When James received a great credit card offer two years ago – a 4.99 percent interest on balance transfers for the life of the card – he jumped at it. He used the cheap money to remodel the kitchen of his Los Angeles-area home.
He never expected the new kitchen would turn him into a pawn in a chess match playing out among Congress, bank regulators and credit card firms.
The offer, from JP Morgan Chase had only one obvious stipulation: No late payments. Because the rate was far lower than a home equity loan at the time, James used the credit card for the construction project, borrowing around $20,000. His monthly payments were very affordable - just under $300. Paying the minimum 2 percent each month, he'd pay off the loan in about 8 years.
James, who requested anonymity because he's uncomfortable discussing his personal finances in public –made sure to pay on time each month, jealously guarding the terms of his cut-rate loan. Little did he realize that Chase could find a way to make his life miserable without raising his interest rate.
But Chase recently threw James-- and perhaps hundreds of thousands of other consumers – a huge credit card curveball. The firm sent letters to customers beginning in late June indicating that minimum payments would be raised from 2 percent to 5 percent. In August, his monthly payment will spike to $750.
"What they're doing is pushing decent people into such tough situations," he said. "I'm between a rock and a hard place."
Around the Web, Chase customers are screaming about the change.
"I'm stuck with a combined monthly payment going from $525 to $1,445," wrote one consumer on a blog devoted to the change in Chase terms. "I explained that this could possibly force me into default for which Chase would not receive any payment. (The customer service agent's) response? 'Chase obviously factored that possibility into the decision for changing these terms.'"
New world order
Consider this the opening salvo in the new world order for credit card firms. Before Congress passed credit card reform legislation in July, bank lobbyists repeatedly warned that the law would cost them revenue and force them to raise rates and fees on consumers. The aggressive step by JP Morgan Chase - effectively a 150 percent increase in required monthly payments -- marks one of the first major changes by a card issuer.
Chase spokeswoman Stephanie Jacobson said the change impacts "less than 1 percent of their customers," but would not divulge a precise figure. Even 1 percent of Chase cardholders would represent nearly 1 million consumers, however.
Chase customers like Daniel Lindenbaum of Coatesville, Penn., say they are being given a Hobson's choice. He said he transferred an $8,000 balance to a Chase card, enticed by a 5 percent interest rate -- and never missed a payment. Nonetheless, his monthly bill will now jump from $163 to more than $350.
"I don't mind paying a little more than the minimum payment every month, but going to over $300 a month when I was paying $163 a month is a big jump for me," he said. "It's not easy to come up with extra cash like that. I called customer service and they … suggested for me to transfer my money elsewhere."
The problem with that, he said, is that he'd have to open a new account with another company and face recently increased transfer fees. Bank of America, for example, just raised its transfer fee to 4 percent. And Chase has said it plans to raise transfer fees to 5 percent.
Lindenbaum figured he'd have to pay at least $200 to switch to a new card. He was confused about why Chase would want to drive him away.
"They are still making money off of me each month and if I pay off my balance faster, they will be losing money in interest," he said. "If I transfer my money to another credit card company, they will lose my money all together."
Surprised by marketing success
James said he thinks Chase made the change for a simple reason: It wants to squeeze consumers who have low-interest loans, force them into a misstep and then rope them into far less desirable loan terms.
"They don't want people to have 5 percent loans out forever and ever," he said. "I don't think they considered how successful their marketing efforts would be."
Jacobson, the firm's spokeswoman, essentially conceded that strategy in an e-mail to msnbc.com.
"Tens of millions of Chase customers have taken advantage of our promotional low rate financing over the last five years," she said. "Most of these loans have been paid back in less than 24 months. However, there have been a small percentage of customers that have not made as much progress in paying down these loans. Our desire is to have these balances paid back in a reasonable period of time."
Bill Hardekopf, who runs LowCards.com, said banks are following through on warnings that credit card expenses for consumers would rise after passage of the Credit Card Accountability, Responsibility, and Disclosure Act.
"From an issuer standpoint, they are looking at their default rates going up, they are in tremendous economic distress and they are trying to minimize their risk as much as possible," he said. "Issuers feel they need to find ways to make up for revenue they are projecting they are going to lose once the legislation takes effect."
Chase told msnbc.com that it would work with consumers who are unable to make their new payments, but James said that's merely an invitation into a lion's den. The only offer he received was a severe change in terms to his account with a much higher, variable interest rate.
When the new federal regulations take effect next year, they will severely limit banks' ability to change rates unless cardholders have variable-rate agreements, so banks are trying to steer consumers away from fixed-rate cards. Bank of America, for example, recently sent notices to cardholders with fixed rates telling them their accounts will be changed to variable rates starting next month.
James said all these changes seem particularly unfair because through 2007, even as the recession started, Chase was still aggressively marketing the low interest cards.
He said he will be able to make the payments with great difficulty, but he wonders about other consumers.
"I've got to stop my retirement contributions, or maybe even ask for an advance at work," he said. "But I don't know what other people are going to do."
RED TAPE WRESTLING TIPS
Consumers who don't like changes to the terms of their current credit card can attempt to transfer balances to a new card, but the process is full-of booby traps, warns Hardekopf of LowCards.com. But there are still cards worth applying for, he said. Here's what to watch for.
- Transfer fees can turn a good deal into a bad deal. A 5 percent transfer fee on an $8,000 balance means a $400 fee. Consumers can choose to roll that fee into the balance of the card, making it seem relatively painless. That's a mistake, Hardekopf said, because it can wipe out any savings from a new low-interest card.
- The low transfer rate often doesn't apply to new purchases. Until February 2010, consumers who switch cards for a lower rate will see their payments applied to the lowest-rate portion of the balance, meaning consumers tend to swap low-interest balances for high interest balances, leaving them back where they started after they pay off the transfer amount.
- Previously, transfer fees were capped by many banks at $50 or $75. Not anymore. And the terms on low-rate offers like "0 percent for 12 months" are shrinking – many last only 6 months now.