Credit Card Companies Busy Adapting To New Economy, Credit Rules

Chairman of the Federal Reserve, Ben Bernanke, released a statement last week claiming that the recession is “likely over”. With a relatively more positive economic outlook, credit card companies are beginning to reposition their credit card portfolios towards growth. Growth, however will probably proceed at a much slower pace compared to their recovery during past recessions.

San Diego State University professor of finance, David Ely says, “[Banks] are, of course, looking to make money on their cards so its reasonable for them to adjust to the new regulatory environment”. He further added that, “You’d expect them to seek ways to make these cards profitable”.

So how are credit card companies maneuvering their credit card operations to maximize profitability?

First, credit card companies have increased interest rates across the board. Consider the new BankAmericacard Basic Visa card, a new credit card line from Bank of America designed for a more simplified and understandable rates and terms. The card offers a lot of benefits to credit card holders such as having the same interest rate for all types of transactions, from purchases to balance transfers. The APR (annual percentage rate) of the credit card is based on the prime rate plus 14%. That makes it 17.25%. Compare that to past credit cards being issued by Bank of America which had a 9.99% plus prime APR.

Another trend among credit card companies is moving to variable interest rates. Consider that, about three years ago, 80% or more of all credit cards used a fixed interest rate. Currently, that has been reversed. These days, 80% to 85% of credit cards are using a variable interest rate. With a variable interest rate, credit card holders will see their interest rates rise and fall depending on the prime rate.

Fees are also another large source of profits for credit card companies. Annual fees, once almost non-existent in the credit card industry, are now becoming more common. Annual fees are a huge turn off for credit card holders forcing credit card companies to get more creative. Thus, some credit card companies are making use of usage fees. A usage fee is charged to a credit card holder if he or she is unable to exceed a certain set amount of spending on their credit cards.

Credit card companies are also focusing their marketing more on consumers with good credit and ample financial means. Consumers belonging to this category can expect an increase in marketing mail from credit card companies.

Lastly, credit card companies are making rewards programs much less accessibly to card holders. A rewards program is expensive in the part of credit card companies. However, they are very popular among card holders and turning away from them could turn into disaster for a credit card company. To get around this, credit card companies are making rewards more expensive and decreasing their shelf life.