in CareerBuilder.com:

As a Customer Support Team Manager, you will oversee a unit of approximately 18-20 collectors in resolving customer debt and customer program eligibility over the phone in the Proactive Solutions Department.

Please note that “customer program eligibility” means making sure that you meet their guidelines for help and know how to ask for it. These guidelines are not public information, but we may speculate that it includes traditional hardship criteria. It may also possibly include limitations based on the types of balances that you hold with Chase, but this is not proven.

No Hardship

For cardholders that do not have a bona fide hardship, there is less help available. Technically, the pressure placed on you by the higher minimum payment requirement does not constitute a hardship, even though most sensible people would disagree.

If you do not have a hardship, then you would not be eligible for help with their plan. That leaves you with a couple of alternatives.

First, if you still have good credit, you might consider rolling much of the balance over into a loan product. This may be unsecured, or you may be able to utilize any remaining equity in your home (assuming you have escaped the housing bust).

If you do not have good credit and are facing problems with multiple credit card accounts, it might be time to recognize that you have a more serious and long-term financial problem. Do your research, find a nonprofit credit counseling organization and get help before your situation gets worse.

We all know that most of the changes to terms on credit card accounts in 2009 have been negative in nature. Given the onslaught of bad news, I did want to share some good news that I recently received from Chase.

Rather than summarize or attempt to restate the letter, I thought it best to repeat the content of the letter here:

We are pleased to let you know that we are making changes to your payment due date to give you more time to pay. Beginning with your July or August statement, you will have an additional 5 days to submit your payment.

Our records indicate that you may use somme type of automated payment service to send in your monthly payments. Please review your July or August credit card statement for your new extended due date and if necessary, make changes to your current payment arrangements with your bill payment service to enable you to take advantage of this additional time.

If for any reason you would like to change your new payment due date, please contact us by calling the telephone number on the back of your card or visit our website at Chase.com. We are here 24 hours a day to service your credit card needs.

Sincerely,

Deb Walden
Executive Vice President
Customer Experience

It is indeed a good sign to see an act of kindness from a credit card company, especially given the unfriendly changes that many creditors have made in response to the deteriorating economy. At the same time, my first thought was “what if they were making my due date sooner?”

I know that some credit card issuers have adjusted due dates so that they fall sooner, thereby increasing the propensity of those that use automatic payment services of being late. I would be interested to know what experience anyone had with having an earlier due date as a result of a creditor changing your due date.

Up until just a few years ago, balance transfers normally incurred a 3% fee that was capped at $50. Now there is no cap, and the fee has increased to 5%.

Cash advances did not have such a fee until now. This up-front fee is also 5% of the cash advance, with a minimum fee of $10. In addition, there is still no grace period on cash advances, meaning that the higher interest rate for cash advances will begin accruing on that balance immediately. Additionally, Chase has quietly lowered cash advance limits on cards, with many reduced to the lower of 10% of the credit limit or $1,000.

For several years from 2003-2007, Chase actively encouraged its superprime customers to rack up large debts through very attractive balance transfer offers. While most were around 3.99% or 4.99%, some were as low as 1.99%.

The idea was that they would float these low interest balances for a few months until the cardholder did something to prompt a higher rate. They were hoping that enough cardholders would miss a payment so that they convert a certain percentage of these accounts into high-profit producers. A cardholder that missed a payment would see their interest rates hiked and would lose the “life of the balance” rates for good.

While these changes have affected a small number of account holders, a very high percentage of account holders never triggered interest rate increases. They were very careful to make their monthly payment so that they could retain the low rate. If they were ever unable to meet all of their monthly obligations, they would choose some other payment to delay. The Chase accounts would always be paid on-time.

Out of Balance Transfer Game

By making such moves to raise balance transfer and cash advance fees, Chase is betting that they will make enough money on upfront fees to offset any higher default risks. While some customers never read the fine print on an offer, most of their superprime customers do. That is why they have such good credit in the first place. These customers will likely balk at any new balance transfer offers that Chase presents to them.

The extraordinarily low rates that Chase offered previously will likely never be offered again given the regulatory climate that credit cards must operate in beginning in February 2010. By reducing the “any time any reason” potential for changing the terms on a credit card agreement, credit card issuers must pass on some of the lost profits to their best cardholders if they are to retain current profit margins.

There was a whole culture of consumers that took advantage of the low rates previously offered. Many of them used the offers to buy cars at below-market interest rates. Some were even as bold as to use these low interest offers as a sort of margin account in order to place investments that were expected to earn a higher rate than they were being charged by Chase.

While Chase encouraged such activity before, they certainly have put the brakes on this marketing strategy. In fact, the higher minimum payment requirements that they have placed on many of their account holders was expanded to an even larger percentage of their credit card portfolio.

Certainly Chase understands the negative public perception that accompanies such changes. However, they are also aware that those who are both writing and reading such infuriating comments are largely those that have already been affected by the changes. In short, the negative press has been fairly minimal given the sudden and shocking minimum payment hikes that have affected so many.

Regardless of public opinion, it certainly hasn’t hurt Chase profits. Chase reported quarterly results of $2.7 billion while CNN reported that most analysts projected a profit of $280 million. That announcement prompted the following quote from CNN:

JPMorgan Chase once again proved that it has been one of the better-run banks during the financial crisis after reporting quarterly results that blew past Wall Street estimates.

If there is good news for the consumer, it is that banks may be almost out of the woods in terms of consumer credit losses. Perhaps that will translate into better terms for cardholders that what the current economic climate has produced. Even if this occurs, it will not happen before February 2010 as provisions of the CARD Act are enacted.

Chase is providing very good benefits to its cardholders that take the step of getting out of debt by completing credit counseling and enrolling in a debt management program. Its almost as if Chase is giving an ultimatum for cardholders that may be overextended on their credit accounts.

Cardholders with good credit may opt to pay off the accounts quickly or transfer the balances to another lender to avoid the 5% minimum payment requirements. However, those with lower credit scores and those who are having trouble making all of their monthly minimum payments may need to seek credit counseling.

What Chase is Providing

These are the main benefits that Chase is currently  providing to eligible cardholders through a debt management program:

• Lower Monthly Payment: Chase can lower the required monthly minimum payment from 5% down to 2.2% of the balance, which can reduce the minimum payment by more than half. In addition, Chase allows credit counselors the flexibility of making further cuts in the monthly minimum payment through a process known as call to action. This places additional discretion at the hands of a credit counselor that is trying to help a distressed cardholder balance their budget. A call to action label on an account can lower the minimum payment further. A standard call to action may allow for an even lower minimum payment of 2% of the balance. If the client has endured a hardship and is on the brink of financial ruin, then a hardship call to action may lower the minimum payment to as low as 1.75% of the balance.
• Lower Interest Rates: Chase is reducing interest rates on most accounts to as low as 7% APR through debt management. This may save hundreds or thousands of dollars each year while repaying the debt. Depending on the level of hardship, a client may be eligible for further reductions in their rates based on the call to action guidelines.
• Reage: Clients that have fallen behind would not have to catch the account up before receiving benefits. This would also help the client avoid fees, which Chase usually agrees to waive through a debt management program.

The higher minimum payments that Chase has imposed on certain accounts has certainly put some clients at risk of financial problems. However, these clients may get relief by taking action right away. Either they need to repay it quickly on their own, transfer the balance to avoid the higher minimum payments or get help through credit counseling.

Chase has indeed lost popularity points based on their changes to cardholder agreements. Those clients that are seeking credit counseling are finding though that the benefits have actually improved for Chase accounts.

Chase initially added a $10 monthly service fee beginning in January as an attempt to recoup some of the profits lost through higher default rates of its cardholders. This was in addition to the change in account terms that required certain cardholders to either increase their monthly payment by 150% or to incur an interest rate hike.

Chase has reportedly reversed its decision to impose the $10 monthly service fee. Additionally, it has provided credits to these cardholders to reimburse them for previously charged fees.

While this is welcome news for many account holders who will be able to avoid $120 in additional fees over the course of a year, it still leaves many cardholders struggling with the new repayment terms on balances they thought would remain at a low rate of interest.

Chase is also allowing for the minimum payment to drop back to the original percentage (2% of the balance for most cardholders) instead of the 5% minimum payment requirement. However, some cardholders fell behind as a result of the higher payment requirements and have since incurred additional late and/or over-the-limit fees.

Consumer resistance to the changes in terms was fierce, and much of the ire was placed on the $10 monthly service fee. This was the basis of a class action lawsuit that were gaining momentum as well as potential regulatory challenges.

New York Attorney General Mario Cuomo announced the agreement with Chase which will end the unpopular practice and result in $4.4 million in refunds to affected cardholders. This is part of Cuomo’s response:

My office will not sit back and allow banks to promise one thing in its solicitations and agreements with consumers, and then when times get tough, change the deal, leaving consumers holding the bag.

Several cardholders have already reported receiving refunds for fees they had already been charged.

Your account number will not change which will maintain the extended reporting period for seasoned accounts. It will be the same account number and will show up as the same account with a different creditor name on your credit report.

While there has been no indication if the terms will change to align with those of other Chase accounts, it is likely that this will occur. What we do not know is if WAMU account holders that took advantage of balance transfer offers will be subject to similar monthly service fees, interest rate increases or 5% minimum payment requirements that caught other Chase account holders off guard.

This could indeed be a startling event for WAMU cardholders that have taken advantage of balance transfer offers in the past. Your minimum payment could go up dramatically.

Consider that your current monthly payment is normally around 2 or 3%. On a $10,000 balance this equates to a $200 or $300 monthly payment. If terms are updated to match those of some Chase accounts, your minimum payment could jump to $500 each month.

Some families have a healthy surplus in their budget that allows them to absorb the higher monthly payment. This could put a pinch in their budget, but it could also force a more rapid repayment which would begin to lower the balance at a faster rate.

Many families already are dealing with higher costs and lower incomes. Some are at a break even, while others are already falling behind. An extra $100-300 in monthly payouts is enough to push many families over the edge.

Some WAMU cardholders have already reported that they have received revised terms on their existing accounts. We have not however, received any confirmation that balance transfers will be subjected to the revised terms of many Chase cardholders.

Chase has simply stated that payment processing currently handled by WAMU will be aligned with Chase’s current policies and processes effective Monday, March 9, 2009. That implies that existing WAMU balance transfers may be subject to changes in terms that have rankled some Chase cardholders.

I originally featured the changes that Chase made to raise minimum payments while adding a service fee. This was one of the more hotly debated issues that we have covered in some time.

Several of the cardholders felt betrayed by the changes and expressed frustration and anger over the new terms. Many anticipated a class action lawsuit as early as December of 2008, and actively sought information regarding such a suit.

According to the law firm that has filed the class action suit against Chase, anyone who has incurred the $10 monthly service fee is eligible to join the lawsuit. It is being filed as a violation of the Truth in Lending Act.

If successful, it is possible that the lawsuit could reimburse cardholders for the total service fees and higher interest charged due to the changes. It would likely not include higher interest rates for cardholders that violated their original cardholder agreement. This would include those who were unable to make their increased minimum payment as a result of the new 5% minimum payment requirement.

In other words, anyone that can afford the changes but feels they should not pay higher interest and fees could benefit from the suit if Chase loses in court. However, anyone that is in real financial trouble probably will not benefit.

Therefore, if you have struggled to make your payments and are in danger of falling behind, you should not wait for a lifeline from this class action lawsuit. It will not save you even if it succeeds. Instead, get help from a qualified credit counseling organization so that you can reduce your monthly payments and avoid interest rate hikes.

Related Links

Giskan Solotaroff Anderson & Stewart Class Action Lawsuit–Investigation of Monthly Service Fee on Chase Credit Cards

Bankrate: Chase Faces Class-Action Suit

What is a Bankruptcy Score?

A bankruptcy risk score is not the same as your FICO score or credit score. Whereas your credit scores measure your risk of nonpayment, your bankruptcy risk score measures your likelihood to file for bankruptcy protection. It is based on how your recent credit history and transactions compare with those of other consumers when they filed for bankruptcy.

Many cardholders were blindsided by interest rate hikes. Chase for example gave many cardholders the option of either a rate hike or a 150% increase in their minimum payment. Other card issuers have raised interest rates by 3 or 4 points for many of their cardholders.

The reason that card issuers are raising rates, fees and even minimum payments is that they are trying to offset losses associated with higher default rates and losses from their other lines of business, such as mortgage units and brokerages. Some cardholders are not amused however.

Consumers may rightfully argue that their credit scores are still reasonably good, and therefore they should be protected from unprovoked rate increases. What they do not often know is that they likely have a bankruptcy risk score that may indicate that they are a higher risk client.

Credit card issuers reserve the right for adjustments to the cardholder agreement terms at “any time for any reason.” While these rights may be restricted beginning in July 2010, they do have the right to make changes without a cardholder’s consent.

If you believe that you have a good credit score and have experienced a rate increase or some other unwanted change, then there is a high likelihood that your bankruptcy risk score is higher than other cardholders with a similar credit score. While these scores have been blocked from consumer access for decades, they may be offered by Experian in the future.

The Federal Reserve enacted regulations in December 2008 that will limit the types of rate increases that credit card issuers can enact. This may bode well for consumers that carry hefty credit card balances, but they will have to wait until July 2010 to see any relief. By then, their interest rates will probably have been increased already.

Remember that card issuers could still lower their rate for any reason, but it will be harder to raise their rates for any reason after the July 2010 deadline. Also, while the Fed may be limiting rate increases, they have not made any rulings to cap minimum payment increases.

Consumers were initially hit with higher minimum payments in 2006 when the Fed pressured credit card issuers to raise minimum payment requirements. The Fed claimed that card issuers were not requiring a high enough minimum payment. In some cases, minimum payments as low as 1% of the balance were possible. Some cards even were characterized as negatively amortizing.

5% Minimum Payment Requirements

In November 2008, Capital One began raising its minimum payment requirements beyond what was requested by the Fed 2 years prior. One car issuer went even further. In December 2008, Chase raised minimum payments to 5% of the balance on may of its “fixed rate for the life of the balance” accounts. They also added a $10 monthly fee to these cardholders that applied as long as they carried these balances.

Some cardholders cannot afford the increase in minimum payments and are forced to make difficult choices if they do not get help through credit counseling. Other cardholders can afford the increase, but they are upset at what they perceive is an unwarranted change in terms.

Sure this is an important issue that is adversely affecting tens of thousands of cardholders. However, the Fed will probably drag their feet on this issue. Here is why:

Fed Action Unlikely

The Federal Reserve and other government regulatory authorities have for years criticized card issuers for allowing minimum payments that they deemed to be inadequate. The government mandates that cardholders be required to make a minimum payment so that they could be expected to pay off the balance in a reasonable period of time.

The government would love for all card issuers to require a 5% minimum payment. They see this as a long-term solution that would ultimately help cardholders avoid overpaying on short-term credit purchases.

There will be some short-term pains with the higher minimum payment requirements. There will be increased defaults just as there were back in 2006 when the previous increases in minimum payments were mandated. However, the Fed views the ultimate increase in minimum payment requirements as healthy for the American people.

I are not suggesting that the increases in minimum payments are warranted, nor am I suggesting that increases should not be made. What I am suggesting is that higher minimum payment requirements of 5% should be phased in on new purchases. This would help transform consumer credit into a safer form of financing that can reduce overreliance on credit cards.

Therefore, understand that the Federal Reserve will not be eager to force lower minimum payment requirements on credit card issuers. This would defeat what the Fed has been fighting for all along.