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Reliable credit customers shocked by higher rates

| Sunday, Nov. 2, 2008

Get ready for tougher terms on credit cards.

As the nation's economy and consumers struggle, card issuers are losing money. So, they are raising interest rates, cutting credit limits and tightening other terms, industry experts said.

Even careful card users -- not just slow-payers and deadbeats -- are getting nasty surprises in the mail.

Maryann Montgomery and her husband paid off virtually each monthly J.C. Penney bill on time and in full for many years. Yet, the Gibsonia couple got a notice the retailer is raising their annual percentage rate to 23 percent from 20.8 percent, hiking late-payment fees and shrinking the "float time" to pay from 30 days to 23.

"We've been good customers for 43 years," said Montgomery, a nurse. "When my husband called to cancel, he told them it was because we don't like the new terms. And they just said, 'Oh, OK.' "

"Consumers are contacting us and saying, 'What's the deal• My APR is going up, and I haven't done anything different,' " said Bill Hardekopf, CEO of Lowcards.com in Birmingham, Ala., which tracks terms for the nation's 1,260 types of credit cards.

J.C. Penney cards are financed by GE Money Bank of Stamford, Conn., which sets card terms.

"Cardholders always have the option of opting out," said spokeswoman Dori Abel about the miffed Montgomerys. She confirmed card terms were stiffened recently, but would not comment about J.C. Penney card losses.

"Card issuers are tightening. And with the economy in recession, it's something that's going to continue for months to come," said Greg McBride, senior financial analyst for Bankrate.com, a North Palm Beach, Fla., firm that tracks financial rates.

American Express cardholders will get notices this month about tighter terms. Interest rates will go up 2 to 3 percentage points, as part of "a broad base of changes to our lending products," said spokeswoman Desiree Fish. For example, a card charging 14.99 percent could jump to 17.99 percent.

"The bottom line is that this is a difficult environment. Because of that, we need to do a number of cost reductions and revenue-building actions," AmEx CEO Ken Chenault recently told analysts.

About 164 million Americans carried a total of 1.39 billion credit cards in 2005, said most-recent data from the U.S. Census Bureau. They racked up $2.05 trillion of charges on those cards that year -- an annual tab the agency projects will swell to nearly $3.38 trillion in 2010.

Card issuers are getting stung by bad credit-card accounts. The industry will post a record $11.6 billion in losses for the summer quarter -- or nearly twice the charge-offs from two summers ago -- estimates Innovest Strategic Value Advisors, an investment research firm in New York.

Charge-offs -- uncollectible amounts that card issuers write off -- could jump to $13.5 billion in the current fall quarter and spiral to $18.6 billion in the winter quarter, when the trend should reach its peak, estimated Innovest consumer finance analyst Laura Nishikawa.

"Charge-offs could continue to rise throughout 2009, depending on how the economic situation pans out," she said.

With rising unemployment and living costs, consumers are having a more difficult time managing card debt. A Standard & Poor's survey of 1,000 cardholders in August showed 13 percent found it much harder to keep up credit card payments than the year earlier, and 25 percent found it somewhat more difficult.

"And more people are taking out money as cash advances" on cards, said S&P Chief Economist David Wyss. "That's significant because that's a really lousy, expensive way to get money."

Delinquencies and charge-offs start to climb when the economy cools off, said analysts. Delinquent payments, or those at least 30 days late, rose to 4.6 percent of outstanding credit card balances in August, up from 3.8 percent the year earlier, said Moody's. That's a 21 percent increase.

"When delinquencies and unemployment are on the rise, card issuers play defense," said McBride. "They scale back credit lines and slice the pie thinner in terms of who gets the lowest rates."

Changes unfolding in credit cards are an aftershock of subprime lending, say experts. Financial institutions chastened by huge losses from risky mortgage loans will defend against losses from credit cards.

"If a financial institution lost money from subprime lending, their appetite for (credit-card) risk is waning," said Bruce Cundiff, director of payment research at Javelin Strategy and Research of Pleasanton, Calif.

"So, for a card holder that might have had a line of credit that was $10,000, now it's $7,000," said Cundiff.

"The general long-term trend of rising charge-offs is expected to persist," said William Black, senior vice president of Moody's Investors Service. The New York firm reviews more than $435 billion worth of credit card portfolios, or 80 percent of the total, and the securities they back.

"Credit card charge-off rates are highly correlated with the unemployment rate, especially when unemployment is on the rise," said Black. He noted the 6.1 percent jobless rate in September was the nation's worst in nearly five years, and expects unemployment to peak at 7.3 percent a year from now.

"What you're going to see going forward is that all credit card issuers will be more selective about who gets credit and at what rate," said McBride.

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