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?