WASHINGTON (TheStreet) — Credit card issuers have lost billions of dollars on bad loans during this economic downturn, and new rules might hurt their revenue streams further.
In May, Congress passed the Credit Card Accountability, Responsibility and Disclosure Act, a law designed to protect consumers from rapid interest rate increases and certain penalties. Some of its provisions began in August, and the next become effective Feb. 22.
Issuers are trying to find ways to boost their incomes, and these efforts will likely come at the expense of cardholders. Here are some predictions for the credit card industry this year:
1. More cards with annual fees: About 20% of credit cards in the U.S. have an annual fee. That percentage will increase this year. New cards have already been introduced with annual fees and some credit card issuers are testing annual fees on their existing cardholders.
In October, Bank of America (BAC) - Get Report (Stock Quote: BAC) told a small percentage of customers that it planned to charge an annual fee of $29 to $99 on their accounts beginning this month. Only a few customers (0.5%) received the notice, but the outcry against this annual fee was loud.
(BAC) - Get Report JPMorgan Chase (JPM) - Get Report (Stock Quote: JPM) is using premium rewards to encourage customers to select or upgrade to cards with annual fees. They introduced the Sapphire Preferred card, which has an $85 annual fee and enhanced benefits.
(BAC) - Get Report (JPM) - Get Report2. Increases in interest rates: Even though the CARD Act limits the issuers' ability to raise rates "at any time, for any reason," expect issuers to find loopholes and create opportunities to raise rates. Because the CARD Act limits interest rate hikes during the first year for cardholders, issuers are likely to boost their advertised annual percentage rates to lock customers in at a higher rate.
(BAC) - Get Report (JPM) - Get Report3. Increases in existing fees: The CARD Act doesn't limit fees, so expect issuers to raise existing fees. For example, the industry standard for balance transfer fees was 3% a year ago. If you transferred $10,000, you would incur a $300 fee. Bank of America has since increased its balance transfer fee to 4%, and JPMorgan and Discover (DFS) - Get Report (Stock Quote: DFS) lifted their fees to 5%. Expect other issuers to follow. Cash advance fees are also likely to increase.
(BAC) - Get Report (JPM) - Get Report (DFS) - Get Report4. Introduction of new fees: Expect issuers to add new fees. Fifth Third Bancorp (FITB) - Get Report (Stock Quote: FITB) charges users a $19 inactivity fee if they don't use their cards for 12 months. In August, Citigroup (C) - Get Report (Stock Quote: C) informed some cardholders that they will be charged an annual fee of $30 to $90 unless they spend at least $2,400 per year. Some retail cards are adding a $1 monthly processing fee if you request a printed statement.
(BAC) - Get Report (JPM) - Get Report (DFS) - Get Report (FITB) - Get Report (C) - Get Report5. Fixed-rate cards will shift to variable rates: In 2009, issuers switched many fixed-rate cards to variable rates, which rise and fall with the prime rate. The prime rate is currently at 3.25%, the lowest level since the 1950s. As the economy recovers, the rate is expected to rise and customers will likely feel the increase. If your card still has a fixed rate, expect it to be switched to a variable rate in the next month.
(BAC) - Get Report (JPM) - Get Report (DFS) - Get Report (FITB) - Get Report (C) - Get Report6. Fewer rewards on some, more rewards on others: Rewards sound generous in advertisements, but the points formula can be complicated and subject to change. Expect issuers to play musical chairs with rewards in 2010.
Issuers will cut costs by reducing rewards for some cardholders, especially those who pay off balances each month and aren't subject to annual fees. These curbed rewards could come in the form of smaller payouts for cash-back cards or increased point thresholds for free hotel stays and flights. However, rewards will likely be used as an incentive for cardholders to accept a credit card with an annual fee.
(BAC) - Get Report (JPM) - Get Report (DFS) - Get Report (FITB) - Get Report (C) - Get Report7. More government regulation: Credit card reform is a hot issue and some Congressmen think the CARD Act didn't go far enough. For example, Congress may try to force issuers to lower the interchange rate they charge merchants. If this passes, it will reduce an important source of revenue for issuers, and consumers will likely have to pay more to make up the loss.
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