The hell with them

I have too many credit cards, far more than I need. I don't use most of them, and on the ones I do use, rarely carry balances more than a month; two at most. I have cards I haven't used in years. About a year ago I started closing them out, but I'm doing it very slowly, because closing accounts you don't use, like everything else you do including breathing, drops your FICO score.

I have one account that I almost never use. I'm not sure why I have it or how I got it, but it's there, it has 14,000 rewards points on it, and it has an APR under eight percent -- or at least it did until yesterday, when I received a notice in the mail that effective in August, my rate is going up to 17.9%.

WTF?

Of course, first I went to see what I could do about these rewards points, and of course all the "rewards" start at 20,000. There is no way I am going to put another $6,000 on this card before August (or ever), so I decided to get right on the phone, cancel the card, and then ceremonially cut it up.

It turns out that customers like me are in the crosshairs of credit card companies, and that our reward for paying our bills on time is going to be higher rates and more fees:

As they thin their ranks of risky cardholders to deal with an economic downturn, major banks including American Express, Citigroup, Bank of America and a long list of others have already begun to raise interest rates, and some have set their sights on consumers who pay their bills on time. The legislation scheduled for a Senate vote on Tuesday does not cap interest rates, so banks can continue to lift them, albeit at a slower pace and with greater disclosure.

“There will be one-size-fits-all pricing, and as a result, you’ll see the industry will be more egalitarian in terms of its revenue base,” said David Robertson, publisher of the Nilson Report, which tracks the credit card business.

People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks.

“Despite all the terrible things that have been said, you’re making out like a bandit,” he said. “That’s a third of credit card customers, 50 million people who have gotten a great deal.”

Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders — “deadbeats” in industry parlance, because they generate scant fee revenue.

“They aren’t charities. They have shareholders to report to,” he said, referring to banks and credit card companies. “Whatever is left in the model to work from, they will start to maneuver.”

Banks used to give credit cards only to the best consumers and charge them a flat interest rate of about 20 percent and an annual fee. But with the relaxing of usury laws in some states, and the ready availability of credit scores in the late 1980s, banks began offering cards with a variety of different interest rates and fees, tying the pricing to the credit risk of the cardholder.

That helped push interest rates down for many consumers, but they soared for riskier cardholders, who became a significant source of revenue for the industry. The recent economic downturn challenged that formula, and banks started dumping the riskiest customers and lowering their credit limits in earnest as the recession accelerated. Now, consumers who pay their bills off every month are issuing a rising chorus of complaints about shortened grace periods, new hidden fees and higher interest rates.

The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

And we will respond by using cash.