Monday, November 17, 2008

Citibank Rates: Up Up and Away

I began IYM and Money Musings back in April 2002 with two overriding (and decidedly unAmerican) tenets:

1) Get out of debt.
2) Build savings.

Here I am, over six years later, and every week's mail brings me more and more evidence that being debt-free (except for the mortgage!) is the way to go. (Future bailouts and debt jubilees notwithstanding.)

Take, for example, this notice from Citibank, which we received just last week:


THE CHANGES. We are changing your card agreement. The changes will be effective for all billing periods beginning on or after December 3, 2008. The changes will be effective whether or not you receive a billing statement.

• We are increasing your variable APR for purchases. Your purchase APR will equal ... a minimum APR of 16.99%.

• We are increasing your variable APR for cash advances. Your cash advance APR will equal ... a minimum APR of 21.99%.

• We are increasing the default APR to equal the greater of (1) the U.S. Prime Rate plus up to 23.99% or (2) up to 29.99%.

There's more (ain't there always?) regarding increased surcharges for foreign purchases and so on, but for Joe Sixpack, the explosive stuff is above.

For my part, it's been pretty engaging to watch, on a blow-by-blow basis, the effects of massive economic deleveraging — of which I'd consider such term changes a part. It's not nearly so neat, of course, if you're carrying balances on your plastic. If that's the case, then the benefits you're seeing from $2/gallon gas just got vacuumed up by Citibank.

On a carried balance of $4k, your monthly interest tab just went from $33 to $56.

On a balance of $10k, your monthly interest charges just climbed from $83 to $142.

It should be noted here that Citibank (whose stock now trades in the single digits, at a price last seen in 1996) is instituting the above changes under no small anchor of duress. The federal government is doing what it can to shove rates lower; banks are doing what they can to ensure consumer rates move higher. They're tightening terms and limits on a wide basis so that even "good credit risk" folks like my wife and I (credit scores @ 800-ish; last late payment was early 1990s) get to "pay" for the profligacy of (1) other consumers, (2) the banks themselves.

Personally, I don't care a whit that the minimum rate on my Citi Dividend Mastercard just went to 16.99 percent. With no non-mortgage debt of any kind, I use the card for the cash rewards and pay the thing off every month. In this regard, Citibank provides me little more than a convenience. Raising my rate is a big fat charbroiled Nothingburger.

On the other hand, if credit-card securitization continues to meet auction failure, then all bets are off. From the Marketwatch story above:

Earlier this month, Citigroup said that it lost $1.4 billion in the third quarter from credit card securitizations and that it expects such losses will continue, possibly reaching record levels in 2009.

The result compared to a gain of $169 million from credit card securitizations in the year-earlier period.

Those comments showed that Citi, like other firms, was unable to package up, or securitize, the loans it makes to customers and sell them into the secondary market.
A higher interest rate would make the difficult-to-sell loans more attractive for secondary market buyers, as well as make them more productive should Citi have to keep them on their own balance sheet.

High-FICO, convenience-only card users (like me) who can't imagine (not like me) their plasti-credit lines largely vanishing altogether in the midst of economic turmoil might do well to consider just that eventuality.

Given what's occurred in the last year or so, I for one have learned to shun the words, "Oh, there's no way that can happen."


— Posted by Michael @ 9:10 AM


Define "largely vanishing", please.

I have a good credit score, pay off my Citibank Mastercard every month, and have a $11,400 limit. If it dropped down to $1,140, I would need to change the way I spend, and would have to plan out some month's expenses more carefully, but it would be a minor nuisance, all in all.

If it vanished entirely, I would need to switch over to debit card for several things. Which would be a larger nuisance.

So which scenario should I be envisioning?


So much of this is predicated on securitization of the card debts, and how much of it investors have the stomach for.

As the recession progresses and the economy weakens (if it does), default rates rise. Investment returns drop. How far they drop, and how low the economy sags, will predicate what happens to folks' credit limits.

I don't know what it'd take to see credit lines sliced by 70-90 percent, and I probably don't want to know. But I try to be prepared for whatever happens.

I just suggest that it's worth a few minutes of planning for "What if?" Unimaginable circumstances ($1k max credit lines across the board, or worse) have a way of sneaking up on us right when we're most off-guard.

Never say never.


Yesterday I got one from AmEx similar to the one you got from Citi, for a card that I don't think I've actually ever used. I guess I can expect similar letters changing the T&Cs on my other cards.

So far none of my limits have been cut. I use an Amex Blue Cash for everything and pay it off monthly; the six or so other cards I have are safely stashed away and have no balance. But I have a huge line of available credit and would be wholly unsurprised to see that cut, even though I only use a fraction of it every month.

But those carrying balances and just barely making the minimum payment are going to get killed.


Makes so happy to have my banking and credit cards handled by my credit union. The APR increased once, about five years, by 1% (to 12.99% for purchases and cash advances).

I use it strictly for convenience (we just became debt-free one week ago!)

After the economy started to slump I checked out the financial stregth ratings of my credit union and my online-only bank that we were using for savings (HSBC). I was stunned to see the poor ratings of HSBC, and the above average rating of my credit union. Needless to say I cashed out the HSBC and transferred it to my credit union!

Credit unions may not have the best loan rates, but they aren't making the bad financial choices that banks with low rates are making.

As for lower credit card limits to $1,000-- I'm sorry to say that it wouldn't phase me. It would be a blessing for people to be forced to live within their means, and save for future spending. Unfortunately, many people don't decide to change their ways until they max out their cards. I know this doesn't apply to convenience users that posted here, but it might be good for the rest of the credit card users (ie. "abusers").


On a separate note, Michael, what are your thoughts on the possible auto company bailout (or so-called loan)?

If I remember, you're from Michigan, like myself and work for a car dealership? I would be really interested to hear your perspective.

I don't like the idea of a bailout, but I'm worried for my home state!


Fair enough.

My credit card is a convenience. And at worst, I would be moderately inconvenienced if my credit line vanished.

That's looking just at that aspect, though. If the economy weakens to that point, I'll likely feel it elsewhere first.

Never say never and all that, but I have no debt and a decent emergency fund. We're all skating on the same pond, and I'm just thankful that I'm not on the thinnest part of the ice.

(heehee - my verification word is "unwinest" - I like!)

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]