Credit Card Issuers Face Angry Customers and Lost Revenue
In its survey of credit card users, comScore found that 97% of respondents changed the way they used a card if an issuer increased the interest rate, reduced the customer's credit limit, added fees or made some other change the customer didn't like. For example:
- 55% of respondents indicated they had decreased the amount they spent using a card if the issuer changed terms
- 27% decided to stop using the card for purchases after term changes
- 12% closed accounts
- 9% applied for a new credit card with another issuer
- 8% transferred their balance to another card
- Only 3% reported spending more on a card after those types of changes were made
A "Perfect Storm" of Factors Rocks Credit Card Issuers
Credit card issuers claim they have had to increase rates and fees, as well as reduce their lending risks, in order to stay in business. Hardekopf says these changes were made because issuers were confronted with a "perfect storm" of factors that rocked their financial stability (but we do have to remember these banks got substantial bailout money, while consumers did not).
First of all, the economic downturn, which started in the latter half of 2008, led to a shaky start for banks in 2009. Record losses and bankruptcies continued in the industry and shook consumer confidence.
In addition, unemployment numbers skyrocketed in 2009 and consumers felt the effects of the worst recession in several generations. As a result, consumers could not make their credit card payments on time and both the default rates and the delinquency rates (payments that are at least 30 days overdue) significantly increased for nearly every issuer. For example, in August, Bank of America, one of the country's largest credit card issuers, reported an annualized default rate of 14.54%.
And finally, Congress and the new administration passed far-reaching regulations for the credit card industry when President Obama signed the CARD Act of 2009 on May 22. Most of the provisions of this bill take effect in February of 2010 and they include restrictions on over-the-limit fees, the marketing of credit cards to adults under 21, and dramatic changes in how issuers can impose interest rate increases.
Banks Take New Measures to Increase Revenue and Decrease Risk
In response to this perfect storm, Hardekopf points to substantial changes banks made to try to increase their revenue and decrease their risk, including: raising interest rates, adding annual fees, switching nearly all fixed-rate cards to a variable rate, reducing rewards, imposing new fees or increasing exisitng ones, slashing credit limits, closing existing accounts, and tightening standards used to obtain credit cards.
"With the economic environment and regulatory mandates prompting issuers to make product adjustments, an already financially-sensitive consumer is responding with dissatisfaction and an increasingly negative perception of their card issuer. Understanding the current sentiment and common concerns among consumers will be critical to success over the next year," said Kevin Levitt, comScore vice president in a statement issued with its 2009 report.
You might expect credit card companies to reverse some of these harsh measures to get customers back but, in fact, they are finding ways around the new CARD Act that will likely make consumers even madder. If a credit card issuer does want to build its market share in 2010, it will have to attract new customers and not repel existing ones by playing these games.