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How the Sub-Prime Crisis Changed the Credit Card Game

» Introduction
The sub-prime loan crisis has caused credit card companies to change their approach to credit card holders. Being aware of these changes can help you avoid falling prey to credit card offers that help the credit card companies at your expense.
» Step 1
Before the so-called “subprime loan crisis,” credit was easy and the percentage of loss in bank’s credit card divisions was compensated for by increases in market share. With banks taking multi-billion dollar losses as a result of fallout from that crisis, this is no longer the case. Instead, banks are doing everything they can to squeeze every ounce of profit and prevent taking on any additional risk in their credit card divisions. In other words, if you think credit card companies were sneaky before, you ain’t seen nothing yet.

This has resulted in several significant changes in offers for credit, particularly in offers for promotional credit rates on credit cards. The first of these changes is that most banks have significantly increased their up front balance transfer fees on promotional rate offers.

Prior to the crisis, it was not uncommon to see balance transfer offers with no up front fee. More commonly, the fee would be 3% with a maximum of $75 or $99. Now, not only is there usually no maximum on that 3% fee, but some banks have started to charge a 5% up front balance transfer fee with no maximum, resulting in actual interest rates almost as high as regular rates on credit cards!
» Step 2
The second change is that before the crisis, it would be common for accounts in good standing to offer 0%-2% interest promotional rate offers, including low interest “life of the loan” offers. The strategy of the credit card companies was to increase market share of debt, knowing that a certain percentage of borrowers would forget their promotional rate was ending, and therefore start paying regular interest for at least a month or two, or maybe more. Now, it is all but unheard of for people to get 0% offers on existing credit card accounts, and “life of the loan” offers, while still being offered are often at rates above those offered for home lines of credit.

It still is common for people to get 0% offers for opening new accounts, but frequently these offers are deceptive, because the balance transfer fee is – you guessed it – 3% up front with no maximum.

One strategy some have found effective is to cancel unused credit card accounts, and then apply for new ones. While it can get you better offers, it might also affect your credit rating, so beware if you are looking to buy a house, refinance, or finance a large item
» Step 3
The third significant change is that credit card companies are doing their best to unhinge low interest “life of the loan” deals they made in the past. This is how they do it: Let’s say you owe $10,000 on a 1.9% promotional rate for the life of the loan. You will almost certainly be inundated by offers on that account for 0% interest loans for a short period of time, say three to six months.

The reason for this is sneaky, cleaver, and obvious. The bank hopes that you will take advantage on that 0% loan, and not pay it off before its due date. If you do pay it off completely before the revert rate, fine. If you fail to pay it off before the rate reverts to the regular rate of the card, you will find yourself in a classic credit card company trap: Because credit card accounts allocate all payments to pay lower interest balances before higher interest ones, all your payments above actual finance charges will go to pay off that low “life of the loan” 1.9% balance, leaving your regular rate balance earning high interest, perhaps as much as 18% or more for the credit card company.

In order to pay off that new balance costing you 18%, you would have to pay off the entire 1.9% balance in full. As I said, its one of the classic credit card company dirty tricks.

Frequently, banks make these offers not only with 0% interest, but without any balance transfer fees whatever. While these kinds of offers can be utilized effectively – if you know what you are doing and know how to plan effectively - one mistake, one lapse of attention that results in your not paying the complete balance of the 0% loan before it reverts will trap your balance at the high regular interest rate of the card until you pay off the low interest life of the loan balance.

In summary, read all promotional offers carefully, and do the math to make sure you really want it before taking advantage of it. And before doing any really tricky maneuvers, plan it out carefully – hopefully as a result of a long term strategy - before opening yourself to be slammed by yet another credit card company dirty trick.

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