It’s a classic case of “what is wrong with this picture”: the Federal Reserve recently slashed it’s benchmark interest rate for the umpteenth time this year to 1%, it’s lowest level in years, yet many consumers are getting broadsided with higher rates and fees on their credit cards. So what gives?

The bottom line is, the credit card companies (aka banks)  are attempting to offset their mounting financial losses by increasing interest rates and every other possible usage fee they can manage. Third quarter 2008 results for most banking and finance-related businesses reported sagging credit card results, with uncollectible loans or “charge offs” rising to over 5% of total credit card balances.  And the loyal customers are definitely not immune; it’s a snowball effect and even if you pay on time and have excellent credit, you will still most likely be affected in some way.

And it’s not just the banks that are putting the screws to credit card users, retailers are also clamping down on consumer credit. Retail giants Target and Nordstrom recently initiated interest rate increases on their store credit cards, while home improvement mogul Home Depot reduced credit lines on its (Citibank issued) store credit cards for customers with delinquent accounts or those whose credit scores have dropped dramatically.

To make things even more complicated for consumers, banks are continuing to tighten the requirements as far as access to new credit, which could put a further crimp in consumer spending. According to a recent article in the Wall Street Journal, the number of credit cards in use dropped 5% from the first to second quarter of 2008, to an estimated 663 million cards. Analysts speculate that this reduction, which reflects the largest quarterly drop in several years, can be attributed to the fact that consumers are getting fewer credit card offers combined with issuers canceling cards for less credit-worthy customers.

And for those with existing accounts? Here’s the latest and greatest, J.P. Morgan Chase Bank announced they will be charging a new $10 monthly service fee to some account-holders who have been carrying large balances for a minimum of two years, while raising their monthly minimum payments from 2% to 5% of their outstanding balance. Chase is also raising rates for cash advances and overdraft protection, as well as its default rate, which is triggered when consumers exceed their credit limit or are late on their payments.

Not to be left off the bandwagon, CitiBank and American Express are in the process of notifying targeted groups of cardholders that they will be raising their regular interest rates by two to three percentage points. American Express additionally is increasing fees for cash advances, late payments and defaults, increasing its foreign-exchange fees to 2.7% from 2% on its consumer and small-business cards and eliminating ways to earn rewards on one of its popular cards.

Well, with all these fee increases and the loss of incentives to use credit cards,  it seems as though the industry is doomed for further hard times. Unfortunately, there will always be people who depend on credit cards to obtain necessary items, and those that cannot control their spending wisely, thus it seems unlikely that too many of these companies will disappear – especially when taxpayer money is on the table to bail them out.

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