Credit

Credit Predictions for 2011, Part 2: Plastic Fantastic

photo: BigBeaks

Last week I gave you my predictions on what the real estate market holds for us in 2011.  This week, I’m going to focus on credit cards.  Remember those plastic rectangular things in your wallet with a magnetic strip on the back?  Unfortunately, in 2010 a lot of us – me included – had at least one of our cards taken away against our will.

I wish I had better news on the card industry for 2011, but for many of us the stars just aren’t lining up.  Here’s what 2011 has in store for credit card users.

CARD Act Subsidizing Will Continue

The CARD Act (The Credit Card Accountability Responsibility and Disclosure Act of 2009) was fully implemented throughout 2010.  The Act promised to protect consumers from the “evil” credit card industry, which isn’t terribly evil.  The jury is still out on whether or not we’re really any more protected than we were in the pre-CARD Act days, but what we do know is that the Act motivated the credit card industry to become very creative with fees. 

The Act all but eliminated over-limit fees and restricted the amount of the late fee you can be charged if you miss a due date.  This will cost the industry somewhere around $50 billion per year and they’re going to want to subsidize the loss in revenue.  Who do you think will be picking up the tab for that one?  Yeah, you’re right…we will.

Late fees and over limit fees are punitive fees, meaning you’re being punished for doing something the credit card issuer doesn’t want you to do.  Pre-CARD Act those fees were rightfully levied against the folks who deserved to pay them.  But since the industry can’t charge those fees any longer (or at the same amount), we’ll all get to pay more for our credit to make up for the revenue shortfall.

Fees, Fees — and More Fees

Thanks to the new rules on overdraft protection enacted in August 2010, banks can no longer approve any transactions that would take you below the $0 mark of your bank account — and charge a hefty overdraft fee, often $35 or more — unless you’ve actively opted into their overdraft protection programs. 

In addition to that, the interchange charged on debit card transactions is about to be capped.  Interchange is the fee the merchant pays for the privilege of accepting a certain type of card.  The fee is absorbed by the merchant and normally runs about 1.5% to 4% of the transaction amount.  It will likely be capped around 2% to 2.5%, which will cost the banks about 2 cents for every dollar spent on a debit card.  It doesn’t sound like much, but given the number of transcations completed each day, it will add up to billions of dollars.

Add together all those restrictions, and by most estimates banks are likely to lose somewhere around $80 billion per year in revenue.  This will be made up a variety of ways, including new fees and an increase of existing fees.  And don’t think that all of the new fees will be applied to your credit card accounts.  An increase in ATM fees is just as effective as an increase in foreign transaction fees.  Money is money, wherever it comes from.

Higher Interest Rates For All

According to Synovate, the average interest rate on a credit card account is now 14.7%, which is the highest it’s been in almost a decade.  Why so high?  I think you already know the answer to that one.  Interest is the easiest and cleanest way to increase revenue.  People will scream bloody murder if the card issuer sticks them with a new annual fee, but they don’t make a peep if their interest rate goes up because that change goes largely under the radar.

The Good News

There is a bit of good news for credit card users.  Issuers are sending out more preapproved offers and they’re sending them deeper into the credit risk pool.  That means in 2011 consumers won’t have to have elite FICO scores just to open a credit card.  We’ll see more attention focused on FICO 680 and above, which is good news for the moderately risky consumers. 

The bottom line for 2011?  Plastic will continue to become more expensive for everyone, not just the riskiest cardholders.

Next week, I’ll talk about credit scores in 2011.  For a change, I’ll actually have some great news!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.