Risky customers take hit with credit card reform

http://www.stltoday.com/business/local/article_ea8d2708-42fc-5c42-a5b5-d81bfa05f51d.html

It pays to be rich if you need a credit card.

A year after sweeping credit card regulations upended the industry, banks are showering perks and rewards on big spenders with sterling credit scores. And they're socking customers with spottier histories with higher interest rates, lower credit limits and new annual fees. In some cases the riskiest customers are being dropped altogether.

"When you look at the regulations, it's a net positive for consumers," says Peter Garuccio, a spokesman for the American Bankers Association. "But there have been some trade-offs."

The widening differences between how customers are treated is largely the result of new constraints on card issuers. The Credit Card Accountability, Responsibility and Disclosure Act, or the CARD Act, was signed into law with great fanfare at a time when borrowers across the country were struggling to make payments. It swept away several practices that for years had grated on cardholders.

The regulations are already transforming the cards on the market. To make up for the drop in revenue, banks are imposing new annual fees and hiking interest rates — but mostly for those with the lowest credit scores. The best customers are more prized than ever.

The CARD Act means banks can no longer freely raise rates or impose fees to manage their default risk, says Dennis Moroney, a credit card analyst with TowerGroup. So when they issue cards, "they have to have their ducks in a row from a risk point of view."

There's no doubt the riskiest customers have become toxic in this environment. In 2009 alone, banks wrote off a record $83.27 billion in credit card debt.

It's no wonder that card issuers have slashed available credit overall since 2007 by nearly a third, or $1.5 trillion, according to TowerGroup.

With bigger issuers such as Capital One the choices for customers with tarnished credit are pretty much limited to secured credit cards. These cards are intended to help borrowers rebuild credit, but require deposits and offer small credit limits. There are often activation fees as well.