Like many, I recently received a nasty letter from Chase informing me that my minimum credit card payment would go from 2% of my balance to 5% with no chance to opt out by closing the account. It seems that in recent years their actuaries were not as smart as they were paid to be as customers sent large balances their way at low rates and were paying them flawlessly over long periods.
The balance transfer checks arrived daily for vacations, home repairs, or higher cost debts. Unfortunately for the banks, many people saw through the marketing hype and refused to charge new purchases, which carried higher rates that would be paid off last. Why push a buck at 19.99% behind one at 2.99%? We all knew that we were opting into a long-term debt product, fully understanding the risks of missing even one payment.
Chase and other companies are in a rush now to squeeze a few extra bucks out of their good customers (of almost 15 years in my case) before the seemingly debilitating Credit Card Bill of Rights goes into effect. Don't feel sad for them yet. The banks might actually make more money thanks to the new law.
The primary goal of the balance transfer offers was to get people to switch to one card and to continue to use that card to make additional charges, upon which the banks likely make profit on both interest and transaction fees far above the tiny profits from the actual balance transfer rate. Many people like me couldn't really understand why the banks would offer us such attractive offers when they knew that we knew that they would not pay off higher rate balances first. There was no way I would give up such attractive rates if I could avoid it. Was I crazy? Were the banks?
Many people took advantage of the very attractive financing deals and have perfect repayment histories. Why pay a debt off early that is unsecured and costs less than your mortgage? It's foolish, like buying a Sony Bravia TV and then a year later saying, "Hey, I think I'll send Sony an extra hundred bucks because their crappy gadgets are having a hard time competing against the iPhone."
Most of the credit card companies have maintained their side of the agreements in letter and spirit and have not pulled rash moves like Chase, who raised minimum payments by 150% for a large number of good customers. Chase seems to be trying to pull off a number of possible feats, whether it's choosing to milk credit-history-obsessed customers or despicably pushing those on the edge into default.
No matter the goal the effect is that a number of people are going to be seriously hurt by this action, as adjusting to a huge payment increase is a shocker for almost anybody. Many would argue that Chase violated industry practices and possibly consumer protection laws (in what essentially seems to be a bait-and-switch move from a long-term debt product to a short-term one). I estimate my own losses to be around $1,000.
It is my understanding that changing the cost of revolving credit card debt has traditionally been the trigger for allowing people to opt out of the contractual change by closing their accounts and paying off the balance under the previous terms, which Chase has said in the latest round is absolutely not possible. Chase and other companies don't really seem to care. Their excuse is that they have to make changes because the economy is so bad. So loyal customers pay--never investors who took risks.
It is ridiculous to say that this change is not an increase in cost to consumers because the most important number in banking is the time period, which is the key that activates an otherwise useless interest rate. A dollar is a dollar, unless you have a choice whether it's paid today or tomorrow. Only today can it be invested or used to pay down high-interest debt.
Even if Chase hates this new law, could it actually be good for them? Well, higher rate balances will have to be paid down ahead of lower rate ones under the new law, so customers with long-term low-rate balances finally have an incentive to make charges again on their cards. My Chase card has the lowest standard rate, but I haven't charged on it because, until this new law takes effect, it would ruin my balance transfer rate of 2.99%.
The day before I received the letter from Chase raising my minimum payment, I had been telling people about how reliable Chase had been for me. I was actually looking forward to the new Credit Card Bill or Rights to take effect because I could finally start charging on my Chase card again for regular purchases at a relatively low regular interest rate.
I intend now to pay off my Chase debt at an ever slower rate than I had planned before (but still on time every month). The thousands of dollars that I spend monthly for my business and household will stay with those companies who still understand that a virtual handshake is a deal and you stick with it.
Chase was the last bank that I expected to throw our agreement under the company bus. They are suddenly no better than a payday lender in my eyes. No matter what they tell you about the deal they are offering, beware because they ultimately seem to have the right to bully you into some other "agreement" if they see fit. You signed the non-contract, so get over it, right? If you're like me, you don't want to do business with a company like that.
The real cost to consumers, if not the substantial direct costs of defaulting, is the lost opportunity of being able to pay off other higher cost debts or of making sure that their families have security through the next year or so of economic turmoil. These families don't have the power to alter their debt agreements like the banks do without the consent of the other parties even though the economy is bad for them too.
There still may be hope in some states. For example, if I understand the ruling properly, the Massachusetts Supreme Judicial Court just reaffirmed in early July (in a case against Dell Inc.) that individuals can sue corporations in other states under the consumer protection statute "93a" even if the contract dictates that the customer agrees to go through binding arbitration in another state and to not enter into a class action suit. I'm no lawyer, but if you live in Massachusetts you might still have time to stop Chase. I say go for it! Could it even reach class action status for Massachusetts residents?
Whatever you do, DO NOT give up too much of your cash if you are financially strapped, especially if your gut reaction to companies like Chase is to not give them one more penny than you absolutely have to. Do not let them ruin you. Emotions are wasted on bureaucracies. Take a measured approach that is best for you in light of their actions.
For the rest of you balance transfer holders, be sure to check your agreements, but it seems that you'll be able to use those forgotten cards again soon for purchases without losing your preferred extremely low balance transfer rates. As for Chase and other companies that are mad at you for their bad decisions, pay the minimums if your rates are still low. Don't feel rushed. Pay them faster if the rates are high.
If you work for a big credit card company, know that your job security, and the whole country's, could very well depend on not pushing customers into default right now. By letting the executives make policies when they are not on the front lines manning the phone calls of desperate customers, you are putting us all at risk. Take what measures your company gives you within their regulations and the law and try to help people out where you can. Small measures add up to big movements. Most importantly, don't take it personally when people are angry at the system and take it out on you.
In any event, the law will soon be more on the consumer's side. It is a step forward.