Which Accounts are Targeted?

If you charge more than $200 a month to your Citi card, then you likely will be spared this $60 annual fee. According to Citi, all of the letters were mailed out and affected cardholders have already received notification.

Accounts that are used less frequently and fall well below the $2,400 annual threshold are likely to see the fee. Citi did provide affected cardholders with the ability to reverse this fee:

However, because we value you as a customer, we wanted to give you an opportunity to have the annual fee credited back to your account.

Decisions to reverse the fee reportedly depend on the customer demonstrating that they do indeed charge close to that $2,400 annual threshold. Otherwise, it is likely that many of these requests will be refused.

The first annual fees are set to be charged on April 1, 2010. It is worth stating that this is not an April Fools joke!

If you want to opt out, the deadline is March 31, 2010. Here is the contact information:

Call Citi at 1-866-915-9425. If you choose to write them, include your name, address and account number in the letter:

Poor Timing

Citibank began mailing out thousands of notification letters on November 1 to notify cardholders that they would see their interest rates skyrocket to 22.99, 23.99 or higher beginning just 5 days before Christmas. This is poor timing at best, and is sure to upset a large number of account holders.

Not only are these rates substantially higher than the national average of 12.60% (Source: Creditcards.com) at the time of this article, they are variable. That means that as the prime rate increases, these rates will increase with it.

Fortunately, no one is expecting prime rate to increase for some time due to the weak state of the economy. That should at least be a minor reprieve. However, at 23% no one is sure to feel relieved.

Increase Does Not Affect Life of Balance Offers

Cardholders that took advantage of one of the special balance transfer offers which held the rate constant for the life of the balance should not worry. Those rates will not change as long as you keep your end of the agreement. The increase only applies to purchases and cash advances.

You should feel fortunate if you are locked in at a low rate for a balance. Those generous offers are history. Where 3.99% for the life of the balance was common just 2-3 years ago, their latest offer is 15.99% until January 1, 2011.

Such a move is likely to raise the ire of Representative Carolyn Maloney, who has steadfastly pushed for more rapid implementation of the Crdit CARD Act. While other banks have backed off a couple of months early, Citibank clearly is willing to take a chance of being targeted in order to lock in some extra profits for 2010 and beyond.

Right to Opt Out

If you would like to opt out, Citibank will allow you to keep your card open under the same terms until your card expires. In case you haven’t paid attention to your cardholder terms, your rate has likely already increased within the past year, meaning that opting out probably would not save you much.

While Citi may look bad for its untimely move, it should be noted that several other major credit card companies had increased interest rates months ago. Citi may be late to the party, but they have still embraced the interest rate increases that desperate cardholders have feared. It remains to be seen whether Citi will follow suit and adopt the changes mandated by the Credit CARD Act prior to the government imposed deadline.

Citi spokesman Samuel Wang confirmed that “a small number of Citi customers may be notified of an annual fee.” He released the following statement:

We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles. These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availablility of credit.

$90 Annual Fee

For cardholders that receive notification of this change in terms, they may expect an annual fee of $90. This fee would not be charged prior to September 2010 according to initial letters that have gone out from the lender.

Details of this new annual fee were initially reported by American Banker on Friday, August 21, 2009. Bankrate.com also confirmed that certain Citi accounts would begin to be assessed this annual fee. Ironically, that reporter’s own mother received one of the first letters.

Citibank declined to provide specifics on how they selected certain accounts for the account changes. There is also no known estimates on how many accounts might be affected by the new annual fees.

In a twist, accounts that will be subject to the annual fee may maintain the account and avoid the fee. To do so, they cardholder must charge at least $2,400 in a year in order to have the annual fee waived. Otherwise, they must opt out of the changes and relinquish all account privileges to avoid the fee.

Citi is not alone in its quest to generate new sources of income from its existing accounts. Most analysts expect to see annual fees and other new charges added to cardholder agreements from most major credit card issuers.

The increases have been quite substantial and are in direct response to two main causes. First, the recession has created a difficult economic environment in which credit card issuers are struggling to offset rising default rates by charging higher rates and fees to their paying customers.

Second, the CARD Act of 2009 has created a rush by credit card issuers to increase rates on existing balances while they still are able. The Act limits their ability to raise interest rates on previously charged balances, and this provision goes into effect February 2010.

In April and May 2009, a large number of Sears cardholders received notices that their interest rates werer going up from around 11% up to 21.4% APR. The announced increases in August are even higher, with rates increasing to US Prime Rate plus 21.99%. That means that rates are increasing to around 25.24% APR.

This increase is affecting more than just high-risk cardholders. A FICO score of 762 is generally considered to be excellent. Even though my Equifax FICO score exceeds 760, I was not spared from the increase. For the record, my Sears card balance is zero.

I could certainly opt out, however there would be little incentive to do so. The only reason that I keep the card is that I have held the account for more than 13 years which helps my credit score. Ten percent of each credit score is affected by the average length of time that accounts, both individually and collectively, have been maintained.

Even given the rate increase, closing the account would be a mistake. However, if an annual fee ever gets implemented, then I would most certainly be justified to close the account.

If you are facing higher interest rates on accounts that are carrying substantial balances, then you should consider speaking with a credit counselor. Make sure that you select a reputable organization that employs accredited counselors.

UPDATE

I contacted Sears Credit Card Services to inquire about the changes. The representative informed me that “all Sears Card customers are receiving a change in terms.” After further inquiry, the representative proposed a counter offer.

The counter offer was to keep the terms as is (17.24% APR) with no changes. How could I refuse?

In short, if you have received a change in terms, call to ask why and see if they have a counter offer that allows you to keep your account open. That way, you can avoid the changes without necessarily having to opt out which would necessitate account closure.

Credit card companies have begun raising interest rates and making other changes to accounts in order to increase revenues and reduce default risks. The problem is that some actions may have actually increased default risks. Here are the changes that some major card issuers have made in 2008:

• American Express changed terms of their credit card accounts to increase interest rates on purchases and fees for late payments. Foreign transaction fees have increased, but they are still less than what others charge.
• Bank of America has raised interest rates on many of their card accounts. Also, many cardholders have recently had credit limits lowered. My limit was recently raised, so any reduction in your credit limit is apparently a result of periodic account review inquiries that suggest financial weakness.
• Capital One changed their minimum payment calculation. This could result in some cardholders experiencing an increase in their minimum payments.
• Chase has implemented substantial minimum payment increases from 2% of the balance to 5% of the balance. Additionally, a $10 fee has been added to many accounts. These changes do not apply to all accounts. Most cardholders that experienced the changes had taken advantage of a low-interest balance transfer offer at least 2 years ago. Affected cardholders could see their minimum payments increase 150%. For example, a $10,000 balance would require a minimum payment increase from $200 to $500 a month.
• Citibank has raised its purchases interest rate and has increased the penalty rate charged to late payers. In addition, Citi’s Sears cardholders may no longer have extra payments applied toward the following month’s minimum payment.
• Discover had only minor changes that matched what other card issuers had also done. They removed the cap from balance transfer fees.

The Treasury has declared a deadline of July 1, 2010 that all credit card issuers must comply with new regulations. These restrictions will keep card issuers from raising interest rates on existing balances for “any time or any reason.” They will also lock in interest rates on existing balances, so that any rate increases would only apply to new purchases.

Many cardholders have experienced frustration with the recent changes. Some consumers have expressed anger at changes made to existing balances that they believed were locked into a deal for the life of the balance. Other cardholders have allowed accounts to lapse because they cannot afford to make the higher payments.

Some relief is on the way to cardholders that find they cannot afford to keep up with their payments. However, the regulatory relief will not reach most of them in time to make a difference. Instead, if you are in trouble now, you should get help through credit counseling before you find yourself in a hole from which you cannot escape.

If you believe that your credit scores are still good but you have experienced adverse changes to your credit account terms, then there is a good chance that your bankruptcy risk score has changed. It could be the reason for your high-risk classification.

Citibank has ended this practice from Sears cards which was relatively unique among credit card issuers. For most credit cards, if you pay more than your minimum payment, it does not substantially reduce your minimum payment calculation for the following month. Instead, that minimum payment is calculated as the total of all finance charges and fees plus approximately 2% or more of the balance.

How it Worked

If your minimum payment was $30 and you paid $60, then your minimum payment for the following month would have been $0. No minimum payment would be required for that month. Now, it will still be approximately $29 or $30 depending on the balance. This is in line with other major credit card products.

Citibank has released the following notification to its Sears card customers:

INFORMATION UPDATE:

Please note: You may no longer make minimum payments in advance. You must pay the Total Minimum Due each billing cycle. We will no longer apply any portion of payments made in current billing cycles to Total Minimum Due amounts in future billing cycles.

If you did not see this notice, understand that it was mailed in the same envelope as the annual privacy notice. Most cardholders summarily throw these away without paying any notice to what is actually contained in the envelope, so it is possible you did not see your notice.

Reason for Change

The reason for this policy change is simple. Citibank would have earned less on late fees and subsequent penalty rate increases on Sears cards. It was “too easy” for cardholders to stay current on their credit card accounts.

The result should be an increase in delinquency rates and in the number of Sears cardholders that experience increases in their interest rates due to late or missed payments. Citi’s accounts receivables will increase as a result of this policy change. What is unknown is whether the accompanying increase in customer defaults will offset this increase in fee revenue.

What is Universal Default?

Universal default is a practice of some credit card companies that increase your credit costs if they see signs of weakness on your credit report. In practice, a consumer that falls behind or goes over-the-limit on one credit card account could experience interest rate hikes and reduced credit limits on their other credit card accounts, even those issued by other creditors.

Why Did Universal Default Disappear?

Universal default was phased out by credit card companies in 2006. They did this during a period of increased Congressional scrutiny of credit card practices.

Congress debated increasing regulations imposed on credit card issuers. The major credit card companies instead tried to prove to Congress that they could police themselves, and that more regulation was unnecessary.

The major component of universal default is the “any time for any reason” right to increase rates or reduce available credit to a cardholder. Members of Congress wanted to outlaw this practice. As a result of these discussions, credit card issuers voluntarily stopped universal default practices in 2006.

Why is Universal Default Returning?

Universal default is returning to credit card agreements for two primary reasons:

1. First, credit card issuers are facing mounting losses from credit card defaults. In addition, many of these firms are also experiencing other subprime credit losses that further hammer profits. Credit card issuers are trying to stop the bleeding, and these increases in revenues should offset some losses.
2. Congress is allowing considerable latitude among financial institutions following the collapse of several commercial and investment banks. Credit card issuers are betting that Congress will allow for such practices in the interim until financial markets stabilize and begin their recovery.

Most credit card issuers are bringing back some form of pricing increases, whether specifically through universal default pricing or through across the board changes. Already, American Express, Bank of America and Citibank have begun raising rates of cardholders regardless of consumer behavior.

If you have a credit card account, you may or may not see an interest rate increase as a result of these changes. They are not necessarily affecting all card accounts by these issuers. However, if you have shown any signs of distress on one card account, you should be prepared for subsequent reactions from your other credit card issuers. Universal default will likely raise your interest rates and increase your minimum payments, possibly beyond what you can reasonably afford!

Increase in Interest Rate for Purchases

Interest rates on Citi card accounts are going up for those cardholders that experienced no rate increases within the past 2 years. This is an across the board increase that is expected to impact 20% of Citibank credit card accounts.

The purchases rate will increase for these accounts. Balance transfer offers would not be affected according to the terms released by Citibank.

Increase in Default Rate

Default rates are also expected to increase for many of these cardholders. This penalty will not impact cardholders as long as they avoid any of the common triggers for default rate pricing. These usually include missed or late payments and exceeding the credit limit on any card account. Of course, if universal default clauses return to the market, then there may be nothing you can do to prevent default rate pricing unless you are able to quickly repay your debt balances.

Avoiding Increases

I too received a notice that my normal interest rate would increase. I indeed am one of the cardholders that has not experienced a rate increase in more than 2 years, which would also subject my account to the announced changes.

I called Citibank and requested clarification on the increase. The changes were explained to me, and the representative declined to reverse the change on my account. It set a minimum APR of 18.99% for purchases, of which other cardholders may see a somewhat different rate.

If the increase in interest rates will affect your ability to repay the debt (rate increases cause payments to increase), then you should consider options to prevent a rate increase. This could include opting out of the changes, which would cause you to lose purchasing privileges on the account once the card expires. To opt out, call Citibank at 866-565-7030, or you may write to Citibank:

Cardholders that are already experiencing repayment difficulty on multiple accounts may need more substantial action. If this is one of several accounts that you have, and you are having trouble keeping up with minimum payments, it may be time that you speak with an Accredited Financial Counselor. Getting lower interest rates on your cards is key to receiving a lower payment.