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Two years ago, millions of ordinary people who'd never had any problems borrowing money suddenly found themselves unable to get the credit they'd come to expect. In the aftermath of the credit crunch, bailed-out Wall Street banks faced widespread criticism for being slow to take the money that the Federal Reserve made available to them and lend it out to their customers.
Now, though, it appears that that trend is starting to reverse itself. Through a number of different initiatives, credit card issuers are loosening their purse strings and reaching out to consumers in an effort to restore their profits. With borrowers returning to the driver's seat in the volatile relationship between card holders and the financial institutions that issue credit cards, it's important to know which offers make sense and which are simply attempts to separate you from your hard-earned money.
Credit on the rise
After a tough period for people seeking credit, the pendulum has already started swinging back toward the free-wheeling days of easy borrowing. A recent SmartMoney article cited figures showing increased activity on a number of fronts. Credit-card issuers have increased low-interest rate offers fivefold this year compared with 2009, and balance-transfer offers to existing customers have gone up nearly 30% since the beginning of the year.
Moreover, after some attempts at novel approaches to raise revenue in light of the limitations imposed by credit card reform, card companies are turning back to tried-and-true approaches geared toward spurring spending. Among them are the following:
- Citigroup (NYSE: C ) and JPMorgan Chase (NYSE: JPM ) have lowered their interest rates as part of promotional offers. With double-digit percentage point reductions, savings can be impressive -- and in some cases, the once-endangered 0% offers are returning.
- Bank of America (NYSE: BAC ) and HSBC (NYSE: HBC ) are offering balance-transfer checks in an effort to grab market-share from other card companies or simply to encourage customers to get quick access to cash.
- American Express (NYSE: AXP ) and Wells Fargo (NYSE: WFC ) are reportedly increasing credit limits for customers.
The moves come as the credit card industry has failed to keep pace even with the slow recovery in the economy. A recent card-tracking report shows that Visa (NYSE: V ) , MasterCard, and Discover Financial haven't seen increases in credit-card activity despite an overall increase in consumer spending. That's consistent with consumer credit statistics from the Federal Reserve, which suggests a trend toward debit cards or cash as alternatives to credit-card debt.
Good news for smart cardholders
It's good to see credit-card companies focusing on their existing customer base rather pulling out stops to grab users of competing cards. Clearly, incentives that can save you money are good for consumers. What you have to keep in mind, though, is making sure you don't fall into the traps that card companies are laying out for you.
For instance, balance transfer checks may look like a great deal, especially when combined with low interest rate offers. But when you read the fine print, you'll find that a $10,000 balance transfer may cost you between $300 and $500 in upfront transfer fees. Moreover, card companies hope that you won't repay the transfer before the promotional rate expires, when you may well see your interest rise by as much as 20 percentage points.
Even higher credit limits can carry risks. By itself, a higher credit limit can improve your credit, as your credit score is partially based on the percentage of available credit that you're actually using. So if you simply keep your spending habits the same, then you could see your credit score go up. But if you do what the card companies want you to do -- use the higher limit as a way to encourage you to keep higher balances on your cards -- then you could end up both deeper in debt and with a worse credit score as a result.
Don't get cocky
Whenever a credit card company gives you better access to credit, it's a potential victory for customers. But what looks like victory can turn to bitter defeat in a hurry if you're not careful. Only by managing your credit and refusing to let card incentives drive your behavior will you get the most from your cards -- even if the banks aren't necessarily happy about it.