Virgil Cottini is the kind of loyal, paying customer that credit card companies used to actively woo.
The Spring Hill retiree has run a fluctuating balance on the Chase Visa card he has held more than 10 years, but faithfully paid more than the monthly minimum through the years. When Chase wanted to raise his rate once, a simple phone call brought it back down to 9.99 percent.
He found out the hard way how the rules have changed. His rate this summer was hiked to a 16.24 percent variable rate, and this time a phone call to a Chase representative only compounded his frustration.
"She said Chase Visa has been doing this since November of last year, and there was nothing I could do," Cottini said. "This is America and I'm all for free enterprise, but to get hit over the head is another thing."
Remember the old days — of a year or so ago — when offers for low-interest credit cards were plentiful for those with a decent-paying job and a track record of paying at least the monthly minimums?
Under the new rules, credit card companies are hiking interest rates into the double digits, slashing limits, closing accounts, offering far fewer teaser rates, hiking balance transfer and cash advance fees and shifting customers to variable rates. Changes have been building throughout the year — part due to the recession and part to beat new consumer protections going into effect next year.
To some longtime watchers of the credit card industry, however, this is more than a cyclical clamp-down to offset rising credit card defaults. It's a transformation of the card companies' core business model.
Out with the "revolvers," those customers who carried a balance and kept current paying at least the monthly minimums. In with wealthier card customers who typically pay off monthly balances in full but are willing to pay annual memberships or fees for the perks of ownership. Like points toward cheaper airfare, hotel rooms or retail purchases.
"It's weird because the bread-and-butter customers for years were the revolvers," said Curtis Arnold, founder of Cardratings.com. "It used to be if you had that good credit score, it helped you to be Teflon. . . . Folks with good credit scores left and right are now seeing rates jacked, lines cut. I know. I've got good credit. I track it. And I've seen it happen."
The Office of the Comptroller of the Currency recently released a survey indicating 68 percent of lenders tightened credit card underwriting standards in 2009, almost double the number in the 2008 survey (35 percent).
Another gauge of the squeeze: Americans received 349.1 million credit card offers in the mail in the second quarter of this year, according to Synovate's Mail Monitor, which tracks direct mail. Though that sounds hefty, it's down 67 percent from more than 1 billion offers a year ago.
The dawn of plastic
As recently as 20 years ago, only half the country held credit cards. Then came the democratization of credit — easier access to credit cards and other forms of borrowing, like home loans. By the time the recession took hold, roughly three-fourths of all households held at least one credit card.
And they used the cards liberally. The average U.S. household credit card debt rose from $3,400 in 1990 to about $10,700 last year, according to CardTrak.com.
As the recession picked up steam, credit cards have become a lifeline for some to pay for groceries, utilities, even mortgage or rent payments. More than one-third of low- and middle-income households used credit cards to cover basic living expenses in five of the past 12 months, according to a survey released last month by Demos, a public policy research group.
"It's really a tough situation," said Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "Families have put themselves in a situation where they're run up too much credit just as credit card companies are jacking up the rates on people who have a high balance."
The total amount of revolving consumer credit card debt has shrunk from a high of $974 billion last year to $917 billion as of June, the Federal Reserve estimates.
Peter Garuccio, a spokesman for the American Bankers Association who tracks credit cards, doesn't think that shrinkage is due solely to card companies tightening credit and charging off uncollectible debt. Recession-wary consumers are also charging less.
Garuccio says he's not convinced that card companies are abandoning "revolver" customers for the long-term, not when they rely on interest payments for 70 percent of their revenue.
Still, if there is a broader industry transformation under way, Garuccio maintains it was brought on because the government forced the card companies to adjust.
Under the recently passed Credit Card Act of 2009, credit card companies effective this week will have to mail bills at least 21 days before the due date and provide at least 45 days notice before changing any significant terms on a card.
In February, the key provisions of the legislation are activated. In essence, card companies won't be able to change credit terms on a card at all for 12 months and then only for future balances and only after adequate notice is given.
Beyond the consumer-protection changes, card companies have another motivation to retrench: rising credit card defaults and debt they don't believe their customers can pay off.
In June, the charge-off rate for card companies rose to 10.4 percent, setting a new record. In other words, roughly one-tenth of consumer credit card debt was written off as not collectible.
Bank of America posted the highest write-offs among the country's biggest lenders at 13.86 percent. It's also one of the lenders taking the most heat for hiking rates of longtime customers who haven't defaulted.
Customers like Joe and Pam Fortune of Port Richey.
The Fortunes said they were current in making payments on separate Bank of America credit cards, but that didn't prevent a double whammy this year.
Pam's rate on the card she had carried for 34 years rose from single digits to 12.99 percent, despite her credit rating north of 800. Joe's rate was hiked from 12.99 percent to 39 percent and his credit limit cut from $12,500 to $5,000.
The trigger for Joe was apparently a dispute over a $375 ambulance fee on his credit report — which was cleared up and subsequently covered by Blue Cross — but Bank of America didn't want to hear any explanations.
"We're never late, never missed a payment," said Joe Fortune, a retired firefighter from Rhode Island. He added that he was astounded that the megabank received federal TARP funds and was "loaded with savings" by being stingy on making loans, and yet it's still clamping down on its customers.
"It's a really sad state when they want to rip off the very people who bailed them out," he said.
Bank of America said about 10 percent of its customers were affected in April by a decision to ratchet up rates for many single-digit interest rate customers with a revolving balance.
Bank spokeswoman Betty Riess said higher rates are being imposed in part because it costs Bank of America more money to make loans. The interbank rate — the interest rate charged on short-term loans between banks — has been high relative to the prime rate. And some financing sources for the banks have dried up completely.
Some financial markets are "virtually frozen and that impedes our ability to use that source for funding," she said. "The bottom line is interest rates that were set in a better economic environment and at substantially lower risk aren't sufficient . . . in today's environment."
Higher costs of doing business were also cited by JPMorgan Chase, the company that raised the rates on Virgil Cottini's Visa card, among many others.
Chase spokeswoman Stephanie Jacobson declined to discuss Cottini's situation or answer specific policy questions. In a statement, Chase said changes to pricing, terms or credit lines are based on borrower risk, market conditions and the costs of making loans.
"We recognize some customers may be affected by these changes for the first time and, as always, we are working hard to provide consumers impacted by these changes with alternatives," the statement said.
Under the pending consumer credit changes, banks will have free rein — and plenty of encouragement — to cut rates again if their access to capital improves along with the economy.
Arnold of Cardratings.com, for one, says there's no guarantee banks will go back to their old ways. What he calls a "paradigm shift" toward charging high rates to customers with a revolving balance could stick.
So what happens next?
"A lot of people I talk to are using cash or debit cards," Arnold said.