Consumer 10.0: The State of Credit

Robert Malkin was hopping mad.

For a decade, Malkin had dutifully paid off his Capital One MasterCard each month. His credit rating was great. But suddenly and for no evident reason, Capital One said it was more than doubling his interest rate, from 6.9 percent to 15.9 percent.

The Bucks County resident got the bad news a year ago, days before President Obama signed the nation's new credit card law. At the time, Malkin had been hearing about card companies' raising rates in response to the financial crisis and recession and in anticipation of the new law's crackdown on credit card traps. But Malkin, 52, said he "never thought it would happen to me."

The Credit CARD Act turns one year old this weekend. Though many of its provisions took effect only in February, and others await, it's a good time to reexamine the market and see where cardholders stand.

Malkin was hardly alone in getting an unexpected bump in interest rates. Others fared worse, as card issuers cut credit limits, canceled accounts, or took their last opportunity to do what the law now bars: raise rates on existing balances.

And today? Average rates are up, largely because card issuers cannot raise rates after you incur debt, so they're pricing default risk into their models. On the other hand, evidence abounds that the market remains competitive.

And the most dire predictions of banking lobbyists did not come true. Cards are still available without annual fees. Rewards programs are as rich as ever. And credit cards remain widely available - at least to those with incomes and good payment histories.

Still, even without many of the old tricks and traps, credit cards remain confusing and potentially risky. So here's a quick-and-dirty guide to the new landscape, with help from experts such as Odysseas Papadimitriou, a former Capital One executive who founded CardHub.com.

Card users come in all varieties. For simplicity sake, we'll focus today on three common kinds. Pick your type, and go from there:

I'm a convenience user. If you're like Malkin, it's important to understand why Capital One raised his rate last May even though he doesn't generate any actual interest.

Capital One is happy to have cardholders who pay in full each month, since purchases generate revenue from merchant fees. But it likes them for another reason, too: It's confident some sizable fraction of them will eventually fall off the wagon.

That happened once to Malkin, a sales rep for a contract manufacturer. He was laid off in the 1990s, and his credit card helped his family endure the disruption.

"I'm a firm believer that they can be a lifesaver if used properly," Malkin says. "If you're downsized, and you don't have a job, without that card, you're in trouble."

Papadimitriou's advice: Shop around to take advantage of the competition. Papadimitriou says people with top credit can find rates in the 10 percent to 12 percent range.

One way is to simply look in your mailbox. Andrew Davidson, of Mintel Compermedia, says card issuers are expected to send three billion to four billion new-card offers this year, up from two billion last year. That's well below their six-billion-plus peaks, but still a sign of "renewed confidence and cautious optimism in the industry," he says.

Another way to shop is to search offers at a site such as CardHub.com, CardTrack.com, or CreditCards.com.

Here's the good news, thanks to the CARD Act: If something happens and you do build a balance, your card issuer can't raise your rate on that balance unless you fall 60 days' late. (With notice, though, it can still bump your rate for new purchases.)

I carry a balance. There's good news for these cardholders, too.

Contrary to many predictions, balance-transfer offers haven't dried up, or become dramatically less lucrative. CardHub, which tracks about 800 card offers, says "0 percent" teaser rates are still widely available for periods ranging up to 18 months.

Some transfer charges have risen - fees of 4 percent or 5 percent are increasingly common. But Mintel says a majority still charge just 3 percent.

Papadimitriou is particularly impressed by CitiBank's "Diamond Preferred" card, which charges a 3 percent fee followed by no interest for 18 months. The post-teaser rate, which also applies to purchases, is 9.9 percent to 18.9 percent.

"Essentially, you're paying 3 percent for a year and a half," he says. "It's hard to beat that."

Beware, though, of one trap that the new law didn't fully vanquish. If you take an interest-free balance transfer, it's still best not to use the card for new purchases until the teaser period ends.

The law doesn't allow card issuers to do what they once did: Apply all payments to the 0 percent portion of the balance while all your new purchases accrue interest. But they can still do that with the minimum-payment part of your payment.

I like my rewards. Despite warnings, these haven't gone away, though their rules continue to evolve. Sometimes, that's to customers' dismay, such as when a favored airline ends a partnership.

Papadimitriou's advice: "Go for cash back."

He says one of the best offers today is on Capital One's Venture Rewards card. Though you'll pay a fee after the first year, you get two miles for every dollar spent - and you can use the miles for a statement credit. "It equates to 2 percent cash back," he says.

The key advantage of cash-back cards is that you don't build a large point balance. If they change the rules, you can just take your business elsewhere.

Best of all, the new law brings predictability.

"Before, maybe the rates looked great, but no one had them after the first six months," Papadimitriou says.

Now, the rate you agree to is the rate you keep, as long as you play by the rules.

       838 mil. Direct-mail card offers,

first quarter 2010

       14.67%     Average interest rate

on cards with balances

       14.23%   

Average new-card offer,                                   first quarter 2010

       15.77%     Current average

non-teaser-rate offer

9.2 months     Average period at 0%                                       for balance transfer

    $853 bil.     All revolving credit,                                      first quarter 2010

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