Vision Credit Education, Inc.

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 served to give consumers many protections from abuses of certain credit card issuers. Unfortunately, there are lots of changes that are taking place that are hurting those of higher risk while rewarding those with lower risk.

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.