Credit Card Predictions and a Question for 2011

Lending standards will loosen, APRs will rise and credit card offers will again flood our mailboxes. Welcome to 2011.
By Bill Hardekopf ,

NEW YORK (

LowCards.com

) -- The past three years have been extremely volatile for credit card issuers and users.

In 2008, the lending market crashed and the recession began. Last year, credit card issuers dramatically raised interest rates and fees, cut credit limits and closed accounts. This year, the majority of CARD Act regulations went into effect.

Look for more credit card information in your mailbox next year, especially if you have good or excellent credit.

Next year looks to have smaller, more subdued changes. Credit card issuers will find ways to manage risks, add accounts and increase revenue, while cardholders continue to pay down their balance and possibly use alternative forms of payment.

Here are some predictions for the credit card industry next year:

1. APRs will rise

There have been a significant number of restrictions placed on issuers during the past two years, and this has had a dramatic effect on issuers' revenue. Due to the CARD Act, issuers cannot increase the APR on an account during its first year without some rare circumstances. So issuers have simply increased the APR on accounts before customers apply. The average advertised

APR

of all 1,000-plus credit cards in the United States the week before the CARD Act passed in May 2009 was 11.64%. One year ago, it was 12.96%. Last week, it was 13.80%. Expect that average to continue to creep up, since any increase in the APR adds much-needed revenue for issuers.

2. Delinquencies will keep dropping

Many delinquent accounts have been written off since their peak in the first quarter of 2009, when 1.21% of all credit cards were 90 days or more past due at that time.

TransUnion

expects card delinquencies to drop to 0.75% by the end of this year and decrease to 0.67% by the end of next year.

3. More credit card offers will come in the mail

Look for more credit card information in your mailbox, especially if you have good or excellent credit. Those are the customers that most appeal to issuers, since they present a much lower risk of defaulting on their loan.

During the second quarter of 2010, U.S. households got 640.3 million credit card offers, an 83% increase over the 349.1 million offers mailed during the same time the year before.

Chase

(JPM) - Get Report

, the largest mailer, quadrupled its mailings versus the same quarter a year ago. The second largest mailer,

Citibank

(C) - Get Report

, almost tripled its mailings from the first quarter.

Discover

(DFS) - Get Report

increased its mailings 70% versus the prior quarter.

Synovate Mail Monitor

estimates that lenders will have sent about 2.5 billion credit card offers by the end of this year. While this is much lower than the 6 billion sent in 2005, the peak year, it is a significant increase that is expected to continue.

According to The New York Times, affluent households get most of the offers; only 17% were sent to borrowers with poor credit scores. That compares with about 39% in 2007 and a low of 7% late last year.

4. Lending standards will slowly loosen

As the economy improves, issuers will find ways to redefine which customers are defined as "higher risk." Issuers can be expected to slowly widen the lending circle and include people who may have had a problem that affected their credit score but can still afford to pay their bills.

While stricter lending has cut issuers' losses from bad loans, it is also limiting revenue. Regulations have slashed revenue for credit card companies and banks and will have to make it up somewhere. As the economy recovers, issuers will have to find ways to reasonably increase lending.

Lenders have already increased their mailings to riskier borrowers. According to Synovate,

Capital One

(COF) - Get Report

mailed more than 22 million card offers to this group in the third quarter of this year, a 50-fold increase over the same period least year.

5. Credit card debt will likely rise

The latest Federal Reserve Consumer Credit

report

showed credit card debt fell for a 26th consecutive month, meaning Americans continue to pay down debt. This has occurred since the economy began its downturn. Consumers have increasingly turned to debit cards as a form of payment.

But not all the credit goes to consumers. Issuers have played a major role in cutting this debt. They have cut credit limits so customers can't charge as much; eliminated high-risk accounts; and maintained tight approval rates on applicants. As credit card issuers start to slightly loosen lending standards, more higher-risk consumers will be approved for credit cards and consumers with higher credit scores may see their credit limits start to increase. This could all lead to the first increase in more than two years in the nation's overall credit card debt.

6. Card issuers will turn to rewards

Issuers are once again expanding awards to attract new customers and using bonuses to encourage spending.

Discover More

and

Chase Freedom

cards offer $100 spending bonuses for applicants who reach a set spending limit -- $500 within three months for Discover More and $799 within three months for Chase Freedom.

Most cards will continue to offer these rewards without annual fees. Some issuers are introducing cards with "super-sized rewards," though, to attract big spenders to cards with an annual fee. Issuers will continue to test and tweak rewards and bonuses to find theformula that most effectively uses rewards as an incentive for consumers to pick and regularly use their card. Rewards are part of the marketing plan for issuers, not just appreciation gifts for their cardholders.

7. More prepaid cards will appear

The recession, credit card regulations and stricter lending have added to interest in prepaid cards. In some ways, prepaid cards are trying to fill the void for credit cards for teenagers and young adults created by the CARD Act. These regulations made it difficult for anyone under 21 to get a credit card, but any teenager (with a parent's permission) can get a prepaid reloadable card.

Credit card issuers, banks and private companies are jumping into prepaid cards, perhaps because they can charge higher fees. The regulations that restrict fees for credit and debit cards do not apply to prepaid, reloadable cards.

8. Balance transfers will get longer introductory periods

When the economy turned bad, issuers cut attractive balance transfer offers, reducing some to as little as three months. But a big shift has occurred this year, and more issuers have increased the length of these 0% offers. Many offer 0% interest on balance transfers for 12 months, such as the Discover More and

Capital One Platinum Prestige

cards. Citi goes one step further: Its

Diamond Preferred card

offers 0% for 21 months and the

Citi Platinum Select

offers 0% for 24 months. These longer introductory periods for balance transfers should continue into at least the first half of next year.

9. Smartphones become a form of payment

Next year is likely the year consumers start waving their smartphones at cashier readers to make a payment. Smartphone manufacturers, credit card companies and

Google

(GOOG) - Get Report

are testing mobile payment systems, although there is currently nothing available to all consumers.

More people and small businesses will also use systems such as

Square

to accept credit card payments from their mobile phones.

There is one big question for the coming year:

Will the Fed raise interest rates?

Is 2011 the year the Federal Reserve raises interest rates? Rates can't stay at record lows forever, and when increases do occur it will have a corresponding effect on just about every credit card's APR. During the recent economic downturn, almost all credit card issuers converted their remaining fixed-rate cards to variable rates tied to an index such as the prime rate. So when the prime rate goes up, those variable rate cards will show a corresponding APR increase, leading to increased payments for every cardholder carrying a balance. Credit card APRs are already high, and it will be harder on cardholders when rates start climbing again.

-- Reported by Bill Hardekopf of LowCards.com.

Bill Hardekopf is chief executive of

LowCards.com

, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

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