Credit card companies bad?

Regular visitors to this corner of the blogosphere (can spheres have corners?) may have gained the impression that the resident writer isn’t a huge fan of credit card companies. Well, to some extent that’s true. Too many of them seem to bury “gotcha” clauses in their agreements, and become almost viciously predatory the moment a customer gets into trouble.

But none of that prevents a recognition of the enormous benefits that credit cards themselves can bring, especially to those who are responsible and self-disciplined. So let’s explore and celebrate some of the unique qualities of these cards, and especially those that are usually unavailable to debit card users.

Credit cards good?

Earlier this month (September 10), this blog reported a study by Javelin Strategy and Research that showed that consumers were increasingly leaving their credit cards in their wallets and using debit cards instead. Yesterday, the San Francisco Chronicle and The Connecticut Watchdog both quoted Javelin’s figures in features that reminded readers why this trend could be a mistake, and how credit card use is often the better choice. Here are some of the arguments put forward:

1. Purchase protection

You don’t have to pay for disputed items on your credit card account until the matter’s resolved. But once you’ve paid for something on your debit card, your money’s gone. That gives you much less leverage with suppliers of shoddy, misdescribed or defective goods.

2. Theft protection

If someone steals your debit card and PIN, you could be liable for all their spending. And you may have to pay up to $500 if your debit card goes missing but you fail to report its loss or theft within two working days. Credit cards generally better limit your exposure.

3. Price protection

Many credit card companies refund the difference if you find exactly the same item you’ve recently bought being offered cheaper elsewhere. It’s unlikely that your debit card issuer would do the same.

4. Fewer fees?

Credit card use often carries lower fees than those for debit cards. It’s worth comparing your bank’s fee structure with your credit card companies’ to see which is offering the best deal.

5. More perks

Many credit cards offer genuinely valuable perks such as roadside assistance, car rental loss/damage cover, trip cancellation/interruption insurance, extended warranties, lost luggage cover and so on.

6. Credit score boosting

Responsible credit card use is one of the fastest ways to improve your credit score, which is likely to give you access to lower rates for big purchases, including mortgages and auto loans.

7. You get credit!

With a debit card, you’re spending your own money from day one. With a credit card, you could get to use the issuer’s money for free for up to 45 days. And, of course, you can spread payments over a long period, if necessary.

Which card might suit you?

Picking a card involves matching your lifestyle and spending habits with the most suitable product. Here are some cards that are worth exploring further:

• If you carry forward a big balance each month–Chase Freedom® Visa offers a one-year, zero percent APR on balance transfers and six months on purchases.
• If you spend a lot but don’t carry forward balances–Discover® More® Card has no annual fee and unlimited cash back rewards than never expire.
• If you want travel or points-based credit card rewards–browse through offerings from American Express.

Credit card trends misread

People who write about credit cards often have sad lives, which may explain why many months ago your correspondent happened across an obscure blog that was arguing a revolutionary proposition. At the time, the wisdom was that the Federal Reserve’s monthly G. 19 consumer credit statistical release showed that most people had been chastened by the recession, and had adopted much more conservative approaches to managing their credit card debt. Profligacy was out, and had been replaced by responsibility and frugality.

After checking the blogger’s figures, this column reported his or her hypothesis. In short, it proposed that the credit card trends that had seen such a high reduction in debt over the last couple of years were largely down to card issuers writing off (”charging off” in the industry jargon) the balances on accounts that had defaulted, and passing them on to collection agencies. Far from embracing a new frugality, many consumers–and especially the unemployed and those whose incomes had dropped significantly–were more reliant on their cards than ever before.

Credit card debt in figures

The latest Federal Reserve G. 19 statistical release shows just how far credit card debt has fallen since its high in 2008. That year, revolving credit (which largely comprises credit card balances) was $957.5 billion. According the latest release, which was published September 8 and covers July 2010, that figure has fallen to $827.8 billion. That’s a drop of $129.7 billion or 13.5 percent.

You can see why glass-half-full types talked up this decline and portrayed it as a welcome return to prudence on the part of credit card users. Sadly, it’s starting to look as if those who thought the glass half empty might turn out to be right.

Credit card news getting worse?

The New York Times reported Friday on a study that suggested that charge offs during the 12 months beginning early in 2009 totalled $80 billion, which is roughly the total amount of credit card debt reduction in the Fed’s figures. The week before, The Washington Post published an even more pessimistic take. It quoted an analyst, Odysseas Papadimitriou, who’d found that, in the second quarter of 2010, banks had charged off $21.8 billion, while credit card debt had declined by only $12 billion.

The difference, the analyst said, was down to extra debt that consumers had been piling on their cards. In other words, far from American consumers paying down balances, they may actually be significantly increasing them.

Credit card rates key?

If you’re finding that your balances are drifting (or shooting) upwards, and your credit score hasn’t yet taken a battering, then it’s imperative that you review the credit cards that you have. Many credit card rates have increased significantly over the last year or two, and you may well find that cards that were best buys when you applied for them are now ruinously expensive.

As always, match the card you choose to your personal credit card use patterns. But if you’re carrying forward significant balances each month, you probably should consider focusing on low rates.

The Simmons First National Bank Visa® Platinum Rewards card has an exceptionally low rate right now, although it’s only available to those with stellar credit scores. The Citi® Platinum Select® MasterCard® also has fairly low rates, and may be more widely available. It also is an excellent balance transfer credit card.

Credit card myths

Did you see The Early Show on CBS News yesterday (Wednesday)? It included a report by Rebecca Jarvis about some of the myths surrounding credit cards. In case you missed it, here are some highlights.

Credit cards and supporting ID

Did you know that most credit card companies prohibit merchants from asking for supporting ID when they swipe a card? With so much fraud around that’s crazy, right? Wrong. If a clerk in a store has access to your credit card details AND personal information contained in your ID (address, date of birth) then you could be much more vulnerable to identity theft.

That’s why credit card companies say that your signature is ID enough. It’s true that American Express and Discover don’t have an outright ban on stores asking for extra ID, but even they actively discourage it. And so should you.

Credit reports aren’t infallible

CBS News quotes experts who say that 80 percent of credit reports contain wrong information, even if your credit history is spotless.

It’s important to correct any error as soon as you can. However, attorney John G. Watts–whose firm, Watts Law Group, PC, of Birmingham, Alabama, advises many victims of inaccurate credit reporting–says that credit bureaus often refuse to remove erroneous information when asked, even if evidence of the mistake is provided. This blog will soon be passing on to readers John’s advice about what to do if you find yourself in that situation.

Credit scores aren’t boosted by positive balances

Some people think that they can improve their credit score if they overpay their cards, and keep a positive balance on their accounts. That’s a myth, and all that you’re doing is giving your credit card companies interest-free loans.

CBS News quoted a spokesperson from the Experian credit bureau who said that all positive balances are reported as zero balances for credit scoring purposes.

Credit cards–how to pick ‘em

Also yesterday, The Christian Science Monitor ran a feature about how to choose a credit card. Its advice? “Pick the issuer, then the card, to get the best deal.”

This tip was based on J.D. Power and Associates’ 2010 U.S. Credit Card Satisfaction Survey, which was reported on this blog on August 23. And it’s not a wholly bad idea.

However, there is another way of looking at this. If you’re serious about getting a great deal, you first need to analyze your credit card use in detail. If you regularly carry balances forward, then credit card rates may be your first priority. If you always pay on time and in full, then you may want to avoid annual fees, or find a good rewards program. If you need a balance transfer credit card, then you should look for a card with a long low- or zero-percent introductory rate.

Actually, that last one is a good example of where the Monitor’s advice falls down. Right now, the Citi® Platinum Select® MasterCard® is offering a zero annual percentage rate (APR) on balance transfers for an extraordinary 24-month introductory period. That could be exceptionally helpful to someone with a substantial balance on an existing card. But Citi didn’t top the J.D. Power survey, so wouldn’t be on a Monitor reader’s list of possible choices.

The best of both worlds

Of course, if you can find a great deal from one of the credit card companies that did head the J.D. Power list, then go for it. American Express holds the No. 1 spot, and it has products that could suit many people. For example, those who like cash back rewards, and spend a lot on their cards, might be tempted by the Blue Cash® from American Express card. It pays up to five percent cash back on gas, groceries and drug store purchases, and up to 1.25 percent on all other purchases. However, those rates only kick in after you’ve spent $6,500 on the card. Before then, the rates are a more modest one percent and 0.5 percent respectively.

The point is to always match the card you choose to your credit card use patterns.

Credit card regulator appointed

One of the provisions of the financial restructuring legislation that was passed earlier this year was the authorization of a Bureau of Consumer Financial Protection, which was intended to have wide ranging regulatory powers over credit cards, mortgages and other financial products aimed at consumers.

On Friday, President Obama made a Rose Garden announcement of Elizabeth Warren, who–reporting directly both to him and to Treasury Secretary Timothy F. Geithner–would take the lead in setting up the new bureau. Warren is the Leo Gottlieb Professor of Law at Harvard and a consumer campaigner who’s as despised by Wall Street and the right as she is feted by progressives on the left. As The Washington Post put it in an editorial yesterday, “…her dim view of the banking industry is fully reciprocated.”

The President didn’t nominate Warren as the bureau’s first director, largely because many thought that Senate Republicans would have filibustered her appointment. However, some believe that she’s still in the running for the job, and that the White House calculates that she stands a better chance of being confirmed down the line if she can show a record of success in her new role of setting up the organization.

Credit card regulation enters new phase?

Yesterday, The San Francisco Chronicle identified three reasons why banks are so vehemently opposed to Warren being given a key role in future credit card regulation. In general terms, these were:

1. Warren is an acknowledged expert in consumer bankruptcies, and well understands the “tricks and traps” (as she calls them) that some credit card companies try to bury in the small print of their card agreements. The new bureau has been empowered to write new, legally-binding standards for contracts that could further restrict issuers’ abilities to impose penalties and to hike credit card rates.
2. Warren is a doughty campaigner, who won’t shy away from closing loopholes, no matter how powerful the interests lined up against her are.
3. Warren is an outsider in both Washington and Wall Street terms, and is less likely to be susceptible to lobbying than others. If she shapes the bureau’s mission, it may be difficult to change its ethos when she moves on.

Credit cards and Warren–some quotes

Credit card companies are right to point to Warren’s naked partisanship. Last year, on HBO’s “Real Time with Bill Maher” (a comedian whose followers include a vanishingly small number of bank CEOs), she talked about credit cards being a “David and Goliath story,” and went on to describe the current situation as “…a totally broken market that makes a few people very rich, and robs the rest.”

That can only be described as partisan, although some would say that it may also be accurate. Indeed, even President Obama called her “one of the country’s fiercest advocates.”

Credit card companies and bridge building

Saturday, Bloomberg reported that Warren had spent part of her first day reaching out to banks and credit card companies, possibly in order to build some bridges, and create some bipartisanship. She refused to name those she had spoken to, but Citigroup, Inc. (the people behind Citi Credit Cards) acknowledged that a call had taken place between her and its CEO, Vikram Pandit.

A Citi spokesperson told Bloomberg that the two:

…had a good conversation when they spoke on the phone today. Citi is very focused on helping consumers in our country, and Vikram looks forward to working with Ms. Warren as she guides the development of this important new agency.

In reality, Warren is likely to need the cooperation of the banks if she is to meet her goals, and it may well be that her ability to work with Wall Street could prove as decisive to her success as her undoubted passion and intelligence.

Credit card debt write offs

When banks write off credit card debt because they think its uncollectible, they call the process “charging off.” And during the darkest period of the credit crunch they were charging off all over.

Then, as the worst customers were weeded out and handed on to collection agencies, leaving behind more creditworthy ones, charge off rates dropped across the industry. Everyone relaxed a bit and executives awarded themselves bonuses. Sadly, they have to come up with a new excuse for the next round of bonuses, because that fall in the rate of charge offs came to an abrupt halt last month.

Credit card default figures

Before the recession, the rate of charge offs remained at somewhere between three and four percent fairly consistently. In the second quarter of this year, it was at 10.66 percent. And yesterday Associated Press quoted the Federal Reserve as saying that, in August, individual credit card companies reported the following charge off rates:

• American Express: 5.5 percent
• Bank of America: 11.72 percent
• Capital One: 8.19 percent
• Chase: 8.18 percent
• Discover: 7.98 percent

All except American Express told the Fed that August saw their charge off rates rise for the first time in some months. Amex’s held steady. Is this a blip or the start of a new credit card trend? It’s too early to say, but watch this space.

Credit card regulation hurts consumers?

Also yesterday, The Atlantic quoted Jamie Dimon, CEO of JPMorgan, on the topic of credit card regulation. Apparently, he called recently introduced rules, “misguided government intervention.” It is possible to take an alternative view. Had credit card companies not routinely regarded their customers with the same glint in their collective corporate eye that Count Dracula once reserved for his most attractive virginal prey, there would have been no reason for Congress to have legislated.

He went on to promise that his bank would be raising fees to compensate for losses resulting from the Credit CARD Act, and would also be withdrawing its provision of credit from about five percent of its card customers.

Credit cards for people in trouble

What happens if you’re one of those people who have lost their credit cards through default, or who may do so as a result of banks cutting back on lending? Well, earlier today, The Detroit Free Press suggested considering prepaid cards, although it warned that some of these can carry very high fees. The trick–as with all cards–is to shop around. A good place to start is with The Mango™ MasterCard® Prepaid Card

If you have enough spare cash to put down an upfront deposit, then a secured credit card could be a good alternative. Providing the one you choose reports to all three big credit bureaus, it gives you the chance to rebuild your credit score. Again, there are good and bad deals out there, so compare what’s on offer, starting with Orchard Bank Classic MasterCards® and the Public Savings Bank Secured Card.

Credit card regulation and business cards

Last week (September 6), this blog warned readers that some card issuers are mailing credit card offers for business products to people even though they know the addressees aren’t businesses. Some don’t even use the terms “business credit card” or “corporate credit card” in the solicitation, instead describing the product as “professional.”

The reason? The latest wave of credit card regulation doesn’t cover business cards, so those issuers making these offers are hoping to ensnare consumers in agreements that still permit abusive lending practices.

Business credit card excesses

Just how abusive those practices can be was highlighted yesterday in The Sacramento Bee. It recounted the story of Misty Seeley, who runs a small business in Rancho Cordova, CA. She told the Bee that her issuers had shortened the time she has to get in a payment after receipt of her statement from 25 days to 14 days. And they have increased her late fees from $29 to $50. Neither of those moves would be legal for consumer cards under the Credit CARD Act of 2009. In fact, it caps late fees–except in exceptional circumstances–to $25.

Misty Seeley is clearly an astute woman, because she zeroed in on the issue when she observed: “The credit card companies have to make their money somewhere. Now it’s coming from small businesses. It’s really frustrating.”

Credit card rates rocket for businesses

It’s not just fees that are causing businesses problems. Credit card rates on corporate products have increased substantially too.

Last week, Transworld Business reported that some business credit card users are paying rates of over 30 percent, which is very nearly double the average for all credit card rates (16.79 percent) quoted by index credit cards today. One expert told Transworld Business:

We predicted earlier this year that small businesses would be subject to rate increases as the banks try to make up for lost consumer revenue resulting from the CARD Act. Since small businesses aren’t protected, they appear to be an easier target for card rate hikes.

Business credit card rewards can be attractive

If you’re not sufficiently organized to meet challenging due dates every month, or you’re not sufficiently wealthy or prudent always to pay off your balance in full, then any business/corporate/professional credit card offers you receive should almost certainly be fed straight into the shredder. But, as a blogger on Forbes pointed out a couple of days ago, if you can manage such a product well, then you could possibly think twice.

The thing is, some business cards are actually pretty good for those whose credit card use is highly disciplined. Forbes recommended two that have particularly strong cash back rewards programs, and this blogger is happy to pass them on with one caveat–it’s not known whether their issuers are among those that allow private individuals to hold their business cards.

Two business products with good credit card rewards

The first that Forbes mentioned was the True Earnings® Card from Costco and American Express. This gives cash back at four percent for gasoline purchases of up to $6,000 a year (one percent on anything above that), three percent in restaurants, two percent on travel, and one percent for everything else.

The other Forbes recommendation was the Ink CashSM Business Card from Chase. This is another straight cash back product, and it offers three percent at gas stations and restaurants, and on office supply and home improvement purchases. You get one percent on everything else.

Wednesday, Javelin Strategy and Research published research that makes grim reading for executives of credit card companies. Total credit card use is declining as more and more consumers are turning to their debit cards for purchases.

The trend is sharp. Bloomberg says, for example, that credit card payment volume through Visa® dipped by 7.3 percent during 2009 while that for debit cards rose by 7.9 percent. However, the Javelin survey suggests that the change in consumer behavior may be even more extreme. It asserts that, in 2007, 87 percent of consumers questioned said that they had used a credit card in the previous month, compared to 56 percent in 2009. The report’s authors say that, if the trend continues, credit card use could dip below the 50 percent mark during 2010.

Credit card companies’ triple whammy

This sort of drop in usage has a very real impact on card issuers’ revenues. Banks rely on “interchange fees” or “swipe fees” for a significant part of their card incomes. These fees are the cut of every transaction that merchants have to pay to banks for the privilege of swiping one of their cards. And the fewer swipes, the fewer cuts credit card companies receive.

But that’s only one of the companies’ problems. As recent credit card regulation has cut their ability to raise revenue through penalty fees, they rely more on income from interest payments. Oh dear. Earlier this week, the Federal Reserve released its monthly analysis of consumer credit. And it shows that revolving credit (which mostly comprises credit card debt) fell–according to Associated Press–during July for the 23rd consecutive month. That month, it stood at $827.8 billion, down from a high of $957.5 billion in 2008.

No wonder credit card rates have rocketed while interest rates in general are at or near all-time lows.

Credit cards without annual fees

The Javelin Strategy and Research document noted one more statistic that is particularly interesting. It says:

Fee sensitivity is paramount in the selection of a new card issuer, as 80% of consumers cited “no annual fee” as the most important criterion when choosing a new credit card.

This is understandable, especially among those who always pay their monthly balances in full and on time. If you never pay annual fees, or interest, or penalty fees then your credit card use is essentially free.

Neither the Citi Platinum Select MasterCard nor the Chase Freedom® Visa has an annual fee. And they both have reputations for charging low rates, which could be useful if you ever do want to carry forward a balance. Why not check them out?

The good people at Synovate Mail Monitor spend their working lives tracking and analyzing credit card offers that are mailed to consumers. It’s not a career that would suit everyone, and its hard to imagine that they get many gate-crashers at their Christmas parties, but they do valuable work.

For example, last month they revealed that, during the second quarter of 2010, U.S. households were in receipt of 640.3 million credit card offers, which was 83 percent up on the same time in 2009. During that 2010 quarter, Chase sent out four times as many solicitations as it did during the same period last year, and Citi tripled its mailings between the first and second quarters of this year.

Credit card companies that think you’re a business

Even if you’re retired or an employee, you may have found a couple of solicitations for business credit cards among the piles of junk mail you’ve received recently. That’s odd. Credit card companies are famous for their slick marketing, and it’s not generally like them to buy the sort of poor quality mailing list that has you down as a business when you’re not.

Well, mystery solved. There’s a good chance that the issuers who sent those business credit card offers knew you weren’t a business. And they wanted you to sign up for those cards in spite of that.

Credit cards for businesses

Why would a card issuer want you, an individual consumer, to take a card that’s designed for businesses? Simple. Business credit cards were specifically excluded from last year’s Credit CARD Act. So all those extra protections from credit card rates, fees, payment cycles and so on won’t apply to the business card that you’re being offered.

Small wonder that Synovate Mail Monitor says that the volume of business credit card mailings jumped 256 percent between the first quarters of 2009 and 2010.

Last Wednesday, U.S. Senator Charles Schumer (D-NY) wrote to the Federal Reserve, asking it to look into these solicitations, and to crack down on card issuers who may be tricking consumers into signing credit card applications for inappropriate corporate products. It was a worthy initiative, but, judging from the Fed’s responses to previous pleas to side with consumers against banks, he might just as well have waited until December and sent a note to Santa.

Credit cards for businesses can be good

Of course, if you are a businessperson, a corporate credit card can be a valuable tool. Most credit card companies offer some form of business card, but perhaps American Express is most famous for them.

Two products that are worth exploring further are the TrueEarnings® Business Card from Costco and American Express and one that carries a great deal of prestige, The Business Platinum Card® from American Express OPEN.

Credit card companies not loved?

Who’d have thought it? Many consumers don’t particularly like their credit card companies. Newsweek reported Thursday that 78 percent of of people participating in J.D. Power and Associates’ annual customer satisfaction survey said they were considering switching.

The magazine said that now: “It seems like everyone loves to hate their credit card companies…” Some might wonder what took them so long.

Credit card offers–how to pick one

On the same day that the Newsweek story appeared, The San Francisco Chronicle carried a feature under the headline, “4 Tips for Picking the Best Credit Cards.” As the title suggests, it identified four key criteria for judging credit card offers:

1. Credit card rates
2. Annual fee
3. Credit card rewards programs
4. Convenience

The Chronicle’s analysis was excellent as far as it went, but may be a little basic for readers of index credit cards. So let’s beef it up a bit.

Credit card rates

Yes, as the Chronicle says, it’s important to carefully analyze the credit card rates on offer. You need to know whether it’s an introductory rate, and, if so, how long it will last and what the standard rate will be when it expires. You need to be aware that many companies advertise ranges of rates, and you shouldn’t suppose that you’ll be granted the lowest. And you need to be clear about whether the headline annual percentage rate (APR) applies only to purchases, and what rates will be applied to cash advances and balance transfers.

But you also need to be clear that–depending on your circumstances–you may be better off ignoring credit card rates. If you’re the sort of person who invariably pays off their balance in full each month, then it doesn’t matter if the APR is 100 percent because you would never have to pay it.

If credit card rates are important to you, you should check out the Iberiabank Visa® Classic card. At the time of writing, this has an APR that starts at 7.25 percent, which is unusually low. However, bear in mind that you only get this rate if your credit score is exceptional, and that it is a variable rate.

Annual fees

These can add up, particularly if you have a number of cards. But there are still plenty out there that have no annual fee. Blue Cash® from American Express, for example, doesn’t have one. But it still has a good rewards program.

Credit card rewards programs

Credit card rewards programs can be a minefield, and a comprehensive guide would need more space than is available here. However, here are some key guidelines:

• Make sure the issuer can’t unilaterally devalue your hard-earned points
• Avoid programs that allow points to expire unless you’re sure you can use them during their valid period
• Airline miles often only suit people with a particular lifestyle; don’t sign up for them unless you’re sure they’re good value for you
• Steer clear of programs that have high earning thresholds unless you’re sure you can meet them without incurring expense

Convenience

This isn’t much of an issue for most credit card companies, but the Chronicle suggests that you make sure yours has a good ATM network, electronic payment facilities, and round-the-clock customer service.

Other factors–including balance transfer credit cards

If you’re exploring balance transfer credit cards, then you really ought to consider the Citi® Platinum Select® MasterCard®. That breather from paying interest could allow you to make serious inroads into your credit card balances.

One final piece of advice–card issuers are notorious for “gotcha” clauses that are buried in the small print of credit card application forms. So take the time to understand fully what you’re signing up for. Mistakes at this point can prove expensive later.