Credit Card Debt Likely Down For Post-Holiday Period

Earlier this month, Experian, a company that helps businesses manage credit risk, published the results of a survey of consumers’ plans for holiday spending. It found that only 21 percent of respondents intend to carry the credit card debt they acquired this holiday season beyond January 2010. That compares with 26 percent of those who were asked the same question about 2008/09 this time last year.

Of those who do plan to carry holiday spending credit card debt beyond January, 24 percent plan to have it all paid off within one or two months, compared with 18 percent past year.

Less Debt, More Saving

The Experian survey may be an early indicator of a new, more mature attitude toward money that seems to be spreading rapidly across the nation. And certainly, the report is not the only reason to infer such a change in consumer attitudes to debt and savings.

The Commerce Department’s Bureau of Economic Analysis released new data Wednesday that showed that personal savings amounted to $525.1 billion in November, compared with $516.7 billion in October. The November figure was 4.7 percent of disposable personal income.

And when comScore, a company that specializes in digital marketing intelligence, asked consumers in October whether they were, compared to a year ago, cutting back on their spending owing to concerns about the economy, 76 percent answered in the affirmative.

Credit Card Use to Change?

The comScore report, which was published December 14, asked more detailed questions about consumers’ credit card use. For example, 65 percent of respondents said that they have changed the way they pay for items because of economic concerns. A follow-up question produced the following breakdown of changes in how people pay:

• 42% were more likely to use cash
• 40% were more likely to use a debit card
• 13% have begun to consolidate spending to fewer credit cards

Changed Credit Card Terms and Conditions Resented

Half of all those surveyed by comScore said that an issuer had changed their credit card terms and conditions in the previous year. Of those:

• 53% had their credit card rates hiked
• 26% had a reduced credit limit
• 21% had additional fees imposed
• 17% had their rewards program amended
• 14% had an increased annual fee
• 10% had a credit card account closed

The researchers commented:

As changes made by issuers to consumers’ accounts have caused many individuals to alter their credit card usage patterns, they have also contributed to a loss of confidence in their issuer, a more harmful long-term effect for the industry. An overwhelming 54 percent of people who were aware of some change said that these changes have worsened their perception of their credit card issuer.

Credit Cards Not All Bad

A credit card offers a consumer unique benefits, including ease of use, rewards, convenience, control, and–of course–a line of credit. And few Americans are voluntarily cutting up their cards.

What this sort of research shows is the importance of having the right card for your own particular needs. And finding that involves shopping around and comparing credit card deals.

Share Your Credit Card Use with the World

Want your Mom to know how much you squandered in a “gentlemen’s” club last night? Want your husband to know you just booked a motel room? Want your wife to know you’re charging $500 in Victoria’s Secret? Want your friends to know what your booze bill is?

Well, not all of those scenarios are a reality quite yet, but you could share with your family, your friends, and the world many details of your credit card use if you sign up for a new service called Blippy.

Credit Cards & Lifestyle–an Intimate Relationship

American Express used to run a TV commercial that included a line saying that its card “…says more about you than cash ever could.” Well, pretty soon all your cards could be speaking volumes about the sort of person you are.

Right now, Blippy publishes transactions only to other Blippy users, and always in the format “X spent Y dollars at Z.” But it plans soon to tie in with Facebook and Twitter so that credit card use is “passively shared” (as the company puts it) with friends and followers.

Your Very Own Credit Card News Feed

Of course, publishing your own credit card news can be harmless. Philip Kaplan, Blippy’s founder, recently gave an interview to the New York Times, and explained how he saw the new service being used.

He told the reporter that he expected most consumers to link only one of their credit cards to Blippy so that they didn’t have to share all their transactions. And he explained that the service allows users to select a level of privacy that they find appropriate, much as people do already with their Facebook and Twitter accounts.

He continued:

If I use my public card at a Starbucks, for instance, all my friends know that I’m at the Starbucks, and they can come and see me, or whatever…I guess you need to have the right temperament if you to want to blog and tweet and Facebook and all that. It’s just another way of saying, “Here’s what I’m doing,” or “Here’s where I am,” or “Here’s a band that I’m really into”–obviously, because I just bought five of their albums.

Need for Caution

This all sounds completely innocuous. However, some users of social networking sites have already discovered that being too candid about their private lives too publicly has consequences. Employers and colleges sometimes check Facebook and similar sites to see if the seemingly angelic candidate who’s applying for a job or admission really is as squeaky clean as he or she claims. Collection agencies use the same sites to help them trace people who’ve skipped on their debts.

And, earlier this year, the Secret Service tracked down Maxi Sopo, a 26-year-old fugitive who’d fled to Mexico, after he updated his Facebook page to tell the world how happy he was with his new life.

Putting the Conspicuous in Conspicuous Consumption

None of this has stopped people queuing up to join Blippy. Yesterday, it emerged that, on the day of the public launch of the service, 25,000 transactions worth more than a million dollars had been “blipped.” And Philip Kaplan told the Washington Post:

We are blown away! Yesterday was the first day that we invited people who we didn’t personally know into the site. We never imagined that we would hit $1 million in purchases in the first few months, much less the first day.

Credit Card Rates Through the Roof

You knew that really low interest credit cards were pretty much things of the past, at least for now, and at least for anyone with a less than pristine credit score. But no one was expecting a card with an annual percentage rate (APR) of 79.9 percent. But that’s precisely the rate recently offered by one credit card company–First Premier Bank.

Credit Card Regulation Triggered the Rate

Apparently, the lender decided on the rate in response to a new round of credit card regulation (resulting from the Credit CARD Act), which is due to come into force in February 2010. It would outlaw some of the fees and charges that First Premier Bank currently levies on its cards.

Eye-Wateringly High Charges

According to the bank’s website (at the time of writing), these add up to a startling amount for those making a new credit card application. The site says:

Available Credit and Cash Advance Limitations: The initial minimum credit limit will be at least $250.00 and the following fees will be billed to your first statement: Account Set-Up Fee of $29.00, the Program Fee of $95.00, the Annual Fee of $48.00, the Additional Card Fee of $20.00 per card (if applicable) and Monthly Servicing Fee of $7.00. These fees will reduce your available credit until they are paid. If you are assigned the minimum credit limit of $250.00 your initial available credit will be $71.00 ($51.00 if you select the additional card option).

Yes, you read that correctly. The total charges for opening an account with a $250 credit limit add up to $199 if you require a second card and $179 if you want just one. Over the first year, total standard fees, and charges (excluding additional penalties for late payments, exceeding credit limits, and so forth) could be $256–in return for a $250 line of credit.

Credit Card Rates Remain Unregulated

The Credit CARD Act will cap standard fees and charges at 25 percent of of a card’s credit limit. That’s why, in a recent mailshot, First Premier Bank said that it would charge those responding to the invitation just $75 in such costs for a $300 limit. That was about to become the legal maximum anyway.

But First Premier wants to make up the revenue it would lose by the lower charges with a higher APR. It sees the fact that the new law leaves credit card rates unregulated as a loophole–hence the hike to 79.9 percent.

Attracting Those with a Poor Credit Report

Obviously, no one with any choice in the matter would sign up for a card charging either such high fees or such astronomical rates. But people with other options are not in First Premier Bank’s target market.

Indeed, the bank is entirely up-front in saying that it sets out to appeal to those who would never qualify for a credit card from a mainstream lender. And, of course, it has to price its products in accordance with risk.

Usury or a Necessary Evil?

The trouble is, a borrower with a poor credit report is likely already to be in financial trouble. He or she may well be forced by circumstances to take up the credit being offered, and could struggle to make repayments. Indeed, it’s easy to see how someone in that position could slide further and further into an abyss of debt.

But does that mean that it’s society’s job to protect adults from themselves? Or is it right to prevent those who are beginning to dig themselves out of difficulty from accessing credit–no matter how expensive–so that they can begin to rebuild their credit score? These are deep, moral questions that people have to answer to their own satisfaction.

But one thing’s for sure. Don’t apply for a credit card with a 79.9 percent APR unless you absolutely have to. And even then think twice.

Credit Card Debt Going Down

The Federal Reserve says that credit card debt is going down. In a statistical release issued earlier this month it reported that American consumers paid down $6.9 billion in revolving debt (which is largely credit card debt) in October 2009 alone. From the end of August to the end of October, they paid down $14.9 billion. In fact, revolving consumer debt has been going down pretty consistently throughout the year.

Credit Card Debt, Going…um, Up?

And that’s confusing. According to figures recently released by Synovate, the market research arm of Aegis Group Plc, the average U.S. credit card balance actually went up–from $7,489 to $8,083–between the second and third quarters of 2009.

So how to square the two sets of figures? Well, it’s simple. Overall credit card debt is reducing. But there are fewer cards in circulation.

Credit Card Deals Generally Worse

Part of this reduction is due to consumers, some of whom have become fed up with credit card companies hiking rates, imposing new annual fees, and upping penalties. Many card holders have simply closed the less attractive of their accounts. But the credit card companies themselves have also been reducing the number of accounts that they regard as risky.

As Anuj Shahani, director of competitive tracking services for Synovate’s Financial Services Group, remarked: “A significant proportion of credit card accounts are being closed, either by issuers or by the consumers themselves due to the change in terms proposed by issuers.”

A Blow to Many a Credit Score

Mr Shahani continued:

This was inconsequential initially as issuers were mainly cutting lines on inactive accounts or for transactors, people who pay their balance in full each month. Recently, we are seeing many issuers reduce credit lines on active accounts or for revolvers, people who do carry a balance each month. This can put many households in a risky situation.

Synovate gives an example of just how damaging this can be. Supposing a household had a $25,000 limit across all its cards, but an issuer cancelled an account with a $10,000 limit. If the household had total balances of $5,000, then that would mean that its “utilization ratio” (the proportion of its available credit that it actually uses) would leap from 20 percent to 33 percent.

And that would affect the family’s credit score because lenders regard any utilization ratio over 30 percent as a red flag.

A Common Scenario

Credit card limits have been dropping all year, partly as a reaction to the credit crunch, and partly because card issuers are worried about how the Credit CARD Act of 2009 (a piece of credit card regulation that will fully come into force on February 22) will affect their profitability.

Indeed, the average American household had five percent shaved off its total credit card limits just during the period between the second and third quarters of this year. That was a drop to $26,657 from $28,005. And, if that was the average, then many individual families must have fared very badly indeed.

Credit Card Companies “Exploit Loopholes?”

The Credit CARD Act of 2009 is due to come fully into force 10 weeks from today. But a report says that it’s likely to fail to prevent credit card companies from continuing to gouge their customers.

The report, which was released last Thursday, was published by the Center for Responsible Lending (CRL). And its title, Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate, says it all.

Credit Card Trends All-Too Familiar

The CRL identifies eight practices that it describes as “abusive tactics.” These are:

1. Pick-a-Rate–New formula for calculating some credit card rates sneakily increases them
2. Variable Rate Floors–Variable rates only vary upwards from the start rate
3. Minimum Finance Charges–You pay the minimum charge (up to $2), even if you owe only a penny
4. Rigged Late Fees–Highest late fees are applied to smaller balances so you pay more
5. Inactivity Fees–You pay up to $36 a year for the privilege of not using your card
6. International Transaction Fees–Going up, and sometimes applied even to dollar transactions
7. Balance Transfer/Cash Advance Fees–More prevalent, and more expensive
8. Balance Transfer/Cash Advance Fees Gain Floors and Lose Ceilings–So (you guessed it) you pay more

What’s Pick-a-Rate?

Pick-a-rate is a good example of a sneaky practice. Indeed, unless you read the small print in your credit card terms and conditions very carefully, you’re unlikely to realize that it may well be happening to you.

In the good old days, credit card rates were usually calculated on the basis of the prime rate that applied on the last day of the billing cycle. But the CRL says that more and more issuers have changed the rules so that they can now charge a rate based on the highest prime rate over a 90-day period. And the organization reckons that pick-a-rate is already costing Americans $720 million a year–an amount that could rise to $2.5 billion as the practice spreads.

Credit CARD Act Won’t Work?

Although the Credit Card Act will certainly stop some abuses, the CRL says that the legislation is powerless to prevent seven of the eight practices listed above. And its provisions don’t explicitly ban the eighth.

Josh Frank, the CRL researcher who wrote the report, commented:

The Credit CARD Act that Congress passed earlier this year was a big improvement for American families. But our research shows that industry keeps finding clever ways to get around meaningful reform, and we need a regulator focused on making financial products fair.

Plummeting Popularity Not a Consideration

In October, a Consumer Reports poll found that:

Credit card holders are angry. More than a one-third (32%) have paid off and closed a card since January 2008, and half of those that canceled did so in direct response to the actions of credit-card issuers, such as cutting limits, hiking rates, or imposing fees…

Twenty-one percent of respondents said they were treated unfairly by card companies, and only 41 percent said they were highly satisfied with their card issuer, making credit cards one of the lowest-rated services that Consumer Reports covers.

And that was back when most people expected that forthcoming credit card regulation would have some bite. Those numbers are likely to get worse, and worse, at least in the short to medium term.

A Glimmer of Hope?

Friday, the U.S. Congress passed the Wall Street Reform and Consumer Protection Act. And that could–depending on the Senate’s reaction to it–usher in a new wave of credit card regulation.

Although the bill doesn’t focus on credit card companies as such, it does contain provision for the creation of the Consumer Financial Protection Agency. And, if that watchdog is given teeth, it may just give those companies a run for their–and our–money.

Credit Card Companies’ Bosses Are Like the Incredible Hulk

It’s hard to be sympathetic, but the bosses of credit card companies have had a difficult year–or two. And they’ve reacted like the Incredible Hulk. “Don’t make me angry. You wouldn’t like me when I’m angry.”

Three Big Troubles

Three factors have particularly enraged them:

1. The credit crunch has led to a huge rise in delinquent accounts–too many people are unable to pay down their credit card debt
2. Credit card regulation–in the form of the Credit Card Accountability, Responsibility and Disclosure Act of 2009–has threatened to reduce significantly their traditionally huge profit margins
3. As a result of the first two, their share prices have taken a hit

But this week, industry executives have received good news on all three fronts they’ve been battling.

Delinquencies on Credit Card Debt Down

Earlier this week, TransUnion, which specializes in credit and information management, announced its forecast for credit card delinquency in 2010. And it expects a decrease in those who are 90 days or more behind with payments on one or more of their credit cards.

At the end of 2009, 1.07 percent of all cardholders are in that position. By the end of 2010, that number is forecast to drop to 1.04 percent. If that prediction proves correct, then the number of delinquent credit card accounts will have dropped by 23.6 percent in the three years since the end of 2007.

Ezra Becker, director of consulting and strategy in TransUnion’s financial services group, commented:

We anticipate that credit card delinquencies will decrease for the third straight year as consumers continue to keep incremental debt to a minimum, and aggressively manage debt repayment. However, the decrease is projected to be smaller than in previous years, indicating that this might be the best consumers can do in managing delinquencies in the current economic environment. It will be interesting to see how the CARD Act, primarily taking effect in February 2010, will impact both consumer, and lenders.

Credit Card Regulation Ducked

The Credit CARD Act to which Mr. Becker referred created real fear among executives. But, luckily (although only for card issuers), legislators gave the companies until February 2010 before the new law came fully into force. So companies had plenty of time to hike rates and impose new credit card terms and conditions before the regulations could bite.

And this week, analyst Bruce Harting of Barclays Capital, told his clients that, although there had been an expectation that the Credit CARD Act was likely to reduce one card company’s fee income by up to 20 percent, “…we believe this will be more than offset by declining credit costs and stable margins…that have benefited from the repricing that occurred.”

Share Prices Tipped to Rise

Bank of America Merrill Lynch analysts issued a note Monday that upgraded three important credit card companies from “underperforming” to “neutral.” And, as one would expect, those share prices rose in response.

The analysts’ note said: “We think Friday’s release of falling unemployment rate and better-than-expected payrolls could serve as the fundamental inflection point that we have been waiting for.”

Time to Back Off

So, from the industry’s point of view, credit card trends this week are all positive. Does this mean that card issuers will stop being angry and start treating their customers less aggressively?

Only time will tell.

Credit Card Applications In-Store Are Easy Now

It’s tempting at this time of year. You’re in a big store or you’re visiting a retailer’s website, and suddenly you’re faced with an offer that’s just too good to refuse. You can save 15 or 20 percent on your day’s shopping if you apply, and are accepted, for a store credit card.

And all you have to do is fill in a form at the check-out. It hardly takes a moment for the retailer’s IT system to check your credit score and for the assistant to ring up your purchases. Your discount is normally deducted from your first monthly statement.

Credit Card Regulation May Change All That

Credit card regulation, in the form of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit CARD Act), may be about to end that scenario for ever. Because the new law has a provision that allows the Federal Reserve to force stores to find out more about potential borrowers’ financial circumstances than a simple credit record check can reveal before issuing a card.

In fact, if consumer groups get their way, the Fed may soon require retailers to obtain proof of a customer’s earnings. So–unless you’re the sort of person who carries pay stubs and/or financial records around–that impulse store credit card application won’t be possible.

Credit Card Rewards Denied?

The National Retail Federation sees this as a denial of the rewards that store credit cards can bring. Mallory Duncan, the NRF’s senior vice president and general counsel, commented on the proposals that the Fed is currently considering:

The proposed rule would curtail or eliminate many routine credit granting practices that are safe, valued, and desired by both retailers and our customers. The effect of the proposed language would be much more disruptive than we believe was ever intended or envisioned by Congress…. Very few consumers carry current pay stubs or financial statements with them to the store (and) many would be disinclined to share those documents with store associates even if they did.

How Desirable Are Store Credit Cards?

Like most forms of credit, there’s absolutely no harm in having a store card providing you don’t need one. It’s those who actually need the credit who are at risk.

Because store credit card rates are generally high. Look at Macy’s as a random example that’s unlikely to be much better or worse than most. At the time of this post, the rate on its cards is 24.5 percent. That’s fine if you can afford to clear your balance every month. But it’s expensive otherwise.

One More Thing

Every application that you make for credit is likely to adversely affect your credit score in the short term. And if you suddenly make multiple applications over a brief period, then the impact could be serious.

Of course, over time the additional line of credit can actually improve your score, although with a store credit card the effect is likely to be small. But if you’re planning to apply for a mortgage, an auto loan, or something similarly substantial, then making any other application could prevent you from getting the best rate.

Credit Card Companies Still Hiking Rates

Last Friday, CBS News reported the story of a very angry woman in Dallas. She’d just received a letter from Citibank telling her that the interest rate on her credit card was going up to 29.99 percent.

The knowledge that she was far from alone in her plight was of precisely zero consolation to that particular Texan. But it is a fact that half of Americans say that their credit card rates have been raised recently.

And one industry observer told the CBS reporter: “The reign of terror continues. They’re doing what they’re doing because they can.”

Credit Card Regulation May Help…

As of February, that will no longer be the case. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the Credit CARD Act) became law on May 22. But legislators very kindly gave credit card companies until February 2010 to comply fully. The lawmakers thought that they were giving the card issuers an opportunity to make the necessary amendments to their processes and computer systems.

Unfortunately, the credit card companies saw the grace period as a chance to protect their profits by hiking their rates, and changing credit card terms, and conditions.

…But Not as Much as Intended

Although the unreasonable increasing of credit card rates will be outlawed from February, some of the changes to terms and conditions during the grace period will considerably lessen the act’s protections. In fact, most card holders are likely to see rate rises after that date.

That’s because card issuers have switched most of their customers from fixed-rate deals to variable-rates. And it’s increasingly difficult to get a new fixed-rate card. According to Mintel, only six percent of credit card companies‘ mailings in the third quarter of 2009 offered variable rates, down from 27 percent for the same period in 2008.

All this means that when the prime rate goes up, so will the huge majority of credit card rates.

Credit Card Rates Bound to Rise

At the moment, the prime rate is at 3.25 percent, which is an all-time low. So the potential for it to drop further is very limited, while the likelihood of it going up–at least in the medium and long term–is extremely high. In fact, it’s pretty much a certainty.

Worse, some card issuers have rigged the rules by saying that “variable” can only mean “vary upward”–at least from the current base. What they’ve done is impose a floor on their credit card rates, saying that they can go up from where they are now in line with the prime rate. But they can never be lower than they are today.

So all most card holders can do is grit their teeth until February and pray that the prime rate stays low.