Photo (cc) by Valerie Everett
This post comes from partner site lowcards.com
The past three years have been an extremely volatile time for both credit card issuers and users.
In 2008, the lending market crashed and the recession began. In 2009, credit card issuers dramatically raised interest rates and fees, cut credit limits, and closed accounts. This year, the majority of the CARD Act regulations went into effect.
But 2011 looks to be a year of smaller and more subdued changes, as credit card issuers find ways to manage risks, add new accounts, and increase revenue, while cardholders continue to pay down their balance and possibly use alternative forms of payment.
Here are some predictions for the credit card industry in 2011:
1. APRs will increase
There have been a significant number of restrictions placed on issuers during the past two years, and this has had a dramatic effect on the issuers’ revenue. Due to the CARD Act, issuers can’t increase the APR on an account during its first year unless there are some unique circumstances.
So issuers have simply increased the APR on new accounts before customers apply for the card. There are no laws restricting those APRs, only competition. The average advertised APR of all 1,000-plus credit cards in the United States the week before the CARD Act passed in May 2009 was 11.64 percent. One year ago, it was 12.96 percent. Last week, it was 13.80 percent (LowCards Weekly Credit Card Rate Report). Expect that average to continue to creep up since any increase in the APR adds much needed revenue for issuers.
2. Delinquencies will continue to drop
Many delinquent accounts have been written off since their peak in the first quarter of 2009. According to TransUnion, 1.21 percent of all credit cards were 90 days or more past due at that time. TransUnion expects card delinquencies to drop to 0.75 percent by the end of 2010 and then further decrease to 0.67 percent by the end of 2011.
3. Credit card offers in the mail will jump
Look for more credit card information in your mailbox, especially if you have good or excellent credit. Those are the most appealing customers to issuers, since they present a much lower risk of defaulting on their loan.
During the second quarter of 2010, US households received 640.3 million credit card offers – an 83-percent increase over the 349.1 million offers mailed during the same time in 2009. Chase, the largest mailer, quadrupled their mailings versus the same quarter a year ago. The second largest mailer, Citibank, almost tripled their mailings from the first quarter. Discover increased their mailings 70 percent versus the prior quarter.
Synovate estimates that lenders will have sent about 2.5 billion credit card offers by the end of 2010. While this is much lower than the 6 billion offers sent in 2005, the peak year, it’s a significant increase that is expected to continue in the upcoming year.
According to The New York Times, affluent households receive most of the offers – only 17 percent were sent to borrowers with poor credit scores. That compares with about 39 percent in 2007 and a low of 7 percent in late 2009.
4. Lending standards will slowly loosen
As the economy improves, issuers will find ways to re-define what customers are defined as “higher risk.” Issuers can be expected to slowly widen the lending circle and include people who may have had a problem that affected their credit score but can still afford to pay their bills.
“While stricter lending has cut their losses from bad loans, it is also limiting revenue,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Regulations have slashed revenue for credit card companies and banks. They will have to make this up somewhere. As the economy recovers, issuers will have to find ways to reasonably increase lending,”
Lenders have already increased their mailings to riskier borrowers. According to Synovate Mail Monitor, Capital One mailed more than 22 million card offers to this group in the third quarter of 2010, a fiftyfold increase over the same period in 2009. HSBC mailed more than 16 million, Citigroup 14 million, and Discover 10 million – approximately a ten-fold increase (New York Times).
5. Credit card debt will likely start to rise
The latest Federal Reserve Consumer Credit report showed credit card debt fell for a 26th consecutive month, showing Americans continue to pay down debt. This has occurred ever since the economy began its downturn. Consumers have increasingly turned to debit cards as a form of payment.
But not all the credit goes to consumers. Issuers have played a major role in cutting this credit card debt. They’ve cut credit limits so customers can’t charge as much, eliminated high-risk accounts, and maintained tight approval rates on new applicants. As credit card issuers start to slightly loosen lending standards, more higher-risk consumers will be approved for credit cards, and consumers with higher credit scores may see their credit limits start to increase. This could all lead to the first increase in more than two years in the nation’s overall credit card debt sometime in 2011.
6. Bigger rewards for spending and new reward cards with annual fees
Issuers are once again expanding awards to attract new credit card customers. They are now using bonuses to encourage spending.
Discover More and Chase Freedom cards offer $100 spending bonuses for new applicants who reach a set spending limit – $500 within three months for Discover More and $799 within three months for Chase Freedom.
Most cards will continue to offer these rewards without annual fees. However, some issuers are introducing new cards with “super-sized rewards” to attract big spenders to cards with an annual fee.
Citi has introduced two new cards with large annual fees and more significant rewards. The Citi ThankYou Prestige Card comes with an annual fee of $500. Cardholders can earn one point for every dollar spent on eligible purchases and 1.3 points per dollar spent for everyday purchases at gas stations, supermarkets, drugstores, parking merchants, and for commuter transportation. Customers also receive an anniversary bonus on points from purchases every year – up to five percent after you are a cardmember for at least four years.
Citi also has a ThankYou Premiere Card with a $125 annual fee. Customers earn 1.2 points for every dollar spent on purchases at supermarkets, gas stations, and drugstores, and one point for every dollar spent on all other purchases. The same anniversary bonus applies with this card.
“Issuers will continue to test and tweak rewards and bonuses to find the formula that most effectively uses rewards as an incentive for consumers to pick and regularly use their card,” Hardekopf says. “Rewards are part of the marketing plan for issuers, not just appreciation gifts for their cardholders.”
7. New prepaid cards
The recession, credit card regulations, and stricter lending have created new interest in prepaid cards. In some ways, prepaid cards are trying to fill the void for credit cards for teenagers and young adults that was created by the CARD Act. These regulations made it difficult for anyone under 21 to get a credit card. Any teenager (with parent’s permission) can get a prepaid reloadable card.
Credit card issuers, banks, and private companies are jumping into prepaid cards, perhaps because they can charge higher fees. The regulations that restrict fees for credit and debit cards do not apply to prepaid reloadable cards.
“Before now, banks ignored prepaid cards because they made much more revenue from debit and credit cards,” Hardekopf says. “Regulations have reduced much of that revenue, so now banks are looking at other options, including prepaid cards.”
8. Longer introductory periods for balance transfers
When the economy turned bad, issuers cut the attractive balance transfer offers, reducing some to as little as three months. But a big shift has occurred in 2010 – more issuers have increased the time period of these zero-percent offers. Many offer zero-percent interest on balance transfers for 12 months, such as the Discover More and the Capital One Platinum Prestige cards. Citi goes one step further: Their Diamond Preferred card offers zero percent for 21 months, and the Citi Platinum Select offers zero percent for 24 months. These longer introductory periods for balance transfers should continue into at least the first half of 2011.
9. Will the Fed raise interest rates?
Is 2011 the year that the Federal Reserve raises interest rates? Rates can’t stay at record lows forever. They eventually must go back up. When increases do occur, it will have a corresponding effect on just about every credit card’s APR. During the recent economic downturn, almost all credit card issuers converted their remaining fixed rate cards to variable rates tied to an index such as the prime rate. So when the prime rate goes up, those variable rate cards will show a corresponding APR increase, leading to increased payments for every cardholder who carries a balance. Credit card APRs are already high and it will be harder on cardholders when rates start climbing again.
10. Smart phones become a form of payment
This could be the year that consumers wave their smartphones at cashier readers in order to make a payment. Smartphone manufacturers, credit card companies, and Google are testing mobile payment systems, but there is currently nothing available to all consumers. We may see an expansion in 2011 with this form of payment.
More individuals and small businesses will also use programs like Square to accept credit card payments from their mobile phones.
While banks are taking their time to advance beyond the magnetic strip, other companies are eager to compete with Visa and MasterCard. Those two companies handled 82 percent, or $2.45 trillion, of the consumer spending on general purpose cards last year in the United States, according to the Nilson Report.