Credit CARD Act

When, last year, legislators wanted a sharp acronym for the law that would create this week’s credit card regulations they came up with “Credit CARD”, which stands for “Credit Card Accountability, Responsibility, and Disclosure.” And consumers are about to find out just what the last of those, Disclosure, means.

Because, from now on, every monthly statement must contain two additional pieces of information. First, they must tell cardholders how long it will take them to pay their current balances down to zero, assuming they continuously make only minimum payments. And secondly, the statements must reveal how much they would have to pay each month if they wanted to pay off their balances over the following three years.

Credit Card Companies Unhappy

Few credit card companies are likely to welcome this innovation. The website of BB&T, one bank that has for years been candid with its customers about these matters, explains why:

Credit card companies usually calculate the monthly minimum payment due as a percentage of your outstanding balance. The percentage is usually more than the interest rate they are charging on your balance, but low enough to make the minimum payment amount seem attractive. After all, they make money by charging interest on what you owe.

Credit Card Debt That Keeps on Taking

And the site goes on to give an example of someone with a $5,000 balance taking virtually 25 years to pay off their credit card debt making only minimum monthly payments. That’s with absolutely no new transactions, penalties, or other fees.

That wasn’t a real-life example, because the bank deliberately chose simple figures to illustrate its point. But those figures are sensible, if not conservative (the credit card rate, for example is 12 percent) and the scenario is all too real.

And Then There Were Two

Most of the provisions of the new Credit CARD Act came into force Monday. And that was the day that Discover Financial Services chose to unveil its new website, which is designed to promote responsible credit card use among its customers.

This website, according to a company press release, offers a number of informative articles and videos that could assist cardholders in managing their money better. And it also provides some online tools that genuinely could be helpful. The press release describes these:

• The Spend Analyzer: this tool offers cardmembers a clear, visual way to track and compare their card spending so they can make informed spending choices
• The Paydown Planner: this option helps cardmembers create a simple plan to pay down their balances
• The Purchase Planner: this tool helps cardmembers understand how a large purchase can affect their account

Good Credit Card News

Not everyone welcomes this week’s new credit card regulations. Some believe that government regulation is rarely effective and often brings unintended consequences.

But it is hard to see how the greater openness and transparency ushered in by the Credit CARD Act’s Disclosure provisions can be anything other than widely beneficial. And, anyway, Credit CAR Act would have been a terrible acronym.

Credit Card Regulation Has Limits

Elizabeth Warren, the Harvard law professor who chairs the Congressional Oversight Panel, was a guest on HBO’s Real Time with Bill Maher show on Friday. And she drew an analogy that graphically explains the limitations of new credit card regulations that come into force today.

She said that relying on laws to control credit card companies was like building a fence on open prairie. The new act erected 10 fence posts (one for each of its key provisions, depending how you define “key”), but any half-decent lawyer–and card issuers employ armies of them–could get around them.

Ms Warren advocated the creation of a super regulator. To extend her simile, the regulator would be like cowboys, permanently stationed at each end of the fence, who would turn back stampeding steers.

Credit Card Terms Already Changed

Issuers have already taken advantage of the nine months between the signing of the act and its implementation to change many credit card terms in ways that disadvantage their customers.

For example, the law prevents companies from hiking credit card rates except in certain very specific circumstances. So the issuers simply switched many cards from fixed-rate deals to adjustable-rate deals, allowing them legally to increase the interest charged when wider rates increase.

More Loopholes

Yesterday’s Washington Post carried a piece under the headline, “Beware of the Loopholes in the New Credit Card Law” that detailed other potential abuses. These include pressurizing customers to opt into costly overlimit fee programs, the re-balancing of fee structures so that those not covered by the new law become more expensive, and the imposition of exorbitantly high penalty interest rates, which are still not capped by the federal government.

Chi Chi Wu, who is a staff attorney at the National Consumer Law Center, told the Post:

We’ve always known credit card companies are very, very clever in getting more profit out of consumers. And they are going to be even more clever in finding ways to make more money even with these new rules.

Credit Card Rates Up

Meanwhile, ABC News reported–also yesterday–that the average rate offered to those making new credit card applications was 13.6 percent last week, up from 10.7 percent during the same period last year.

At the same time, the number of credit card offers for accounts with annual fees jumped from 25 percent in the last quarter of 2008 to 43 percent during the same period in 2009. And issuers have been imposing other new sorts of fees, including those for paper statements and account inactivity.

Fees levied on balance transfer credit cards have also increased widely. For instance, JPMorgan Chase has hiked its balance transfer fee from three percent to five percent.

Credit Card Companies Feeling the Pinch

Sunday’s Financial Times covered the story from the industry’s point of view. It said:

US credit card issuers are facing a $12bn revenue shortfall this year from price limitations imposed by new rules that take effect on Monday, according to an analysis by law firm Morrison Foerster…. Over five years, the overall hit to the industry could exceed $50bn, analysts and industry groups said.

Credit Scores Down

Karma Credit last week released its U.S. Credit Score Climate Report. And it showed that the national average credit score dropped two points in January to 669. That’s the first time it’s been below 670 for a year.

Ken Lin, CEO of Credit Karma, told Collections and Credit Risk magazine that he expected credit scores to hold steady through the rest of this year, and told the publication: “I think many people really started to get a handle on their finances in 2008. They started to pay attention to how their credit was affecting them. This is why you don’t see such big decreases [in 2009] as you may expect.”

But Credit Karma’s report contained even better news. Since December, consumers with credit cards have paid down their debt by two percent. That tends to confirm the Federal Reserve’s analysis of the trend, which shows continuing debt reductions throughout 2009 and back into 2008.

Credit Card Debt in the Larger Picture

The report also revealed some fairly startling figures about overall consumer indebtedness. It says that, in January 2010, the average consumer with an account had:

• $7,925 in credit card debt
• $180,190 in home mortgage loans
• $51,919 in home equity loans
• $14,736 in auto loans
• $26,337 in student loans

Of course, it’s widely acknowledged that personal debt in the U.S. is high. The Federal Reserve says that, in December, American consumers owed $2.46 trillion. But, somehow, seeing it broken down by individual account holders makes it all the more depressing.

Credit Card Companies Look to Brighter Future?

A little more cheerfully, the big credit card companies released monthly data Tuesday that contained mixed news. The Wall Street Journal said that the figures “…reinforce the challenges facing lenders.” However, Forbes ran its report under the headline “Clouds Parting over Credit Card Troubles,” and said that “Improvements in delinquency figures could signal that fewer credit card defaults are ahead….”

But even the Journal had to admit the possibility of light at the end of the credit card tunnel:

“Delinquency trends indicate we’re moving toward lower charge-offs eventually,” said Scott Valentin, an analyst at FBR Capital Markets. But “clearly, it’s still a stressed environment.” Valentin said he expects charge-offs–credit-card loans on which lenders don’t expect to collect–to peak by April-May.

Credit Card Offers Increasing

In separate credit card news, the Synovate Mail Monitor was published last week, with the following headline, “Credit Card Offers Make a Comeback to US Households,” and continued:

During Q4 2009, US households received 398.5 million credit card offers, a 46% increase from the 272.5 million offers received during Q3 2009. However, volumes are still fairly tepid when compared to 668.1 million offers mailed during the same time a year ago.

All of which is extraordinarily good news for aficionados of junk mail.

Credit Card Regulation Only a Week Away

After what has felt like an eternity, the Credit CARD Act of 2009 finally comes fully into force (except for certain provisions that affect gift cards) on February 22. And few will breathe a bigger sigh of relief than parents whose children have student credit cards.

That’s because credit card companies long ago began to direct their slick marketing techniques toward those on college campuses. Of course, they saw all youngsters as potential new customers who could remain loyal credit card users for decades. But students were particularly valuable because college graduates are more likely than most to be both affluent and, consequently, good credit risks.

Credit Card Companies on Campus

Back at the end of 2008, the New York Times investigated some of the methods that card issuers used to target students. Perhaps the most surprising fact uncovered in the subsequent report was that hundreds of colleges across the country had signed agreements with card companies. In fact, Bank of America alone had 700 such deals in place at that time.

Many contracts contained confidentiality clauses, so their details remain unknown. But the Times found that one university received a dollar for every successful credit card application (as long as the account wasn’t closed within 90 days), three dollars for each card with an annual fee, and half-a-percent of all the retail purchases made using cards that fell within the deal.

The Times quoted a student newspaper editorial from a different university: “…it doesn’t take a giant leap for someone to ask why the university should encourage responsible spending when it receives a cut of every purchase.”

New Protections

As of next week, the new credit card regulations sweep away these cozy deals, along with the ubiquitous tents, and stands that credit card companies used to erect on campuses. Gone too willbe the T-shirts, blankets, sandwich vouchers, and other promotional goodies that card issuers used to exchange for completed credit card applications.

Because the Credit CARD Act not only outlaws these, but also makes it illegal to issue a card to anyone under 21-years old who does not have independent means unless their parent, guardian, or another adult co-signs the agreement. Even then, the adult will have to give written permission before the credit limit on the card can be raised.

Giving Leverage to Parents

This provides parents with some much-needed leverage when protecting their offspring from unmanageable credit card debt. And if those parents believe that their child is unable to take responsibility for a credit card at all, then it allows them to insist that the student use only cash, or a combination of cash and a debit card.

Of course, there are real advantages to having cards for those who can manage them responsibly. Part of one’s credit score is based on the length of one’s credit history. So, for example, college graduates who haven’t had a card could pay more for, say, a car loan when they’re 23 or 24 years old. They might even be declined completely.

Credit Cards and the Young

It’s generally a mistake to see credit cards as instruments of the devil and credit card companies as invariably evil. In the modern world, it can be tough to get by without a card, and many students learn very successfully how to manage their finances during their college years.

But few will mourn the passing of the years that saw credit card issuers regarding campuses in much the same way that the cowboys wearing black hats used to view small, wild west towns. And most parents welcome the opportunity to participate more actively, and (if they have any sense) more constructively in their children’s financial lives.

Credit Card Debt–It’s Bad Enough When It’s Your Own

Credit card debt that’s problematical can be one of the most depressing and distressing issues that you’re likely to face in your financial life. But being told that you have credit card debt when you haven’t had the pleasure of spending the money must be even worse.

Yet that’s the situation being faced by an increasing number of credit card holders, according to a new survey, published yesterday, from Javelin Strategy and Research, a San Fransisco-based company that describes itself as, “the leading independent provider of quantitative and qualitative research focused exclusively on financial services topics.”

It gives a whole new meaning to the term, “balance transfer credit card.”

Identity Fraud Soaring

The report shows that 11.1 million Americans were the victims of identity fraud last year. That’s a full three million more than in 2007. Back then, 3.6 percent of the U.S. population was affected, a figure that shot up to 4.8 percent in 2009. Javelin defines identity fraud as: “the unauthorized use of another person’s personal information to achieve illicit financial gain.”

The company believes that much of the increase may be a result of the economic downturn, and points to similar rises during previous periods of widespread financial hardship. But, even if it’s true that recessionary times tempt the once honest into criminality, and force existing fraudsters to up their game, that doesn’t provide much consolation to victims.

Credit Card Users Especially Vulnerable

Yesterday’s Los Angeles Times expanded on the research findings:

Last year, the number of new credit card accounts that were opened fraudulently shot up 39%… And at least 13% of all identity crimes from 2009 were committed by someone whom the target had known.

That 39 percent increase in the number of fraudulent credit card applications is shocking, especially compared with the same figure for debit cards, which actually dropped two percent last year. In 2009, debit cards accounted for 33 percent of all card fraud.

The Most Vulnerable of All

Two groups turned out to be especially vulnerable to identity fraud. Small business owners were one-and-a-half times more likely to be victims than adults as a whole, possibly because they execute more transactions than most.

And 18-24 year olds were the least likely to spot such frauds quickly. In fact they took twice as long to do so, because they check their accounts less frequently, and are less inclined to subscribe to services that monitor credit reports.

Some Good News

The good news is that credit card use by others in your name is unlikely to harm your financial health either very much, or for long. The Javelin report says:

…during 2009 there was a drop in fraud costs per victim and a decrease in time to resolution, thanks to increased consumer awareness, assistance provided by financial institutions, consumer support organizations, and law enforcement.

In fact, the median consumer cost for victims of all identity fraud dropped by 25 percent between 2008 and 2009: from $498 to $373. And the mean resolution time for incidents fell from 30 hours to 21 hours over the same period.

And, of course, credit card companies generally cap customer liability at a nominal sum or even zero. So you can relax a bit–but not too much.

Credit Card Trends Are Toward Lower Balances

Friday, the Federal Reserve published its consumer credit figures for December 2009. And they show that credit card debt reduced for the 15th consecutive month. That is the longest period of decline since the Fed began compiling the data back in 1968.

Revolving credit, most of which is credit card balances, fell at an annualized rate of 11.7 percent in December, leaving $866 billion dollars still to pay down.

Credit Card Use Changing?

Some observers see these figures as (to quote Friday’s BusinessWeek): “…some indication Americans are getting their balance sheets in better order.” But it may be more complicated than that.

The Fed data also showed that non-revolving credit (auto loans, personal loans, and so on) actually went up by $6.8 billion in December. While that was not enough to fully offset the reduction in revolving credit brought about by changing patterns of credit card use, it may suggest that consumers have not become entirely averse to borrowing. So is it just their cards that Americans have come to distrust?

Credit Card Companies Less Popular?

USA Today thinks that may be the case. It ran a piece yesterday under the headline, “American consumers just say no to credit cards.” It said:

Tim McFarlin, a consumer bankruptcy attorney in Irvine, Calif., 34, stopped using credit cards eight years ago because he thought the industry’s business practices were unfair to consumers. “Any time there’s even a hint of a financial issue in the consumer’s life, the credit card company will raise the interest rate to the high 20s or 30%,” he says. “They’ll do anything they can to make life as difficult as possible.”

…The public’s opinion of credit card companies, which has never been particularly high, has plummeted during the past two years. Forty-seven percent of consumers surveyed in July said they trust credit card companies less now than they did a year earlier, according to Auriemma Consulting. Only national banks and the federal government fared worse.

A Hard Habit to Kick

In using the phrase “just say no” in its headline, USA Today was alluding to the similarities between some credit card use and drug use. Both can provide instant gratification, but carry a cost that has to be paid in the future. And both are hard habits to kick.

So just how much of the reduction in revolving credit is down to greater self-discipline and a genuinely changed relationship between Americans and their cards, and how much is down to lower credit limits and fewer new accounts being opened? Bear in mind also that some is likely to be a result of card issuers writing off some balances as uncollectable.

Good Times Starting Again?

Only time can tell whether consumers will keep those reduced balances down. But the Financial Times reported yesterday that those who have been relatively unaffected by the recession are beginning to return to their old spending patterns. It interviewed the heads of various luxury good manufacturers who identified a new readiness to buy premium and prestige goods.

One of them, Fabrizio Freda, chief executive of Estée Lauder, observed: “We view this as a return of the aspirational consumer.” And another, a senior executive at Polo Ralph Lauren, said last week that the fashion brand and retail company had “slowly begun to see the gradual return of our core luxury customer, including buyers of couture dresses that sell for more than $4,000.”

It will be interesting to see whether less fortunate people similarly revert to their old spending patterns once the effects of the recession wear off–and whether they go back to their old habits when it comes to credit card use.

Credit Card Debt vs. Mortgage Payments

Your mortgage is a “secured” debt. That means that if you get seriously behind with your payments you risk losing your home through foreclosure. Credit card debt is “unsecured.” So being delinquent with your payments may be expensive and ruin your credit report. But it’s unlikely to leave you homeless.

You’d think that it would be common sense to prioritize mortgage repayments over those for credit cards. But most Americans who find themselves unable to pay both are choosing to keep up to date with their cards.

New Payment Hierarchy

This strange phenomenon first arose in the first quarter of 2008. For the first time, more people were current with their credit cards and delinquent with their mortgages than the other way around.

But a new report, published yesterday, from TransUnion says that the practice of prioritizing credit card payments is becoming more widespread. In the third quarter of 2009, 6.6 percent of consumers were behind with their mortgages while current with their cards. At the same time, just 3.6 percent were current with their mortgages while delinquent with their cards. Those figures are starkly different from those in the first quarter of 2008, when the numbers were 4.3 percent, and 4.1 percent respectively.

Worse for Bad Risks

Those in the lowest scoring risk segment were much more likely to prioritize keeping their credit cards current. Twenty-nine percent of those in that category were paying their cards while letting the mortgages slide in the third quarter of 2009, while only half that number were giving preference to their mortgages.

Credit Card Trends

This shift in mortgage and credit card trends is probably being driven by a number of factors. Ezra Becker, TransUnion’s director of consulting and strategy for its financial services business unit, identifies some:

The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting (or not meeting) their credit obligations. The insight gained through this analysis reveals a lot about changing consumer preferences. The financial services industry must recognize and adjust to the payment hierarchy shift with judicious modifications to business models, new assessments of specific areas of risk, and by strategic revisions to acquisition and account management strategies.

Other Factors?

The TransUnion report doesn’t try to go further and explain why this change in many people’s payment hierarchies has come about. However, five possible causes come to mind.

1. Credit card companies are generally more aggressive in chasing delinquencies than many mortgage lenders.
2. Cards provide an immediate source of credit, and losing the use of them can mean being unable to buy food, cover transportation costs, and generally access things that are immediately essential.
3. Too many people are unrealistically optimistic, and think that “something will come up” that can rescue them from a seemingly distant foreclosure.
4. Whether you’re behind on your mortgage payment or your credit card payments makes little difference to the impact on your credit report.
5. Credit card companies have made late payment and overlimit fees much more expensive in recent years

But, whatever the causes, the trend toward paying credit cards at the expense of mortgages is likely all too often to end in tears.

Credit Card Debt

Customers who pay their balances in full every month may be treated by credit card companies as if they’re royalty, but they’re not actually all that profitable. Some pay monthly fees, but they rarely, if ever, contribute to the card issuers’ principal consumer revenue streams, which are interest, late fees, and overlimit fees.

Credit card debt is the lifeblood of the industry, which is why balance transfer deals are still being offered. At the same time, credit card companies are, according to IRA Bank Monitor, having to write off some 10.35 percent of all such debts as uncollectable. So card issuers are particularly looking for customers who have good or excellent credit scores, but who also carry balances forward.

Balance Transfer Credit Cards–the Good Old Days

It feels like a different era, but it was only a couple of years ago that credit card companies were falling over themselves to attract new customers. Indeed, it was at the end of 2008–just 14 months ago–that U.S. credit card debt reached its highest point and topped $445 billion.

But its been a while since it was widely possible to transfer your credit card balance without incurring a fee. That’s because credit card companies realized some time back that many smart customers were transferring their balances immediately every time their zero-rate introductory offers expired. So those consumers were effectively borrowing money without ever paying any interest, something that those in financial services find anathema.

Balance Transfer Credit Card Deals Today

WBKO just published a list of current (well, they were current last week when the feature was published; check with the card issuers to see if they’re still the same) fees initially charged by some of the major banks for balance transfer credit cards. These are expressed as a percentage of the sum to be transferred:

• American Express–three percent
• Bank of America–four percent
• Capital One–nil for most, but three percent for a Platinum Prestige card
• Chase–five percent
• Citi–three percent
• Discover–five percent

Before Making that Credit Card Application…

Dennis Santiago, CEO of Institutional Risk Analytics (IRA), wrote a piece about transferring balances between credit cards for the Huffington Post last week. In it, he said:

Favorable introductory rates and good payer rates are the “toasters” of the credit card world. They’re meant to capture and retain valuable “interest on outstanding balance” paying customers. This means if you have one of these credit card accounts and diligently pay the minimums on time every month–yup, yup–you are valuable to that bank. Perk up! You are valuable whether you have a checking account there or not. What you also need to realize is that every other credit card issuers out there also covets you. That’s why those things keep clogging the mail box and wink at you from the computer screen every time you log on or off your online banking. Just make sure to keep paying that minimum and your account will keep getting the favorable treatment.

But no matter how desirable you are to card issuers, you should carefully check out the different deals on offer before you make any credit card application. And you can begin to assess those deals by using the credit card calculators here.