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Uncle Sam Winks Again at Citigroup’s Credit Card Fees

By Larry Doyle on August 21, 2009 at 6:01 PM in Banks, Citigroup, Credit Card Companies, Economy, Sense on Cents (Larry Doyle blog)

When a company, which is a ward of the state, increases credit card fees can it be said to be the equivalent of a tax increase? I believe it can. In that vein, Citigroup is raising taxes on its credit cards by initiating annual fees. The Wall Street Journal highlights this development and reports Citigroup to Initiate New Annual Fees on Some Credit Cards:

Citigroup Inc. is instituting annual fees on some current credit-card accounts in an attempt to offset strict new legislation that could dent its profits.

The move comes on the heels of several warnings from the banking industry, which has said that issuers would be forced to rewrite the playbook on plastic because new credit-card laws would take a bite out of their income.

Rates of between 20% and 30% aren’t sufficient for income purposes? The fact is, current card holders are paying for the undisciplined lending practices of the bank over the last 5 years.

These laws include new limits on interest-rate increases on existing balances and greater disclosures.

The legislation was written to prevent abusive practices on the part of the banks. The fact that it allows for the implementation of practices such as these paints the legislation as the equivalent of a ‘show trial.’

Typically, annual fees are associated only with cards that offer generous rewards programs. In recent years, few issuers have risked losing market share by charging annual fees across the board.

Now, Citigroup’s attempt to charge annual fees—perhaps the first time a large card lender has used such fees in response to the legislation—will be watched closely by competitors.

Card lenders are seeking ways not only to offset the effect of the legislation, but also to cope with growing losses stemming from souring credit-card loans.

Card issuers have been raising interest rates and fees, tweaking rewards programs, reducing credit lines and closing accounts.

“We have adjusted pricing and card terms for some customers as part of our regular account reviews,” said Samuel Wang, a Citigroup spokesman. “These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit. As part of this change in terms, a small number of Citi customers may be notified of an annual fee.”

Higher cost of doing business? What? Borrowing from the Fed at between 0-.25% is too high? These types of statements take a special type of gall. Wow!

The fee increase was reported earlier by blogs such as Bargaineering.com, and American Banker.

In one instance, a Citi cardholder was informed, in a mailer, of a $30 annual fee. This fee may be waived if at least $2,400 in spending is racked up on the card in a year.

Citigroup is experimenting with a range of annual fees, some in excess of $30.

Cardholders notified of these annual fees have two months to opt out, paying off their balances under current rates and terms over the rest of their contract.

Peter Garuccio, a spokesman at the American Bankers Association, an industry trade group, said, “Annual fees are one way that card issuers can reconfigure their card portfolios and reprice their products” following the credit-card legislation.

The new legislation, the bulk of which will be implemented in February 2010, aims to limit fluctuating interest rates and fees, and arm consumers with more information about their debts.

Given that the legislation goes into effect in February 2010, the banks are clearly trying to get all of these income generating, beat-the-consumer maneuvers in place well before then. Thanks Wall Street and Washington.

What a joke. Problem is, once again, the joke is on the American consumer.

Related Sense on Cents Commentary:
Uncle Sam Just Winked at Citi’s Credit Card Rate Increase (July 1, 2009)
Banks Build Better Mousetrap (July 9, 2009)

tzada

This country is in trouble. Since many many Americans are waking up to our peril, maybe we can end things. Like in take back this country.

I was lucky to be able to get out of debt to credit cards. They creep up on you. One day your interest rate is this and the next month it is huge. Really for no good reasons, except I should have read the small type. I sold something I didn’t wish to sell, but the relief when it was over was wonderful.

Divorce that credit card company and find one who hasn’t made that choice yet.
Peggy Sue

I’m at the point where I think borrowing money from the Mob or the banks is irrelvant. They both break your legs and the interest charges are out of town. My husband and I are down to one credit card and we’re clearing the balance as fast as we can.

They can keep their annual fees. From now on? I’ll take a page out of my father’s book: pay in cash or don’t buy at all.

Screw ‘em!
Linda Anselmi

When a company, which is a ward of the state, increases credit card fees can it be said to be the equivalent of a tax increase?

Excellent point LD. I hadn’t considered that side of it at all. I think we are going to see to what extremes corporate entities are willing to go to regain those huge returns. They love that “big money”. Problem is those days are long over. And won’t be returning for a generation or more. But our government is tied to their purse strings and doesn’t want to tell them so. Because that would mean government would have to recognize their own “big money” days are over as well. And without govt reigning the corp. interest, they will continue to inflict more and more damage as we all go swirling down the drain.
sybilll

I got a leaflet from Citi/MasterCard, one day before the new credit card law was imposed, that (yippee!!), my rate was being increased to 23.49%. Never been late, and only owe $600, so I know what I will do. But, in these horrific economic times, some people just have to resort to credit. I did at one time, and am $600 away from being free from this demon. And, yes, I DO see this as a tax. Others far more financially savvy than I can make compelling arguments, but, at the very least, I feel that rate is usury, especially since they used MY money to stay afloat. Appalling.
CG

LD, interesting as I had not reasoned that these fees amount to a tax. As you noted, one has to wonder about how those such as Citibank will survive charging rates of 20-30% interest, plus penalties, plus annual fees, plus the portion of every charge, is it a portion of the 3% discounted to seller? Especially as you say, had they not engaged in undisciplined lending practices over the last 5 years, and perhaps not engaged in undisciplined investing practices too, they would not be in this predicament. There will be a lot more arrogance and gall to come unfortunately… Perhaps as taxpayers we need to insist on a complete audit of the Federal Reserve and insist on some meaningful transparency.
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JayD

Rising credit card fees seems to be the name of the game these days. Fortunately I have a very high FICO score and plenty of credit. I can pick and choose whom I wish to be in debt to. I was puzzled by the fee increases because my score is so high but raise them they did. Good credit scores and loyalty be damned. It is not just Citigroup that raised their fees. Captial One did it not long ago. American Express did it just recently. There are others doing it as well and I am sure every credit card company will be jumping on this fee-increase bandwagon in due time.

I use my lowest fee credit card for regular use and then I use other cards for special offers of low interest rate fees for limited times. These special offers run for about a year at 3.99%, 2.99%, and I just got one for 1.99% APR. But their regular purchase rates are in the high teens or in the 20+ APR range and I will not support those companies by using their cards.
devildog666

When all those notifications came out upping the interest rates, I paid off all my credit cards. I had over a dozen and used to play musical credit cards moving around debt to finance my business, now the companies are starting to cancel my cards because I haven’t used most of them in years.

Recently I bought a new car and the finance officer said I had the highest FICO score he had seen in five years. (I live in Ohio where your either looking for work or gave up looking. Not many good credit scores here.) Because I have a history of paying off my loans early they claim I wasn’t an attractive borrower to the banks and the loan rates weren’t that great, go figure. I didn’t take out a loan.

In this economy if you have to use a credit card to finance purchases, you’re in trouble, but it can also be said a dollar spent today will have 50 cents purchasing power tomorrow.