We know the credit markets remain seized: late on Black Friday when no one was listening, the Federal Reserve issued a statement that its emergency lending to banks had increased over the prior week. Thus, massive amounts of money continue to flow to large financial institutions in an effort to stimulate economic activity, but by all appearances the money is not flowing into the broader economy. Quite the contrary; as the Fed lowers rates and adds record amounts of loaned cash to bank balance sheets, big banks are actually increasing consumers’ cost of borrowing and reducing their lines of credit. Witness Citibank's recent adverse actions against cardholders.
The most recent beneficiary of a taxpayer-financed lifeline, Citibank is the latest to demonstrate a strange way of saying thanks. First, we were subjected to the made-for-SNL performance on CNBC by the company’s largest shareholder, Saudi Prince Alwaleed. The interview was shot on location at the Prince's stables in Saudi Arabia. Note the beautiful sable horse in the background:
Far less entertaining were the letters that arrived in the mailboxes of millions of Citibank credit card customers last week. The letters informed customers that the APRs on their accounts will be hiked dramatically and immediately. Many will see their APRs raised more than ten points as soon as December 3 - just days after receipt of the letter.
The company claims the rate increases are limited to 20% of their cardholders (if true, that still represents 11 million Americans). In a statement, the company offered few details but acknowledged that it was “repricing a group of customers” in order to “continue lending in this environment.”
Those who pay their balance in full each month have nothing to worry about. And from what we can tell, “promotional balances” - such as that 1.9% balance transfer you might have taken advantage of - are not affected.
Based on admittedly-unscientific online discussions, customers across the risk spectrum have been targeted - including, most oddly, lowest-risk customers with top FICO scores who don’t carry balances. This would seem to indicate that the repricing is more widespread than Citi has indicated.
This deals an embarrassing death blow to the company’s enthusiastic promises last year, when Citi Cards CEO Vikram Atal told the United States Senate that they would abandon the practice of hiking rates on existing balances. Atal said the company was “giving up that practice,” and
“...will not voluntarily increase the rates or fees on the account until the card expires ... the only reason we would consider increasing the rates or fees before the card expires would be if a cardholder pays Citi late, exceeds the credit limit, or pays with a check that bounces. We believe we are the first bank to adopt this policy.”
Setting aside broken promises, Citi is right that we’re in a very difficult environment. But such a precarious environment seems to be the most dangerous time for repricing. Further, the repricing is in direct opposition to the first principle stated by the Federal Reserve when they announced the Citibank bailout last week: “to support a healthy resumption of credit flows to households and businesses.”
It may behoove us to think this forward a quarter or two from the perspective of the bank, the customers, and the broader economy. Beyond the unseemly PR of appearing to burn the taxpayer from both ends when they can least afford it, there are more serious implications.
First, customers who are barely making ends meet under their current arrangements could easily tip into default under the new terms. Many won’t even notice the change until it’s too late. This is the adjustable-rate-mortgage of the credit card business - but in these cases, the customer had no way to see the adjustment coming. This is not just bad for those customers, but it’s bad for Citibank because it will almost certainly generate larger losses down the road.
Second, Citi is allowing customers to “opt out” of the change, but those who do must close their account. This action almost always hurts a customer’s credit score, and the impact can be dramatic. It delivers a nasty one-two punch: it both reduces their reported payment experience and their amount of available credit. More than a third of a FICO score is determined by calculating the person’s percentage of available credit, so closing a credit card account can hurt big. Lower scores, in turn, will cause these customers to be seen as higher risk, and other lenders are likely to reprice them too, setting off a domino effect that could crush those who’ve done nothing other than pay their bills on time.
Third, this makes consumers much less likely to borrow and therefore spend. For many Americans, this is a good thing. But like it or not, spending is the engine of the American economy. The vast majority of consumers borrow - even short term - to finance things like holiday shopping. At a time when consumers are tightening their belts anyway, this presents another very ominous leading indicator for retailers at their most important time of year.
So, why is Citibank doing this? The easy answer is that they need to quickly increase their near-term cash flow in order to survive. This means letting less cash go out the door and charging higher rates on the cash they do.
A more cynical answer might be that the company wants to get ahead of impending legislative and regulatory changes. Both the Cardholders’ Bill of Rights and new lending regulations proposed by the Federal Reserve will expressly prohibit the practice and seem sure to pass by early next year. In light of Citi’s aggressive actions, we wonder if legislators may now consider making these changes retroactive.
So keep your eye out for letters from Citibank - and tell us your story.
Anthony Citrano is a freelance writer with a "great deal of interest in the consumer space, especially with regard to consumer credit and (bad/absurd) customer service experiences. Don't ask me why; I'm just that way." He has also written for Money Magazine.
(Photo: me and the sysop)
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