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Is the Era of Democratic Credit Really Over Now?

When the Wall Street Journal printed an article a couple weeks back (subscriber only, sorry, no link) about the end of the democratization of credit, my first thought was “old news.” Credit has gotten tighter in all its forms. Credit card balances are being slashed for no reason or for red flags that were ignored before the recession, HELOCs are being closed, mortgage refinance attempts are being denied, and people aren’t getting granted as much credit in the first place.

Despite all this people with good credit and smart credit card practices could still get credit cards, mostly. And no matter how high the interest rates were, it didn’t matter because they paid them off on time.

But is that about to change?

An article by USA Today reveals some disturbing new trends that will upset the system of credit as we know it, if they continue.

Credit Card Companies Now Charging Fees For Too Little Spending

That’s right, it’s not even an inactivity fee (which some are charging). Citigroup has started charging annual fees to people who don’t spend enough with their credit cards.

There’s a certain logic to it. If you’re a good money manager, then you don’t carry a balance on what you spend. Therefore the only way the credit card companies profit from lending you money is by getting that 3% of your spending (from merchants). For $2400, the example number cited in the article, that’s $72 the credit card company receives. Apparently that’s enough for them.

Look Out for New Annual Fees

Even if you spend enough on your card that you’re not worried about inactivity fees or low-spending fees, you may still be hit with new annual fees. Bank of America has announced that they’re going to be putting annual fees from $29-$99 on some of their cardholder’s accounts. USA Today says that customers who don’t carry a balance and haven’t ever paid late may still be effected.

Adding an annual fee is the right of any credit card company, written into the contract. They have to give you warning and you can choose to close the card, but unless you can call and get it waived, you can’t stop it.

And Your Rates Can Still Go Up

Citibank recently got in hot water for increasing rates on customers who hadn’t been behaving badly. While the CARD Act will offer some protections about the speed at which rates increase and the warning you get beforehand, ultimately the credit card company still has the right to raise the rates.

So, What Does This Mean for Credit?

Credit has almost never been democratic. Large lines of credit were restricted to the very rich. A poorer person might be able to borrow at high interest (or with a security of equal value, such as in a pawn shop). There were very personal credits such as tabs at stores, but these weren’t in the amounts to which we’ve become accustomed. The idea that a middle-class person might have $20,000 in credit card debt, would probably shock people even 50 years ago (even adjusted for inflation).

Is credit going away?

I don’t think so. And I don’t think it’ll entirely lose the universal aspect it’s acquired in the past 30-40 years. But of people start getting charged annual fees and low-spending fees as a matter of course, then I think that the way many financially-savvy people use credit is going to change.

I would not be surprised to see them leaving cards with annual fees but still using the cards with low-spending fees, being careful to spend the appropriate amount while remaining within budget (since many of these people use the credit cards soley to get the rewards, rather than to maintain a good credit history).

For those who habitually carry a balance, I think this won’t be a wakeup call. But it may be the start of a system that drives more people to get out of debt so they won’t get eaten by fees and interest.

So here’s my question for my readers, because I’m the curious type: If your credit card company started charging a low-spending fee and you weren’t spending enough—would you spend more on the card or would you close it?


{ 16 comments… read them below or add one }

Amanda October 26, 2009 at 8:07 am

I really don’t know what I’d do. Would one’s credit be affected by closing a credit card account? *sigh* I wouldn’t want to put more on a credit card; that would require more juggling for me as far as the budget, but I could do it. So, really, I don’t know what I’d do. lol
.-= Amanda´s last blog ..Cloth Diapering: The How =-.

Caro October 26, 2009 at 8:23 am

If every one of my credit cards did this, I would probably do an analysis of my credit cards and figure out a few things. First, which of my oldest cards are worth saving. This would be because I understand that keeping your oldest credit cards is important to your credit rating. And by “worth saving” I mean, do they give me the appropriate incentive to use them (at least 1% back). Then I would look at my other incentive cards and decide which ones I like the most.

And then I would close most of my cards only keeping the oldest and best incentive cards..and divide my spending carefully among them. More work, certainly, but that’s how I would do it.

I would not increase my spending, but I put most of my household bills through my credit card currently so my guess is that we spend enough already to keep a few cards alive.

Kandace October 26, 2009 at 10:15 am

I ran into this a couple of months ago. I have a credit card with a lifetime no annual fee–one of the reasons I chose it. I’ve had the card for about 18 years and it’s my only credit card and I pay off the balance monthly. I got a letter in the mail saying they were now going to charge me $30 annually to use the card. If I spend $2,400 each year, they will credit back the annual fee.

I got on the phone and tried to get them to waive this because of the length of time I’ve been with them and because I was supposed to have no annual fee for life. I was told I could either close the account or pay the fee.

Last month I paid the fee, but I’m starting to look for another card that will off the services I want without the fees. Once that gets established, I’ll close my other account. I hate to do that because it is my longest running credit, but they have changed the rules, charging me an annual fee while I am still very much alive. It will bite my FICO score. I’ll end up eating the $30 fee I paid, but since the contract we originally established no longer appears to be valid on their part, I feel no more allegiance to them.
.-= Kandace´s last blog ..Are We Getting Greener? =-.

ABCs of Investing October 26, 2009 at 11:19 am

I don’t think charging basic fees for users will become the standard because the credit card companies already make money on every transaction.

I can see their point about having minimum usage amounts which probably wouldn’t affect me.

I wouldn’t necessarily do anything right awawy if my credit card started costing me $30/yr but I would probably look around for a better alternative and switch if one existed.

Julia October 26, 2009 at 11:37 am

I’d be okay with that as long as it was a reward card. I have no problem using my cards and paying them off each month in order to collect rewards.

One of my cards jus started charging an annual fee–it was a Capital One card. I closed it because I was so irritated. I always paid the balance in full and was a loyal customer for 8 years. Not anymore!

Marie October 26, 2009 at 12:15 pm

Close it – I use them for convinience and so that a bunch of miniscule transactions don’t drown out my bank statement (so I can easily see my bills paid at a glance). Also I get 3% back from my rewards card but who knows how long that will last.

Zella October 26, 2009 at 2:28 pm

I already use my primary credit card plenty… it’s a rewards card, and I use it for a combo of business (that gets reimbursed) and personal, and then paid off each cycle. So what I’m saying is that I probably wouldn’t be affected. Maybe on one of my other cards, but worst case, I could always split charges. Two more mouse clicks to pay, but that’s pretty neutral for me.
.-= Zella´s last blog ..Thank you, A. =-.

Amy October 26, 2009 at 5:27 pm

That depends. I guess for cards that I use little or not at all, I would probably close them. For cards that I do use, maybe spending a bit more would be worth keeping them open. I mean, I use my debit card for certain things, but I could use a credit card instead, seeing as how I already have the money anyway. (I do trust myself to get the balances paid in full each month–I have been debt free for over a year.)

Broke M.B.A. October 26, 2009 at 10:12 pm

I’d close my one credit card account. I rarely use it and only for convenience. I do wonder how much it would affect my credit rating. I’ll still have a mortgage, but other than that, I probably wouldn’t borrow money for any other reason.

jesse October 27, 2009 at 12:33 am

Considering all my credit cards are of the same age now because my oldest card was closed due to inactivity, I would just close the card. I only have my cards for credit history and I now have school loans that are the same age as my credit cards so there is no incentive to keep the cards. I use a charge card for all my purchases because of rewards and it already has a yearly fee but the rewards in this case outweigh the charge, but if all my cards took this route there would be massive closures from my end.
.-= jesse´s last blog ..Linkworthy: Placebo, Placenta and Sleep Patterns =-.

Mackenzie October 27, 2009 at 7:10 am

I would close the credit card. I have enough school loans that I feel like I’m building a credit history in any case. Part of that also stems from the ambition that a mortgage is the only other loan I ever want to pay for.
.-= Mackenzie´s last blog ..Cooking Soup in a Pumpkin =-.

Cassie October 27, 2009 at 8:59 am

If there was a minimum I had to spend, I would be okay with that. My card is a rewards card so I use it for everything to get the rewards, and then pay off the full balance every month. However, if they started charging a yearly fee, I would have to consider switching cards.
.-= Cassie´s last blog ..Can I borrow your costume? =-.

marci @ onlinecolleges October 27, 2009 at 1:54 pm

I would totally close my credit cards once there’s an inactivity fee. I think that is BS! Aren’t credit cards for emergencies? Not regular spending? That’s what I’ve always thought of them as (use sparingly).

Credit Card Chaser October 27, 2009 at 11:21 pm

Personally I try to make as many purchases with my 2 cash back credit cards as possible so that I can get the 1% to 3% cash back so I don’t think I would ever get hit with an inactivity fee.
.-= Credit Card Chaser´s last blog ..House Votes to Move CARD Regulation Start Date up to Dec 1st =-.

Mr. Not the Jet Set October 29, 2009 at 12:52 pm

Credit cards have never been democratic. It is a dictatorship that you can choose not to participate in – despite rumors that it is the only way.

And no, credit cards are not for emergencies or regular sending. They are a method for banks to make money off of your transactions.
.-= Mr. Not the Jet Set´s last blog ..Just a Reminder…. =-.

Funny about Money November 1, 2009 at 10:09 pm

Depends on the card. I need to have an AMEX card to buy gas at Costco (cheapest vendor in town). Because it gives me a nice annual kickback, I charge lots more than $2,400 on it. So no such fee would apply.

But because not every vendor accepts American Express, I also have a Visa card. I hate getting any more bills than absolutely necessary, so I rarely charge on the Visa card. If they started gouging me for not spending myself stupid on their card, the card would go.

What I would NOT do, however, is keep either card if they started charging me an annual fee for the privilege of lugging their piece of plastic around in my purse.
.-= Funny about Money´s last blog ..The highest and best use of a swimming pool =-.

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