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4-9-2006, 9:32 PM
http://moneycentral.msn.com/content/Banking/creditcardsmarts/P144895.asp
7 credit-card trends that can cost you
Here's what you need to know about rising rates, new fees, credit-card deals and other trends and traps that will affect you tomorrow and for years to come.
By Liz Pulliam Weston
How far we've come.
Thirty years ago, if you had a credit card -- and many people didn't -- you probably had only one, and it came with a fixed rate. You couldn't use your card at the grocery store, the doctor's office or millions of other places. Your only reward for using it was being able to put off paying for the stuff you bought for a little while.
Today, the typical American adult has four or five cards and uses them in one out of every four transactions. Hundreds of different rewards programs compete for your attention, and you can use your card for everything from apples to plastic surgery.
So where do we go from here? Credit-card industry experts checked their crystal balls and weighed in with the following short- and long-term trends.
Average interest rates will climb
Today four out of every five cards has a variable rate, and those rates have been on the rise. Over the next year, credit-card issuers will continue passing along the Federal Reserve rate hikes and then some.
The Fed raised short-term rates by two percentage points between February 2005 and January 2006. The average variable rate on credit cards during the same period rose nearly 3 percentage points, according to credit research site CardWeb.com from 12.84% to 15.75%.
Many economists expect the Fed to raise rates another half point or so in the next year, which should boost the average card rate by the same amount or more.
Meanwhile, regulators succeeded in forcing most issuers to revamp their minimum-payment formulas so that borrowers make principal as well as interest payments. In the past, required payments could be so low that a borrower might need decades to pay off a debt if she only paid the minimum.
The combination of higher rates and higher minimums is expected to put a financial squeeze on more consumers, leading to higher default rates by the end of the year, said Tanya Azarchs, a bank-rating analyst for Standard & Poor's.
How to use this news: If your credit is good, you don't have to tolerate rising rates. Banks are still competing fiercely for the best customers. "If your credit score is 720 or above, you should be paying 10% or less," said Curtis Arnold of CardRatings.com. Negotiate with your issuers for lower rates or take your business elsewhere. Arnold notes MBNA is currently offering several cards with 7.9% "fixed" rates. (Nothing is truly fixed in the credit-card world, but these rates aren't designed to fluctuate.)
If your credit is bad, check out the resources in MSN's Your Credit Rating Decision Center for ways to boost your numbers. If you're having trouble making the minimums, stop charging and work out a plan to pay down your debt. If you can't, consider contacting a legitimate credit counselor (read "The consumer's guide to credit counseling" first). Act now -- things aren't likely to get better otherwise.
Low-rate offers will continue, but with more traps
Higher interest rates make those low- and zero-rate offers potentially more expensive for banks -- but that doesn't mean they'll go away.
Instead, expect more fees and ways to trigger higher interest rates. One example: Chase recently removed the cap on balance transfer fees for some of its low-rate offers, Arnold said; previously, the fees had been limited to $75.
"It doesn't seem like a big deal when the balance transfer fee is 3%," Arnold said, "but if you transfer $10,000, suddenly it's gone from $75 to $300."
Depending on how long you planned to carry the balance, the extra fee could offset or erase any savings from the lower-rate offer.
"You really have to do the math," Arnold said. "You could end up losing money on a deal like that."
Issuers are also modifying the "low rate for the life of the balance" offers, which promise 0% to 4.99% rates on transferred balances until you pay off the debt. Some issuers now require borrowers to make a minimum number of purchases, which of course accrue interest at a much higher rate. Since your payments go toward the low-rate balance first, you could wind up accruing some pretty hefty finance charges on your purchases.
How to use this news: It's always been important to read the fine print of any credit-card offer, but especially so now. You should know how long the introductory rate lasts, when and how much the rate will adjust, what fees you'll pay to transfer balances, whether additional purchases are required and if so, how many. Since you can lose your great low rate with a single late payment, set up automatic or recurring payments to ensure at least the minimum always gets paid on time.
Then again, you can simplify your life considerably just by refusing to carry a balance. Interest rates won't matter -- although you'll still have to pay on time to avoid late fees.
Great deals are coming -- and going
Arnold pictures credit-card executives sweating away in their corporate towers, straining to come up with spectacular deals that will garner attention in a crowded market -- only to be appalled when savvy consumers figure out how to exploit the deal in ways the suits never intended.
A classic example: MBNA's AAA gas-rebate card, which was among the first to offer 5% back on gas purchases. MBNA had intended this to be a general purpose card, but since there was no cash rebate on other purchases, many users responded by only using it for gas and using other cash-back cards for the rest of their spending. The card's gas-rebate deal has since been trimmed.
Another instance: Discover initially required two purchases a month on one of its 0% transfer offers, but failed to specify the amount. Some users charged only tiny amounts, leading Discover to institute dollar minimums.
"Some (users) buy two cups of coffee a month (while they get) 0% on balances of $15,000 to $20,000," Arnold said. "At the end of the year you've paid for some finance charges, but typically only a few bucks."
Currently, 5% rebates on "everyday purchases" at gas stations, groceries and drugstores are all the rage, and Arnold expects the deals to get even better as companies fight for market share. But again, the best deals will get exploited and trimmed back, so take advantage while you can.
How to use this news: If you carry a balance, concentrate on finding the lowest-rate card possible. But if you pay your bill in full every month, make sure to shop around to find the best rewards offers once or twice a year. Sites like CardRatings.com, Bankrate.com and CreditCards.com can alert you to good deals.
Beware, though, of applying for too many cards, which can hurt your credit scores. Limit your applications to one or two a year, at most, and refrain from applying for new credit if you're in the market for major borrowing like a mortgage or auto loan.
Fees will grow
Average fees for late payments, over-limit purchases and other infractions have nearly doubled in the last decade as issuers relied increasingly on fee income for their profits, and that trend isn't about to abate.
Arnold expects some issuers to boost their typical fee, currently around $39, over the $40 mark this year.
At least one issuer has tried to channel consumer fury over ever-higher fees, but the result should make you pause. Citibank's Citi Simplicity Card promises no late fees if you use the card at least once a month, but Arnold points out late payments can trigger a super-high penalty rate of over 30%.
"That doesn't sound consumer-friendly to me," Arnold said.
How to use this news: You can save your credit score as well as your pocket book by avoiding late and over-limit fees. Avoid using more than half your credit limit at any given time, and set up automatic or recurring payments to make sure your bill is paid by the deadline.
Consolidation won't spoil the party -- yet
For most of the 1990s, 10 card issuers controlled about 80% of the credit-card business. Today, that's down to five, yet "banks are still hungry," S&P's Azarchs said. "They're still competitive."
That's largely because there hasn't been much growth in the lending side of the credit-card business, Azarchs said. People already have a lot of credit cards in their wallets and aren't adding many more, so issuers try to grow by stealing business from each other. Hence all the low-rate offers and rebate deals.
That could change if the industry consolidates much more, and many analysts expect more mergers in coming years.
"Competition is always the thing that's driven this industry," Arnold said. The idea of less competition "scares me."
How to use this news: If you're concerned about industry consolidation, let your lawmakers know. Otherwise, be prepared for less-generous offers and even higher fees if credit-card issuers continue their merger binge. It won't happen overnight and may not happen at all. But if you need it, this could be another excuse for paying off your credit-card debt while you still have plenty of low-rate options.
Micropayments will grow
Since issuers aren't making as much profit lending money, Azarchs said, they're looking to cash in by increasing the number of transactions they handle.
That means encouraging more small-change transactions of $5 or less. Research firm TowerGroup predicts the volume of small electronic payments -- "micropayments" -- will grow to $11.5 billion by 2009 in the U.S. and $40 billion globally.
"There has been a slow, steady march of credit cards replacing cash, and this is the last frontier," Azarchs said. "It's not like what happened when supermarkets began accepting credit cards, which was huge … but the credit-card companies are definitely looking for ways they can make money from processing transactions."
You can already see the signs. Chains including McDonald's and 7-Eleven already accept plastic for small transactions, and Motorola recently announced plans to incorporate a payment chip in some of its cell phones. (Consumers in Asia already use their phones to pay at vending machines and other locations.) TowerGroup managing director Theodore Iacobuzio said such "contactless" options, where a cell phone or key fob is waved in front of a reader, will help fuel micropayment growth. Eventually, he predicts, contactless payments may supplant plastic, just as plastic supplanted checks and cash. Liz Pulliam Weston‘s newsletter
Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.
But where credit card companies see profits, merchants see extra costs. Retailers must pay for card-based transactions, typically 1% to 2% of the total charge, which can wipe out their profit on the smallest transactions. Iacobuzio predicts retailers will find ways to reduce the costs, possibly through aggregating many small transactions as Apple does with its iTunes online store.
How to use this news: Expect to see more retailers accepting plastic for small transactions. If you're carrying a balance, you should resist adding to it, even incrementally; otherwise, you can take advantage of the convenience and the possible advantage of being able to track more of your spending.
Security will continue to be an issue
Several well-publicized security breaches at merchants and credit-card processors have exposed millions of credit-card account numbers to thieves in the past couple of years. The major credit-card networks are cracking down, but they have their work cut out for them.
Visa USA recently reported that the vast majority of the merchants it surveyed weren't properly protecting consumer data. Visa found only 17% of the 231 large merchants it questioned were following payment card industry guidelines regarding customer data security.
"Securing payments is not something Visa can do alone," said Visa spokeswoman Rosetta Jones. "We need the participation and cooperation of everyone involved in processing the data."
One of the biggest problems: retailers and processors are hanging on to data they shouldn't. Deliberately or because of quirks in the software they use to process card transactions, customer-account numbers and PINs may be stowed in unencrypted databases that are vulnerable to hacker attacks.
The major credit-card networks, including Visa and MasterCard, will respond by fining credit-card issuing banks, which in turn will fine the merchants involved, said Avivah Litan, payment card industry analyst with research firm Gartner. That will help force better compliance, she said.
"The networks are getting a lot tougher than they used to be," Litan said.
How to use this news: If you're given a choice, don't let a merchant (online or otherwise) store your credit-card account information. Check your monthly statements for unauthorized activity or, better yet, use personal finance software or online account access to scan your accounts at least weekly. If you spot a problem, call the issuer immediately but then follow up in writing to preserve your consumer rights under federal law. Also, consider having at least two open, active credit-card accounts; replacing a lost, stolen or compromised card can take five to 10 business days, and you may want to have an alternate card available while you wait.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
7 credit-card trends that can cost you
Here's what you need to know about rising rates, new fees, credit-card deals and other trends and traps that will affect you tomorrow and for years to come.
By Liz Pulliam Weston
How far we've come.
Thirty years ago, if you had a credit card -- and many people didn't -- you probably had only one, and it came with a fixed rate. You couldn't use your card at the grocery store, the doctor's office or millions of other places. Your only reward for using it was being able to put off paying for the stuff you bought for a little while.
Today, the typical American adult has four or five cards and uses them in one out of every four transactions. Hundreds of different rewards programs compete for your attention, and you can use your card for everything from apples to plastic surgery.
So where do we go from here? Credit-card industry experts checked their crystal balls and weighed in with the following short- and long-term trends.
Average interest rates will climb
Today four out of every five cards has a variable rate, and those rates have been on the rise. Over the next year, credit-card issuers will continue passing along the Federal Reserve rate hikes and then some.
The Fed raised short-term rates by two percentage points between February 2005 and January 2006. The average variable rate on credit cards during the same period rose nearly 3 percentage points, according to credit research site CardWeb.com from 12.84% to 15.75%.
Many economists expect the Fed to raise rates another half point or so in the next year, which should boost the average card rate by the same amount or more.
Meanwhile, regulators succeeded in forcing most issuers to revamp their minimum-payment formulas so that borrowers make principal as well as interest payments. In the past, required payments could be so low that a borrower might need decades to pay off a debt if she only paid the minimum.
The combination of higher rates and higher minimums is expected to put a financial squeeze on more consumers, leading to higher default rates by the end of the year, said Tanya Azarchs, a bank-rating analyst for Standard & Poor's.
How to use this news: If your credit is good, you don't have to tolerate rising rates. Banks are still competing fiercely for the best customers. "If your credit score is 720 or above, you should be paying 10% or less," said Curtis Arnold of CardRatings.com. Negotiate with your issuers for lower rates or take your business elsewhere. Arnold notes MBNA is currently offering several cards with 7.9% "fixed" rates. (Nothing is truly fixed in the credit-card world, but these rates aren't designed to fluctuate.)
If your credit is bad, check out the resources in MSN's Your Credit Rating Decision Center for ways to boost your numbers. If you're having trouble making the minimums, stop charging and work out a plan to pay down your debt. If you can't, consider contacting a legitimate credit counselor (read "The consumer's guide to credit counseling" first). Act now -- things aren't likely to get better otherwise.
Low-rate offers will continue, but with more traps
Higher interest rates make those low- and zero-rate offers potentially more expensive for banks -- but that doesn't mean they'll go away.
Instead, expect more fees and ways to trigger higher interest rates. One example: Chase recently removed the cap on balance transfer fees for some of its low-rate offers, Arnold said; previously, the fees had been limited to $75.
"It doesn't seem like a big deal when the balance transfer fee is 3%," Arnold said, "but if you transfer $10,000, suddenly it's gone from $75 to $300."
Depending on how long you planned to carry the balance, the extra fee could offset or erase any savings from the lower-rate offer.
"You really have to do the math," Arnold said. "You could end up losing money on a deal like that."
Issuers are also modifying the "low rate for the life of the balance" offers, which promise 0% to 4.99% rates on transferred balances until you pay off the debt. Some issuers now require borrowers to make a minimum number of purchases, which of course accrue interest at a much higher rate. Since your payments go toward the low-rate balance first, you could wind up accruing some pretty hefty finance charges on your purchases.
How to use this news: It's always been important to read the fine print of any credit-card offer, but especially so now. You should know how long the introductory rate lasts, when and how much the rate will adjust, what fees you'll pay to transfer balances, whether additional purchases are required and if so, how many. Since you can lose your great low rate with a single late payment, set up automatic or recurring payments to ensure at least the minimum always gets paid on time.
Then again, you can simplify your life considerably just by refusing to carry a balance. Interest rates won't matter -- although you'll still have to pay on time to avoid late fees.
Great deals are coming -- and going
Arnold pictures credit-card executives sweating away in their corporate towers, straining to come up with spectacular deals that will garner attention in a crowded market -- only to be appalled when savvy consumers figure out how to exploit the deal in ways the suits never intended.
A classic example: MBNA's AAA gas-rebate card, which was among the first to offer 5% back on gas purchases. MBNA had intended this to be a general purpose card, but since there was no cash rebate on other purchases, many users responded by only using it for gas and using other cash-back cards for the rest of their spending. The card's gas-rebate deal has since been trimmed.
Another instance: Discover initially required two purchases a month on one of its 0% transfer offers, but failed to specify the amount. Some users charged only tiny amounts, leading Discover to institute dollar minimums.
"Some (users) buy two cups of coffee a month (while they get) 0% on balances of $15,000 to $20,000," Arnold said. "At the end of the year you've paid for some finance charges, but typically only a few bucks."
Currently, 5% rebates on "everyday purchases" at gas stations, groceries and drugstores are all the rage, and Arnold expects the deals to get even better as companies fight for market share. But again, the best deals will get exploited and trimmed back, so take advantage while you can.
How to use this news: If you carry a balance, concentrate on finding the lowest-rate card possible. But if you pay your bill in full every month, make sure to shop around to find the best rewards offers once or twice a year. Sites like CardRatings.com, Bankrate.com and CreditCards.com can alert you to good deals.
Beware, though, of applying for too many cards, which can hurt your credit scores. Limit your applications to one or two a year, at most, and refrain from applying for new credit if you're in the market for major borrowing like a mortgage or auto loan.
Fees will grow
Average fees for late payments, over-limit purchases and other infractions have nearly doubled in the last decade as issuers relied increasingly on fee income for their profits, and that trend isn't about to abate.
Arnold expects some issuers to boost their typical fee, currently around $39, over the $40 mark this year.
At least one issuer has tried to channel consumer fury over ever-higher fees, but the result should make you pause. Citibank's Citi Simplicity Card promises no late fees if you use the card at least once a month, but Arnold points out late payments can trigger a super-high penalty rate of over 30%.
"That doesn't sound consumer-friendly to me," Arnold said.
How to use this news: You can save your credit score as well as your pocket book by avoiding late and over-limit fees. Avoid using more than half your credit limit at any given time, and set up automatic or recurring payments to make sure your bill is paid by the deadline.
Consolidation won't spoil the party -- yet
For most of the 1990s, 10 card issuers controlled about 80% of the credit-card business. Today, that's down to five, yet "banks are still hungry," S&P's Azarchs said. "They're still competitive."
That's largely because there hasn't been much growth in the lending side of the credit-card business, Azarchs said. People already have a lot of credit cards in their wallets and aren't adding many more, so issuers try to grow by stealing business from each other. Hence all the low-rate offers and rebate deals.
That could change if the industry consolidates much more, and many analysts expect more mergers in coming years.
"Competition is always the thing that's driven this industry," Arnold said. The idea of less competition "scares me."
How to use this news: If you're concerned about industry consolidation, let your lawmakers know. Otherwise, be prepared for less-generous offers and even higher fees if credit-card issuers continue their merger binge. It won't happen overnight and may not happen at all. But if you need it, this could be another excuse for paying off your credit-card debt while you still have plenty of low-rate options.
Micropayments will grow
Since issuers aren't making as much profit lending money, Azarchs said, they're looking to cash in by increasing the number of transactions they handle.
That means encouraging more small-change transactions of $5 or less. Research firm TowerGroup predicts the volume of small electronic payments -- "micropayments" -- will grow to $11.5 billion by 2009 in the U.S. and $40 billion globally.
"There has been a slow, steady march of credit cards replacing cash, and this is the last frontier," Azarchs said. "It's not like what happened when supermarkets began accepting credit cards, which was huge … but the credit-card companies are definitely looking for ways they can make money from processing transactions."
You can already see the signs. Chains including McDonald's and 7-Eleven already accept plastic for small transactions, and Motorola recently announced plans to incorporate a payment chip in some of its cell phones. (Consumers in Asia already use their phones to pay at vending machines and other locations.) TowerGroup managing director Theodore Iacobuzio said such "contactless" options, where a cell phone or key fob is waved in front of a reader, will help fuel micropayment growth. Eventually, he predicts, contactless payments may supplant plastic, just as plastic supplanted checks and cash. Liz Pulliam Weston‘s newsletter
Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.
But where credit card companies see profits, merchants see extra costs. Retailers must pay for card-based transactions, typically 1% to 2% of the total charge, which can wipe out their profit on the smallest transactions. Iacobuzio predicts retailers will find ways to reduce the costs, possibly through aggregating many small transactions as Apple does with its iTunes online store.
How to use this news: Expect to see more retailers accepting plastic for small transactions. If you're carrying a balance, you should resist adding to it, even incrementally; otherwise, you can take advantage of the convenience and the possible advantage of being able to track more of your spending.
Security will continue to be an issue
Several well-publicized security breaches at merchants and credit-card processors have exposed millions of credit-card account numbers to thieves in the past couple of years. The major credit-card networks are cracking down, but they have their work cut out for them.
Visa USA recently reported that the vast majority of the merchants it surveyed weren't properly protecting consumer data. Visa found only 17% of the 231 large merchants it questioned were following payment card industry guidelines regarding customer data security.
"Securing payments is not something Visa can do alone," said Visa spokeswoman Rosetta Jones. "We need the participation and cooperation of everyone involved in processing the data."
One of the biggest problems: retailers and processors are hanging on to data they shouldn't. Deliberately or because of quirks in the software they use to process card transactions, customer-account numbers and PINs may be stowed in unencrypted databases that are vulnerable to hacker attacks.
The major credit-card networks, including Visa and MasterCard, will respond by fining credit-card issuing banks, which in turn will fine the merchants involved, said Avivah Litan, payment card industry analyst with research firm Gartner. That will help force better compliance, she said.
"The networks are getting a lot tougher than they used to be," Litan said.
How to use this news: If you're given a choice, don't let a merchant (online or otherwise) store your credit-card account information. Check your monthly statements for unauthorized activity or, better yet, use personal finance software or online account access to scan your accounts at least weekly. If you spot a problem, call the issuer immediately but then follow up in writing to preserve your consumer rights under federal law. Also, consider having at least two open, active credit-card accounts; replacing a lost, stolen or compromised card can take five to 10 business days, and you may want to have an alternate card available while you wait.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.