On Friday, American Banker reported that Citigroup is imposing annual fees on some of its existing credit card accounts.
Citi spokesman Samuel Wang said in an e-mail statement:
"We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles. These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit."
"A small number of Citi customers may be notified of an annual fee," he added, without providing a total. He declined to provide a range of fees or the reason certain accounts were targeted.
One unhappy recipient of the terms-change notification -- my mom -- gave me a copy of the letter. It announces that an annual fee of $90 will be charged to her account starting next year in September, and every year afterward, unless she charged a minimum of $2,400 during the previous year. The only other alternative was opting out by Sept. 30, 2009, which would close her account.
The customer service representative she spoke with reiterated their offer to waive the fee if she charged $2,400 to her card. She decided the math made no sense -- $2,400 a year to save $90 -- and shuttered the account.
Because I know many will ask, here's how closing accounts affects your credit score. It doesn't matter who initiates the move, the result is the same. Once the balance is paid off, the credit limit no longer counts toward your debt-to-available credit ratio. If that ratio then increases, your score can suffer. Paying down balances on other accounts should help offset score damage. Read my column "Why closing a credit card account hurts score" for a more detailed explanation.
Citi isn't alone in penalizing borrowers who aren't profitable enough. Fifth Third Bank now charges a $19 inactivity fee on accounts with no activity in 12 months.
Credit card issuers are exploring ways to profit in the face of restrictions under the CARD Act, which among other things, will prohibit rate hikes on existing balances unless the increase is due to a 60-day late payment, promotional rate expiration, index movement tied to the variable rate or the end of a workout arrangement. Industry representatives have warned that the law would cause a resurgence in annual fees.
Already annual fees have picked up in credit card solicitations. About 28 percent of all mailed credit card offers carried an annual fee in the second quarter of 2009, up from 17 percent a year ago, according to direct mail tracking service Synovate Mail Monitor. The average annual fee on mailed offers increased to $82 this year, a record high in nearly 20 years.
The CARD Act doesn't restrict annual fees per se but requires 45 days' advance notification before implementing a new interest rate or fee. This requirement goes into effect today.
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