The Latest Credit Card Trap: No Limits, Just 'Access'
For years, the financial institutions behind the plastic in your wallet have used a host of methods both subtle and brash to up your costs and their profits. But now that the Obama administration's CARD Act is fully in effect, banks' ability to make money from such fees and penalties has been cut -- sometimes dramatically.
Is it any surprise that the banks are pushing back, looking for creative ways to recoup those lost fees?
"They were making a ton of money on people overspending, but with the economy and new rules, they are shaking people down to recover for fees they shouldn't have been charging in the first place," says Ira Rheingold, executive director of the National Association of Consumer Advocates.
Admittedly, some banks are in a relatively precarious position. According to industry consultants and insurance brokers Marsh & McLennan, it costs most banks between $200 and $300 a year to maintain a checking account -- the price of staffing, overhead, ATM and computer systems, and FDIC insurance premiums. (That number, though appears to be derived using a rather sketchy accounting trick: It assigns every overheard cost a bank incurs to be, well, a bank -- as a cost of maintaining checking accounts.)
Still, until recently, banks could offset those costs (however assigned) with fees from overdrafts and merchant account transactions. "Today, banks are expected to earn, on average, between $85 and $115 in fees per year, per account," says Thomas Fox, community outreach director at Cambridge Credit Counseling Corp. "But that's hard to do if the customer maintains a low balance. When that's the case, a bank may actually lose between $85 and $185 per year, per account. These challenges have opened the door to new pricing structures."
The Illusion of an Unlimited Credit Line
One such new maneuver comes from J.P. Morgan Chase (JPM), which recently removed the credit limits from many of its Freedom MasterCard accounts, replacing them with what it calls "credit access lines." The upshot: Unless a cardholder opts out of the change, he can spend significantly more than he would have been able to before, under circumstances when once he might have been charged an over-limit fee, or seen his card declined.
For some people, this may be good news.
"It does give consumers more flexibility," says Kim McGrigg, a spokesperson for the nonprofit Money Management International. "For example, if you need more borrowing power this might help you avoid opening another credit card account. It also eliminates the fear of having charges denied or having to pay over-the-limit fees."
For the undisciplined, though, it could be a recipe for debt disaster. "Some people associate the amount they are allowed to borrow with the amount they can afford to borrow. They are two very different things," points out McGrigg.
No preset limit means no warning from our bank that you're overspending your means. It also means that you have no clear idea when Chase will say you've hit your limit. Some card users have reported an issue in which the lack of a spending limit means your available credit looks lower to reporting agencies like Experian, which can hurt your credit score. (Chase has responded to this claim that it "report[s] credit access lines to credit bureaus in the exact same way we report credit limits/credit lines to the credit bureaus.") And any charges that exceed your old credit limit come due in the next billing cycle, making this limitless card not quite the convenience it appears at first glance.
What's behind Chase's changes? "We are committed to helping customers maintain or gain greater control over their spending," says Steve O'Halloran, public affairs director for Chase Card Services. "A credit access line provides customers with spending flexibility when they really need it." The card also added new, free features, including personal identity theft protection and travel and emergency assistance services. The bank did, however, end the card's roadside assistance program.
National Association of Consumer Advocates' Rhinegold isn't buying it. "This has nothing to do with customer convenience but the bank's profits," he says.
Kathleen Day of the Center for Responsible Lending agrees that it's just another trick to get people to spend more. "It's bad behavior like this that's why the Consumer Financial Protection Bureau is needed," says the consumer advocacy group spokeswoman. "It's this mindset that people are mad about. Some banks just don't get it."
Your Opt-Out Options
While Chase made headlines with its change, this credit access line "feature" has become common, particularly on high-end or travel cards, says Linda Sherry, director, national priorities for Consumer Action.
And if you're really offended by your credit card company's tactics, shop around. Look at what kind of deals you can get from credit unions, advises Rheingold.
But if you decide you're disciplined enough to handle the freedom and opt in, make sure the card's credit line and usage is being reported on your credit report accurately. Check your credit score now, and again in a few months to see if it is affecting you negatively, advises Sherry.
Finally, remember: Credit is a tool of convenience, not an extension of your income.
Corrections: An earlier version of this article state that Chase had made these changes for all Freedom MasterCard accounts. The change was made for select users, according to the bank. The article also said Chase's roadside assistance program was free. It is not. The bank does offer free alerts to let customers know when they are nearing their credit limits.