Economic Trends Positive

Sunday’s New York Times painted a positive portrait of a U.S. economy that’s quickly regaining health, strength, and confidence. Of course, the piece acknowledged that there’s a way to go before things are fully back to normal but the overall tone was one of restored vigor.

Some of the statistics quoted in the Times’s article include:

• March saw orders for long-lasting manufactured items increase sharply
• Sales of new homes leaped 27 percent that month
• Consumer spending–according to some economists’ estimates–expanded by four percent in the first quarter of this year
• Exports in January and February were up 15 percent on the same time in 2009

Credit Card Trends Also Positive

Much of the data surrounding credit card use are similarly positive. For example, the Federal Reserve’s figures, published April 7, for February credit card debt showed that it dropped at an annual rate of 13.1 percent. And Americans owed $100 billion less in credit card debt that month than they did back in the last quarter of 2008.

Meanwhile, Visa Inc. published its fiscal second quarter results Wednesday, and these exceeded most analysts’ expectations and prompted the company to increase its 2010 forecasts. Joseph Saunders, company chairman and chief executive, said that Visa: “…is increasingly optimistic that the worst of the recession is behind us… Our performance was fueled by higher-than-expected payments-volume growth.”

In other words, credit card use is up. In fact, during the quarter ending March 31, 2010, the value of transactions on Visa-branded cards jumped 13 percent on the same period in 2009–to $745 billion. The number of transactions also rose over the same period: by 14 percent to $10.6 billion.

Credit Card Companies Also Doing Better

Many card issuers (Visa is a debit and credit card network; not the same thing) are also doing much better this year. But, arguably, American Express is the star in the credit card company firmament.

Last week, the company published its first quarter results, and they were even more impressive than Visa’s. By many measures of credit card trends, American Express is the leader, or at the very least, one of them.

American Express a Leader

For instance, AmEx card customers spent 23 percent more in the first quarter of this year than during the same period in 2009, significantly beating Visa’s rise in credit card use. And the company had to write off (”charge off” in the jargon) less problem credit card debt than last year and than most of its competitors.

There is a wide range of reasons for the company’s strength:

• AmEx is a payment network as well as a credit card company
• It offers charge cards as well as credit cards
• It has maintained conservative lending policies
• It has a big presence in the corporate market

Of course, American Express executives would argue that–more importantly than any of those–the company offers superior products. And, depending on your needs, they make a good point. Four AmEx cards that are particularly worth checking out are:

• American Express® Gold Card
• American Express® Premier Rewards Gold Card
• Blue Cash® from American Express®
• Blue Sky from American Express®

Credit Cards Less Popular than Debit Cards

According to Visa Inc., it was back in the last quarter of 2008 that the total dollar volume spent on its branded debit cards first exceeded that spent on its credit cards. Does that mean that a tipping point has been reached, and that from now on it’ll be downhill all the way for credit card use?

Credit Card Debt Hangover

Well, maybe. It’s certainly true that, during the recent recession, many Americans were seriously spooked by their exposure to credit card debt, and resolved never to leave themselves so vulnerable again. So it may be some time before the country sees the sorts of high levels of credit card debt that existed a few years ago.

But it’s much too soon to consign credit card use to history. Because credit cards can do things–valuable things–that debit cards simply can’t.

Credit Cards and Debit Cards: Some Differences

Everyone knows that debit cards deduct money straight from your bank account while credit cards give you an opportunity to spread payments. However, in addition, credit cards usually offer better legal protections against card theft and fraud, including identity fraud. They also make it much easier to rent cars and reserve hotel rooms.

Credit Card Rewards Rock

But–also very importantly–credit card rewards programs are usually much, much better than those (if any) offered with debit cards. Monday’s New York Times had a feature on debit card rewards that showed just how miserly they can be.

For example, those who belong to the Chase Extras program, but choose not to pay an annual fee, receive a dollar for every $5 they make in signature purchases. The Times says that a cardholder would have to spend $25,000 in order to earn a $50 Macy’s gift card.

Compare that with the Chase Sapphire Card. You get a point for every dollar spent on a wide range of purchases, two points on airfares booked through Ultimate Rewards, and 10,000 bonus points after making your first purchase. All this, and the card doesn’t have an annual fee.

Not Just Chase

It’s not just Chase whose credit card rewards program outperforms its debit card scheme. It’s pretty much universal.

Take Citi. Sign for a debit card purchase and the standard rate is one point for every $2 spent. Use a PIN and it’s a point for every $3. Compare that with a Citi® Diamond Preferred® Rewards Card. The Citi website says (see the site for terms and conditions) you get:

• 5 ThankYou Points for every $1 spent on purchases at supermarkets, drugstores, and gas stations for 12 months, 1 ThankYou Point thereafter
• 1 ThankYou Point for every $1 spent on all other purchases
• No annual fee

Credit Card Deals Too Good to Die

There’s not much doubt but that the once-passionate love affair that consumers for years carried on with their credit cards has faded recently. But as long as credit card use continues to offer real advantages, Americans will still include them in their wallets.

Target announced this week that it will stop issuing its Visa credit card to new applicants. Customers who desire a Target credit card will be issued a Target store card that can be used only at Target stores or Target.com. Existing Target Visa cardholders need not worry; their cards will still be valid just as before (although it is unclear if they will be issued a new Visa card or the store-only card when their current card expires). The change to store-only Target credit cards begins April 29.

Target is definitely bucking a trend with this decision. More and more, retail stores are teaming up with Visa, MasterCard, American Express or Discover to make their cards more appealing, because these cards can be used most anywhere credit cards are accepted, while store-only cards restrict cardholders to just the store issuing the card.

Why would Target make this change? There seem to be two reasons. First, Target is a major retail chain and probably has the strength to force cardholders into store-only cards without losing a tremendous percentage of cardholders, who use the card not only for credit but for the rewards it offers. Second, unlike many other retailers who team up with banks like Chase or Bank of America to issue cards, Target largely issues its own cards, forcing it to take on the receivables from Visa purchases made at non-Target stores — Target must feel that the profit from taking on these debts is not worth the risk involved (and vice versa).

Credit Card Offers Returning

Unless you have the most glittering of credit scores, it’s unlikely that you have received many credit card offers through the mail for some time, at least until recently. But that could be changing.

That’s because credit card companies are slowly recognizing that it’s going to be tough making money in their industry unless they issue some, er, credit cards.

Credit Cards and Credit Risk

Of course, even credit card companies aren’t dumb enough to go back to their old business model, which appeared to revolve around the exciting strategy of lending seemingly limitless amounts of money to people who were distinguished solely by their patent inability to repay the debt. Would they?

Surely now they’re starting to explore the novel concept of lending only to consumers who stand some chance of settling their obligations. You know, people with good credit scores.

Responsible Lending

Nope. According to Mail Monitor from Synovate, a specialist market research company, U.S. households received a total of 398.5 million credit card offers in the last quarter of 2009, 46 percent more than during the previous three months. And the company press release says:

An increase in mailings to the subprime market was responsible, to a great extent, for the increase in the mail volume in the latest quarter. The subprime segment had experienced incredible credit tightening following the recession and initial passage of the CARD Act. However, issuers like Capital One have stepped up to mail to this segment once again.

Meanwhile, the Detroit Free Press quoted Mark Zandi, Moody’s chief economist, earlier this week, saying that he was “…seeing early signs that credit card lenders are easing up a bit on underwriting standards.”

Credit Card Rates to Cover Poor Risk Management?

The Synovate report goes on to imply that perhaps card issuers may be covering the risks associated with subprime lending by hiking credit card rates still further. It pointed out that the average purchase APR for offers mailed in the fourth quarter of 2009 was 13.51 percent, which is the highest for at least five years.

Another unwelcome development for consumers was an increase in the number of credit cards being offered with annual fees. These made up 35 percent of all offers mailed, the highest proportion in a decade. The press release continued “Mail Monitor anticipates both APRs and the proportion of offers with an annual fee to continue to rise in 2010.”

Credit Card Applications Still Not Foregone Conclusions

It would be a mistake to think that the process of loosening lending policies has yet reached the point at which every credit card application will succeed. On the contrary, some card issuers are still enforcing tough criteria that make it difficult for the less creditworthy to add to their plastic.

However, the trend toward easier credit does seem to be established. So perhaps now is the time for you to review your existing credit card deals, and see if there aren’t better alternatives out there.

Credit Card Debt and Small Businesses

The Herald Tribune made sobering reading Monday (April 19) for anyone who owns a small business, and who also carries credit card debt. That’s because it ran a story that said: “…every $1,000 increase in credit card debt increases the probability a firm will close by 2.2 percent.”

It would be comforting to imagine this is one of those statistics than imaginative journalists dream up when bored and hungover on Sunday afternoons. But, sadly, not. It’s a direct quote from a study published by the Ewing Marion Kauffman Foundation (The Foundation of Entrepreneurship), and written by Dr. Robert H. Scott, who’s an assistant professor of economics and finance at Monmouth University.

Credit Cards and the Entrepreneurial Myth

Dr. Scott’s report, entitled The Use of Credit Card Debt by New Firms, highlights how leveraging credit cards to finance ventures has become a part of the mythology of American enterprise:

United States pop culture is filled with many examples of creative entrepreneurs using credit cards to jumpstart their businesses. Spike Lee’s first movie was funded by maxing out his credit cards, which resulted in launching his career as a director. The Blair Witch Project, a film that grossed more than $250 million, was funded almost exclusively with credit card debt totaling around $35,000…

Unfortunately, the unwelcome outcome for most who risk all on a throw of the metaphorical dice is that they lose all. The reason Spike Lee and the producers of the Blair Witch Project are so famous is only partly because they make (or, maybe, made) good movies. It’s also because they beat the odds. And–by definition–that gives them rarity value.

The Business of Credit Card Use

The Herald Tribune piece suggested, at least in part, one reason why credit card use is now seen by small business owners as essential. There was a time–not that long ago–when new ventures were mostly funded by investments from the entrepreneur’s friends and relations. But in the current economic climate, few individuals feel secure enough to bet their future on someone else’s vision, no matter how loved those budding businesspeople are.

When a Credit Card Offers Business Benefits

Of course, just because credit card use must be carefully managed by entrepreneurs doesn’t mean that business people should shun them. On the contrary, ABC News yesterday (April 18) singled out one business card that provides exceptional rewards for users. The ABC News report said:

…I’m a fan of the American Express Business Platinum Card®. The Platinum card lets you convert points from your Platinum card to frequent flier miles on multiple airlines, and you can redeem your points at various major hotels including properties. I’ve also saved hundreds of dollars redeeming my points for Hertz car rentals, even in the peak summer season.

And the writer went on to stress other advantages, including access to various airport lounges and significant discounts at hotels and resorts. Other American Express business credit cards that are worth checking out include:

TrueEarnings® Business Card from Costco and American Express

Gold Delta SkyMiles® Business Credit Card from American Express

Starwood Preferred Guest® Business Credit Card from American Express

Credit Card Rates–Call for More Control

On April 14, the Consumers Union issued a call for the Federal Reserve to step in to regulate credit card rates further. As a result of the Credit CARD Act of 2009, protections are already in place that prevent credit card companies from gouging consumers over penalty fees. However, there are few regulations that cover interest rates.

In a statement, Lauren Bowne, a staff attorney for Consumers Union, commented:

Last year’s shameful frenzy of credit card interest rate spikes has saddled millions of Americans with high cost debt, including many consumers who always paid their bills on time. The Fed should undo that damage by requiring banks to lower interest rates for customers who were treated unfairly before the new credit card protections went into effect.

The Consumers Union argues that the Fed should require a bank to revert to the old interest rate if a hike would not have been allowed under the Credit CARD Act’s new provisions.

Credit Card Debt Trends Improving…

Last week, the credit card companies filed their March figures with regulators. And the data showed that Americans are increasingly getting on top of credit card debt.

In particular, delinquency rates (the percentage of credit card accounts that are at least 30-days late) were down, pretty much across the board. For example:

• American Express’s were down to 3.3 percent from 3.6 percent in February
• Bank of America down to 7.07 percent from 7.23 percent in February
• Capital One down to 5.39 percent from 5.51 percent in February

…But Credit Card Debt Still a Problem

Delinquencies are a good bellwether for credit card debt because the fewer the cardholders who are a little late now, the fewer the people with serious debt issues who are likely to crawl out of the woodwork later. So it’s likely that charge offs (balances that are written off as uncollectible because they’re 180+ days late) will be down in six months’ time.

Unfortunately, that’s not the case now. Charge-off rates in March were up from February for some credit card companies, including American Express and Capital One.

Credit Card Regulation Still Settling In

National Public Radio interviewed one industry expert last week who highlighted some of the problems with recent credit card regulation, including the Credit CARD Act.

John Ulzheimer told Michelle Norris that the idea that the new law would protect consumers from higher interest rates was “one of the great myths.” And he went on to explain that the Act only obliges banks to give cardholders 45 days’ notice of any hike in credit card rates, although it also allows cardholders to opt out of the rise.

But, because card issuers often go out of their way to make rate rise notifications as invisible as possible (the boring enclosure in the monthly statement or impenetrable legalese in an anonymous white envelope), many people don’t realize that their credit cards have become more expensive until it’s too late.

Perhaps the Consumers Union’s appeal to the Fed (see above) can help with this. But a breath-holding strategy seems unwise at present.

Credit Card Debt Down Again

After a blip in January that may well have been a result of holiday spending, American credit card debt resumed its precipitous fall in February. Last week, the Federal Reserve released its latest data on consumer credit, which showed that the change in the annual rate in February’s “revolving credit” (which mostly comprises credit card debt) was -13.1 percent.

To put that into context, consumers owed $858.1 billion in revolving credit in February, compared with $958.1 billion during the last quarter of 2008. Yes, that does make a difference of precisely $100 billion, and–yes, again–that is a suspiciously round number. However, it seems more likely it’s more coincidence than error on the Fed’s part. Well, let’s hope so, anyway.

Credit Card Rates Set to Rise Further?

Those same Fed data also indicate that the average rate for credit cards is currently 14.67 percent. Now, it’s not been made clear how that’s calculated, but many of those living in the real world–who actually have to pay credit card bills–would perhaps prefer to believe index credit cards‘ figure, which at the time of writing is 16.80 percent.

On Saturday, the New York Times ran a story suggesting that credit card rates are set to rise. Actually, it said that interest rates for all sorts of borrowing were likely to rise, and that those increases–in mortgages, auto loans, and lines of credit, as well as credit card bills–had already started.

More Expensive Credit All Round?

The open paragraph of the Times piece summed up its argument:

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates… The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

And it went on to quote one expert who thought that credit card rates could increase by anything from nearly two percent to nearly three percent between now and the fall.

Credit Card Use and You

Your personal pattern of credit card use is likely to determine just how bothered you are by rising rates. If you clear your balance in full every month then you probably won’t care much about credit card rates, not least because you never pay interest.

However, if you often prefer to carry balances forward, now could be a good time for you to review the plastic you have in your pocketbook. There’s a good chance, depending on your personal usage, that you should be trading in generous rewards points and low annual fees for low interest rates.

And you could begin by checking out these three cards:

• Chase Freedom Card
• Citi Platinum Select MasterCard
• Discover More Card

They offer a variety of initial balance transfer deals and reward programs.

Credit Card Companies Love Rewards

When Gartner, the IT research specialist, published a report last year entitled Innovation Map for Value-Added Services in Card Processing, it identified credit card reward programs as a key enabler of growth for card issuers. You can see why.

Credit card companies are now subject to much more stringent regulation, and that has squeezed one of their principal revenue streams–penalties for late payments and exceeding limits. What’s needed to replace that income is a way to get good, creditworthy consumers to pay for their credit card use, something they often used to get free.

And a credit card reward program that is perceived to deliver real value is probably the easiest way for a card issuer to persuade a cardholder to pay an annual fee.

Credit Card Rewards: How to Protect Them

Yesterday’s New York Times carried a feature warning that some credit card companies have sneaky ways of reducing the value of rewards. The piece made some good points (forgive the pun), but is it really all that surprising that, for instance, Bank of America and Citi can wipe out rewards points that are more than five years old?

Five years seems a long time, especially with a card that racks up points quickly, such as the CitiForward card. With that, you get 100 points a month just for paying on time, five for every dollar you spend on books, movies, music, and at restaurants, and one for every dollar you spend on other purchases. Surely you’re going to want to redeem those for something worthwhile in under five years.

Credit Card Terms and Rewards

As the Times points out, you can also lose reward points if you breach certain of your credit card terms. It gives Discover as an example of an issuer that can erase all points if a card is inactive for 18 months.

And many credit card companies can penalize points if you’re late making monthly payments. For instance, Bank of America currently holds your points hostage if you’re more than 60-days late, although you should be able to redeem them again as soon as you’re current. Others are less generous, and it’s possible with some to permanently lose every single reward point for being just 60-days overdue.

Generous Credit Card Users

If you’re sitting on a pile of points that you have no plans for, you have various options that could put a smile on other people’s faces.

To start with, it’s worth seeing whether you can transfer points to friends or family who have similar accounts. Some rewards programs allow you to do this for a minimal fee or even for free.

And, of course, many credit card companies have special schemes that allow you to donate points to charities. Some companies have large databases of organizations to which donations can be made, while others offer a narrower selection. Your issuer’s website should be able to help.

Credit Card Debt Hurts Issuers

When the boss of JPMorgan Chase wrote to his shareholders last week, he had some explaining to do about the company’s credit card division. In his letter, Jamie Dimon, the bank’s chairman and CEO, said:

By all measures, 2009 was a terrible year for our credit card business. The economic environment drove charge-off rates to all-time highs. Card Services lost $2.2 billion (compared with last year’s profit of $780 million).

Those “charge-off rates” he refers to are the amounts of credit card debt his company had to write off as uncollectible. These, it turned out, added up to 8.5% of all Chase card balances, which sounds terrible until you realize that most credit card companies did substantially worse.

Credit Card Regulation and the Future

Mr. Dimon went on to predict that the recent tightening of credit card regulation–mostly in the form of the Credit CARD Act of 2009–would: “…reduce our after-tax income by approximately $500 million to $750 million…”

Extraordinarily for a banker, he followed up that estimate with something dangerously close to praise for the new law. He said:

We believe that many, but not all, of the changes made were completely appropriate. In fact, we had voluntarily eliminated certain of the targeted practices – like double-cycle billing, which resulted in greater interest charges for customers who revolve a balance for the first time (2007); and universal default pricing, in which creditors consider credit histories with other lenders in setting rates (2008).

Chase Sapphire Credit Card–a New Model?

This column previously reported the view of some industry observers who believe that credit card companies need a new business model. They think that in future, card issuers must concentrate on products that deliver such great rewards and services that they attract the most creditworthy and affluent customers.

Well, Mr. Dimon’s team has launched a product that sounds a lot like that. He described it thus: “The Chase Sapphire card was developed from the ground up to address the needs of affluent consumers, with premium rewards and exceptional service.”

According to the company’s website, the Chase Sapphire card offers:

• Unlimited rewards. Exceptional experiences.
• Points never expire.
• No blackout dates. Unrestricted airline travel.
• Any reward. Anytime. Guaranteed

Balance Transfer Credit Cards

While exploring Chase products, the company has an interesting balance transfer credit cards program, currently offering zero percent APR on transfers for up to a year. The Chase Freedom card also has a rewards program and “Blueprint,” which is a smart proprietary tool that can help you better manage your finances.

Being allowed to transfer balances is becoming increasingly rare in credit card land, so this is well worth checking out–but only if you have a healthy credit score.

Credit Card Use Falling

Credit card use seems to be less popular according to research published Monday by Packaged Facts, a division of MarketResearch.com. The figures, based on a survey conducted last year, show that 54 percent of Americans name cash as their preferred form of payment. And only 53 percent of those asked had carried out any credit card transactions at all in the previous month. The report suggests:

…the falling percentage of consumers who have used their credit cards in the last twelve months indicates that more people are keeping their accounts open for emergency purposes only while opting to use the equally convenient–and still popular–debit card instead.

Credit Card Regulation Fails Businesses

Also Monday, BusinessWeek reminded its readers that recent credit card regulation reform applies only to consumers. Those who have business credit cards do not enjoy the same protections.

The report focuses on over limit fees, which the Credit CARD Act of 2009 outlawed for ordinary users. Small businesses are still liable for such fees, which are typically $35. This may not sound like a lot, but–if the amount that the card is over its limit is small–then the annual percentage rate (APR) could easily be in payday loan territory.

Credit Card Companies Reviving?

Credit card companies have had their fair share of woes over the last couple of years, what with record write-offs of uncollectible balances, and that new, consumer-friendly regulation. But at least one fund manager is tipping them as a smart investment.

Reuters reported Tuesday that Invesco Aim is expecting the companies to do well as the economy recovers, and quoted a fund manager with the firm as saying: “The credit card industry became very pessimistic on the potential for losses, but it now appears that the losses have bottomed and consumer credit quality is improving.”

Credit Card Offers–Beware

Yesterday’s New York Times carried some sage advice for consumers who are thinking of buying a shredder. But the piece also contained some valuable reminders for cardholders.

Everyone knows that it’s important to shred old bills and statements in order to foil dumpster-diving identity thieves. But it’s also vital to destroy thoroughly some credit card offers before consigning them to the trash can. In particular, mail shots that say you’re pre-approved for a card are vulnerable, especially if they carry a bar code. Fraudsters have been known to sign these, mail them, and then change the account address all before the innocent victim has any idea what’s going on.

The Times feature went on to highlight two other credit card related documents that can expose you to danger. These include:

• “Convenience checks”–they’re not marketing gimmicks; they’re real checks drawn on your account.
• Promotions suggesting you add cards to your account–they often contain more information than you’d want anyone else to know

Happy shredding!