Credit Cards Stayed in Pocketbooks Last Weekend

Credit card use was, compared to 2008, way down during this year’s so-called “Black Friday” weekend, the traditional kick-off to seasonal shopping. According to research commissioned by Reuters, only 26 percent of people out buying over the period said they’d used a credit card.

Thirty-five percent of those interviewed said they’d used debit cards to make purchases. But the biggest single group, which comprised 39 percent of respondents, told researchers that they’d stuck with cash.

Britt Beemer, who founded the company that carried out the survey, America’s Research Group, told Reuters: “That’s an amazing shift in consumer’s habits.”

The findings fit in with earlier research by the National Retail Federation (NRF) that asked consumers how they intended to pay.

Credit Cards Still Useful Online

What remains unknown is the impact that online shopping may have on credit card use. Traditional shoppers spend Black Friday weekend (the one after Thanksgiving) in the nation’s malls. But another group of consumers waits for the following Monday (which retailers have dubbed “Cyber Monday”) to begin their buying.

In a press release issued the day before Cyber Monday 2009, the NRF reported a survey that says:

• 96.5 million Americans plan to shop on Cyber Monday this year, up from 85 million in 2008
• 87.1 percent of online retailers have a special promotion for Cyber Monday, up from 83.7 percent last year
• 91.5 percent of Cyber Monday shoppers–or 88.2 million Americans–plan to shop from home
• 13.5 percent, or 13 million people, plan to shop from work on Cyber Monday
• 69 million Americans have said they plan to shop from work at some point during the holiday season

And none of those consumers can use cash online. So the credit card trends begun on Black Friday weekend may just alter when the holiday season’s online shoppers join in the buying frenzy.

Credit Card Debt, and Delinquencies Down

But it’s not just credit card use in stores that’s down. Research from TransUnion, a company that specializes in credit and information management, reports that–at $5,612–average credit card debt in the third quarter of 2009 was slightly lower than the previous quarter’s figure and for the same period in 2008. Although the change was less than two percent, it suggests a new wariness to this form of borrowing on the part of card holders.

TransUnion also found that delinquencies were down in the last quarter compared to the previous one–this time by nearly six percent. In a statement, Ezra Becker, who is TransUnion’s director of consulting and strategy for financial services, attributed this in part to new credit card regulation. He said:

For the first time in ten years, third quarter national delinquency rates showed a decrease from the previous quarter, indicating a departure from the usual seasonal patterns. This movement could have occurred for a number of reasons. First, the national savings rate fell in the third quarter, possibly indicating continued consumer efforts to keep debt to a minimum and debt repayment under control in the face of an already depressed labor market… Second, many lending institutions modified credit card rules, fees and charges in the third quarter, in advance of the Credit CARD Act taking effect in February 2010. Those changes almost certainly impacted the dynamics of third quarter performance.

Credit Card Use Costs Retailers Dear

When Dave Sutey, who runs a chain of convenience stores in Montana spoke to his local newspaper recently, he was surprisingly open about his business’s books. He told the Helena Independent Record that his thrift shop’s second biggest expense wasn’t rent, or leases, or payroll taxes. It was the fees he had to pay for processing debit and credit cards. These charges are called, in industry jargon, “interchange fees” or “swipe fees.”

And Mr. Sutey’s not alone. The National Association of Convenience Stores reckons that those in its sector made $5.2 billion profit in 2008, but paid $8.4 billion in interchange fees. So the owners of those outlets had to pay more–much more–to credit card companies last year than they could pay to themselves for owning and operating their businesses.

Credit Card Use Costs Us All Dear?

Some consumer groups argue that all retailers–it’s not just convenience stores that pay these fees–simply pass on the costs to their customers in higher prices. So with each credit card use everyone pays, even those who settle up in cash.

The American Consumer Institute issued a report Tuesday that claimed that interchange fees cost every American household $337 in 2008, and that amount is likely to be higher this year. The report also suggested that, at nearly $40 billion, swipe fees account for 57% of banks’ total credit card fee income. And it says: “Americans pay the highest interchange fees of all industrial nations.”

Credit Card Regulation the Way Forward?

Some in Congress believe that further credit card regulation is required to bring swipe fees under control. And the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) directed the U.S. Government Accountability Office (GAO) to investigate the charges.

The GAO’s report was issued earlier this week, and–at least in part–concurred with some consumer groups. It said:

Some consumers have benefited from competition in the credit card market, as cards often have no annual fees, lower interest rates than they did years ago, and greater rewards. However, consumers who do not use credit cards may be paying higher prices for goods and services, as merchants pass on their increasing card acceptance costs to all of their customers.

Credit Card Companies Need the Money?

However, the GAO report highlighted other concerns. It also said:

Issuers, particularly smaller issuers such as community banks and credit unions, report relying on interchange fees as a significant source of revenue for their credit card operations, and analyses by banking regulators indicate such operations traditionally have been among the most profitable types of activities for large banks.

It’s become increasingly apparent in recent months just how creative–not to say slippery–credit card companies are capable of being in avoiding regulation that might damage their profits. The New York Times examined Wednesday how a 2003 law in Australia, which sought to regulate interchange fees there, ended up with unforeseen consequences, some of which harmed consumers’ interests.

Real Protection Is Hard to Achieve

If legislators here wish to rein in swipe fees, they have to be tough, both in ignoring the pleas of industry lobbyists–too many of which result in legislative loopholes–and in the skill with which a new law is drafted.

Credit Card Companies Get a Gift–from Congress

The New York Times last Friday published one of those magisterial editorials that it does so well. The headline was “A Gift to Credit Card Companies,”and the content none too politely criticized issuers’ “deceptive predatory practices” during the grace period that they were given before the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit CARD Act for short) comes fully into force.

And it went on to attack Senator Thad Cochran (R,MS) who, earlier in the week, had blocked a legislative attempt to freeze credit card rates immediately.

Credit Card Rates Too High

The day after the New York Times’s piece, the Boston Globe brought its guns to bear on the industry. It too criticized Congress for its handling of credit card regulation. And its attack on card issuers pulled no punches. The opening paragraph read:

When organized crime charged double-digit rates for credit, it was called loan-sharking, and polite society frowned on it. Today some of the nation’s biggest banks are imposing interest rates on credit cards that would turn Tony Soprano green with envy. And Congress has been looking the other way.

The Globe piece continued with a quote from Vikram Pandit, who is CEO of Citigroup. In what some in the industry might have perceived as friendly fire, he told Globe staff that the industry “needs clear rules of the road – whatever they are.”

The editorial conceded that imposing maximum credit card rates would dramatically reduce the number of new cards that the industry would be willing to issue, but concluded that–after the 2008 meltdown–that would be a price worth paying.

Consumers Union Joins Barrage

Also last week, the Consumers Union issued a statement on the subject. It called on the Federal Reserve Board (FRB) to stop credit card companies from continuing a range of “abusive practices.” These included:

• Forcing customers to accept interest rate increases that will soon be illegal
• Failing to advise customers of their right to opt-in for over-limit coverage
• Rigging some supposedly “variable” credit card rates so that they’re not truly variable
• Harming customers’ credit scores when changing card contracts
• Making it difficult for customers to earn their way out of penalty interest rates

Credit Card Regulation May Already Have Loopholes

The Credit CARD Act has provisions that are designed to limit issuers’ penalty options if a customer is less than 60 days delinquent on payments. However, the Consumers Union reveals that Citibank may have–with breathtaking creativity–already circumvented these.

Citibank has hiked its credit card rates to as much as 29.9 percent while offering to credit back 10 percent of the interest if the customer pays on time. So the bank hopes that it can in effect charge that eye-wateringly high penalty rate the instant a late payment arises, without having to wait for the cardholder to reach the 60-day delinquency that the Credit CARD Act provides for.

Credit Card Companies Make How Much from Penalties?!

Meanwhile, Saturday’s Denver Post reported that penalty fees alone are expected to generate revenues of $20.9 billion for credit card issuers this year.

No wonder banks are being so creative.

Credit Card Regulation Extending to Gift Cards and Similar

According to the National Retail Federation, gift cards will be–for the third year running–the most requested gift this holiday season. Meanwhile, the New York Times recently quoted analysts who believe that, by 2012, Americans will be loading more than $100 billion on all forms of pre-paid card, including Visa- and Mastercard-branded pre-paid “credit” (more accurately “debit”) cards, and retailers’ gift cards.

Given this appetite for these types of cards among consumers, it is unsurprising that the Credit CARD Act of 2009 included provision for their regulation. And, last week, the Federal Reserve published its proposals for protecting the public.

Credit Card Rates Not an Issue

Of course, most of the things that bother consumers most about traditional cards–credit card rates, spending limits, late payment penalties, and so on–don’t apply to pre-paid and gift cards. But that doesn’t mean that these financial instruments don’t raise concerns of their own.

The Fed’s discussion document points to a number of these:

Concerns have been raised regarding the amount of fees associated with gift cards, the expiration dates of gift cards, and the adequacy of disclosures. Consumers who do not use the value of the card within a short period of time may be surprised to find that the card has expired or that dormancy or service fees have reduced the value of the card. Even where fees or terms are disclosed on or with the card, the disclosures may not be clear and conspicuous.

The Fed’s Proposals

Unfortunately, any new consumer protections will not be in place in time for this holiday season. However, it is the Fed’s intention that they are going to be active for the end of 2010. And the principal areas that are likely to be covered are:

• Restrictions on dormancy, inactivity, and service fees
• Expiration date restrictions
• Additional disclosure requirements regarding fees

Credit Card Companies Calm

Credit card companies that issue pre-paid cards responded to the Fed’s discussion document with surprising–not to say worrying–equanimity. In a statement, Kirsten Trusko, who is president of the Network Branded Prepaid Card Association, said:

While we are still digesting the full impact of the Federal Reserve Board’s newly proposed rules related to gift cards, our general feeling is that the Fed’s proposal seems tough but fair and reasonable. In fact, much of what is being proposed related to expiration dates, clear and conspicuous disclosure of fees, restrictions on certain kinds of fees, etc., is already being done by many members of the industry. We look forward to working with the Board in the coming weeks to provide comments for improving on certain aspects of the proposed rules and resolving any unanswered questions they may have.

Credit Card News Reporting Ignores Small Businesses’ Needs

Credit card news reporting–including that in this column–tends to concentrate on consumer issues. But many small businesses rely heavily on their corporate credit cards to keep going. So why isn’t more attention paid–both by the media and legislators–to corporate cards?

After all, what’s good for small businesses is good for the American economy–and so for us all.

Failings of New Legislation

The new Credit CARD Act, which is due to come into force in February 2010, is expected to provide some powerful protections for consumers. Yet it ignores small businesses completely.

That’s because that law is an amendment of the Truth in Lending Act, which protects only: “a natural person who seeks or acquires, goods, services, or money for personal, family, household use other than the purchase of real property.”

Credit Card Regulation Could Help Small Businesses

So Rep. Neil Abercrombie (D, HI) introduced the Small Business Credit Card Act of 2009 (H.R. 3457). That, according to Mr. Abercrombie’s website, is:

…bipartisan legislation to protect small businesses with 50 or fewer employees from abusive practices, such as double-cycle billing, unannounced changes in payment due dates or interest rates hikes on existing balances. The Credit CARD Act will protect consumers from these practices.

So What’s the Problem?

On Friday, the New York Times reported that Mr. Abercrombie’s measure is facing opposition from his own side. The article claimed that, according to some congressional aides (although not her own), it is Representative Nydia Velázquez (D, NY) who is blocking the bill.

Nobody on Ms Velázquez’s team is confirming her opposition. But some others on the Hill are suggesting that she is unwilling to blur the line between individual consumers and corporate America.

Credit Cards Critical for Small Businesses

The National Small Business Association (NSBA) recently published its 2009 Small Business Credit Card Survey. It included an overview, penned by the NSBA’s chair, which said:

When asked in December 2008, 49 percent [of small businesses] reported using credit cards in the past 12 months to finance their firms. In late-April, however, that number jumped to 59 percent. This increase is occurring despite a rise in the number of small businesses reporting worsening credit-card terms. Asked to evaluate their credit-card terms over the last five years, 79 percent reported worsening terms–up from 69 percent in December 2008. Even more eye-opening: when asked if their credit card terms had worsened in the last six months, a whopping 75 percent reported that they had.

Credit Card Trends for Small Businesses Not Good for Lenders

As always, there are two sides to every story. Credit card companies have been tightening their terms at least partly because they too are suffering.

Indeed, only last week, Advanta, a lender that specialized in small business credit cards, filed for Chapter 11 bankruptcy, five months after it ceased lending. Since then, it’s been collecting on $2.7 billion that it’s owed, but has encountered increasingly serious default levels.

A Way Forward

According to the government’s U.S. Small Business Administration, small firms:

• Represent 99.7 percent of all employer firms
• Employ just over half of all private sector employees
• Pay 44 percent of the total U.S. private payroll
• Have generated 64 percent of net new jobs over the past 15 years

In these circumstances, protecting a line of credit that is so critical to so many small businesses may not be a luxury. Some would argue that it’s an economic necessity.

Credit Card Rewards Must Suit You

It would be nice to think there’s not someone out there who’s never been on an airplane–and never plans to–who has a card that earns them air miles. However, you just know that somewhere precisely such a person exists.

But before you laugh too loudly, you might just want to check your own wallet. Because a combination of changing lifestyles, and amended credit card terms and conditions may mean that many, many Americans are currently signed up for credit card rewards programs that don’t really suit them.

Credit Card Debt and Credit Card Rewards Don’t Mix

To start with, most people who don’t pay off their balance in full every month should probably select a credit card based on the lowest interest rates possible and not on the credit card rewards program.

But you might not be getting the best deal, even if you do pay off your balance every month. More and more credit card companies are imposing annual fees on their cards that carry valuable rewards programs (and on some that don’t), and a little cold arithmetic is necessary to see if a card that was once a winner is now somewhere toward the back of the pack.

Credit Cards & Lifestyle

Another factor that could have made one of your cards less attractive without your really noticing is a change to your lifestyle. If you’re one of millions of Americans who fly less frequently, stay in hotels less often, and have cut down on car rentals, then perhaps you should be looking for cash rewards rather than freebies.

Of course, if your lifestyle still involves a great deal of travel, then a rewards program with travel perks could still be highly valuable. The American Express’s Starwood Preferred Guest card is a good example of a card that can return real value to the right person.

Research Before You Do Anything

If you find that you ought to change one or more of the cards in your wallet, then you should obviously search out the deals that most closely suit your way of life. That could involve finding a different rewards program, or it could simply mean exploring the range of low interest credit cards–as far as such things still exist.

But think before you sign that new credit card application. You need to have an excellent credit score to get a new card, so it could be a mistake to burn your bridges.

And simply cancelling an existing card can damage that credit rating, as can making multiple applications. So it’s often better simply to cut an existing card in half, and let the account die slowly and naturally through disuse.

Credit Card Debt Shows Overall Reduction

Last Friday, the Federal Reserve published its Consumer Credit statistical release for September 2009. It showed that American consumers are paying down what they owe. In fact, they reduced their indebtedness by $15 billion during that month alone. Unfortunately, they still owe $2,456 billion.

Still, the Fed’s figures show that outstanding revolving credit (which is largely made up of credit card debt) dropped 10 percent in the third quarter of 2009. And that can’t be bad.

Credit Card Debt a Growing Problem

How can credit card debt be both going down and be a growing problem? Well, the debt that’s being reduced belongs mainly to people who can afford to repay it. For them–and for those who lent to them–it wasn’t a problem in the first place.

Those who do have a problem are the unemployed, and 10.2 percent of Americans now fall into that category. Add in those who are working part-time jobs because they can’t find full-time employment, and those who have given up looking for work because they’ve given up hope of finding anything, and that number jumps to 17.5 percent.

That’s causing credit card companies all sorts of problems. And when credit card companies face difficulties, their first instinct is to pass the pain on to their customers.

Credit Card News Not Good

Last week, CNN Money carried a report entitled Credit card issuers fight for more profit. It said that: “A good rule of thumb is that the level of credit card losses is usually about one percent higher than the unemployment rate.” And it went on to quote predictions from Moody’s that growing losses for credit card companies would continue until mid-2010, when they’re expected to peak at 12 percent.

Bank of America’s Special Pain

Bank of America (BofA), which is the nation’s second largest issuer of Visa products, and third largest issuer of MasterCard-branded cards, faces particular difficulties. Its credit card “charge-off rates” (the debts that it thinks it won’t recover) are currently running at 14.25 percent, against an industry average of about 10 percent.

And last Friday, BofA took the unusual step of including a new risk factor in its third quarter report. Companies have a legal obligation to reveal new risk factors only in their annual reports, and rarely offer them up part way through a year. So it’s likely that the bank perceives this new risk as posing a serious threat to its business.

And what is the risk? Looming legislative and regulatory pressure.

Look on the Bright Side

Increased regulation may cause banks pain, but it just may also protect consumers. BofA reckons that it’s likely to lose $200 million in revenue in the fourth quarter because it’s made its overdraft rules fairer. And that move anticipated legislation.

Credit card regulation, in the form of the Credit CARD Act, is going to be implemented soon. It should be interesting to see whether it makes credit card terms fairer.

Credit Card Companies and Legislators: A Grand Canyon of Mutual Misunderstanding

The U.S. House voted yesterday to bring forward the provisions of the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act). If passed by the Senate (and few would today place a bet on the likelihood of that), the Expedited Card Reform for Consumers Act would implement regulations very soon that are currently due to take effect only in February 2010. In particular, they would greatly restrict a card issuer’s ability to increase credit card rates or vary credit card terms and conditions.

As the two sides–legislators, and lenders–face off, their sheer blank-eyed, mutual incomprehension would be almost comical were it not so potentially harmful.

Credit Card Regulation Always Bad; Government Interference Always Evil

On the one hand, credit card companies believe absolutely that they have done nothing wrong. A period of grace between the signing of the Credit CARD Act, and its implementation has been used most constructively to ensure full compliance with the new law. As a statement from the American Bankers Association put it earlier this week:

The CARD Act represents the most sweeping reform of the credit card industry in decades and banks are working diligently to implement its provisions by next February, as Congress required. But this is an enormous task, requiring the complete reworking of internal operations, risk management models, funding calculations, employee training, and computer coding, all of which are necessary for servicing hundreds of millions of accounts every day.

Accelerating the time frame for implementation of the CARD Act will be extremely difficult, if not impossible, for card issuers.

Credit Card Regulation Always Good; Credit Card Companies Always Evil

Meanwhile, some legislators say that they have been inundated with complaints from constituents who claim that they’ve been gouged by their credit card companies during the grace period between the signing of the act and its pending implementation.

Rep. Carolyn Maloney (D,NY) commented yesterday:

Card companies have redoubled many of the abusive practices that brought Congress to pass my original reforms last Spring. Rather than use the time–time they asked for–since the bill’s signing in May to prepare for the changes, they’ve raised rates and fees with absolutely no regard for the dire position of millions of their customers.

I believe the card issuers have heard the message loud and clear today: their practices can no longer be tolerated. These reforms are crucial changes which level the playing field between card issuers and card holders.

The Good, the Bad, and the Evil

As is usual in such matters, both sides are both right, and wrong. It would have been totally impossible for the industry to have complied instantly with the Credit CARD Act’s requirements, so legislators had no choice but to provide a lengthy grace period.

But it was obvious from the start that credit card companies–already shaken by what seemed at the time to be a near-complete financial meltdown–were genuinely spooked by the prospect of new regulation. The idea that they would not take advantage of the grace period to protect their shareholder’s interests, and their profitability, lies somewhere on a continuum that has naivety at one end and stupidity at the other.

Allowing an unpoliced grace period before the implementation of financial services regulations is like installing a shark tank in a children’s petting zoo. The outcome is unlikely to be pretty, but you can’t really blame the shark.

Credit Card Offers Clogging Up Mail Less

You’re probably very nearly as happy that credit card companies are sending you fewer offers as your long-suffering mail carrier is.

In the third quarter of 2009, credit card issuers sent out 391 million pieces of marketing direct mail. That averages out at about 30 million items of junk mail a week, which sounds quite a lot.

But no. In the same quarter of 2008, credit card companies sent out 1.3 billion mailshots. And that works out at a hundred million items a week.

Credit Card Deals Getting Worse…

That reduction is great news if you’re a tree that’s scheduled to be cut down to make paper pulp. But it’s not so good if you want to apply for a credit card.

The direct mail figures come from Mintel, a leading market research company.

And Andrew Davidson, who’s a senior vice president at Mintel Comperemedia, points out that there’s more to this story than just numbers. He says: “Credit card issuers are cautiously navigating Credit Card Accountability Responsibility and Disclosure (CARD) Act regulations. In addition to adjusting their direct marketing strategy by sending less mail, they’re raising rates and fees on existing and new cards. The credit card offers we see today are undeniably less attractive than they were one year or even six months ago.”

…Much Worse

Andrew Davidson’s team found that:

• Although prime rates remain static and low, variable purchase Annual Percentage Rates (APRs) in credit card mailings jumped by more than a full percentage point between the first and third quarters of this year
• This time last year, 27 percent of mailings offered fixed rate credit card deals. This last quarter, that figure was six percent.
• Introductory purchase APRs are being offered for briefer periods. Last year, half of mailings provided introductory periods of 13 months or longer. This year, just five percent did. And 21 percent gave less than six months.

Credit Still Available–If You Don’t Need It

These credit card trends don’t apply to everyone. If you’re rich, secure, and have a great credit score then you probably still receive credit card offers. In April through June of this year, Mintel says that card issuers sent out 28 percent more offers that they did in January through March. But only for premium credit cards, and only to those who presumably don’t need credit.

As Andrew Davidson says: “Credit card companies are competing to attract people with high credit scores and big spending habits. Because premium credit cards often have high associated fees and low risk, issuers see them as an excellent way to restore profitability in today’s economy.”