And you can see why prepaid credit cards are so popular. Anyone with a little upfront cash can get approved for one, so they’re ideal for youngsters and those with badly damaged credit. And they can be a great way to avoid credit card debt or overdrafts: you can only spend your own money. Once the cash you’ve preloaded runs out, the card stops working.

Prepaid credit card pitfalls

If only that were the whole story, it would be easy to endorse prepaid cards as a panacea for so many ills. But it isn’t. On Dec. 19, Sen. Robert Menendez (D-N.J.) highlighted a number of issues:

1. If your prepaid card is lost or stolen, you may stand to lose the balance that remained on it.
2. If your card issuer goes bankrupt, you could similarly lose that balance.
3. Many cards come with horrifically high hidden fees.

As Menendez notes on his Senate website:

This season, its [sic] hidden fees that are making for a Blue Christmas. Unsuspecting consumers are finding out the hard way that prepaid cards often give you much less than the dollar amount you load onto them thanks to unnecessary fees. We need to ensure that families who rely on prepaid cards are not surprised by hidden charges.

To counter these issues, Sen. Menendez is proposing the Prepaid Card Consumer Protection Act, which would require:

1. Comprehensive disclosure of all fees before the card is purchased
2. Limits on the fees that can be levied
3. Protections if a card is lost or stolen
4. FDIC cover, so money wouldn’t be lost if an issuer goes bankrupt

With luck, such regulation could prevent repeats of a story told by The New York Times a couple of years ago: When Floridian Damon Saxton tried to access money from his prepaid card using an ATM he accidentally hit the wrong keys while he was entering his PIN. His card issuer charged him $2.95 “for a declined ATM transaction.” So he called the customer service center to complain. His pleas fell on deaf ears, but he was charged a further $1.95 for the privilege of calling.

Secured credit cards have advantages over prepaid

If your credit history is too damaged to qualify for an unsecured credit card, then a secured credit card may be a better option for you than a prepaid card. These provide many of the statutory and other protections that mainstream credit cards offer. IndexCreditCards.com recently published an article “Best and worst secured credit cards for 2012″ which teases out some of the differences between these cards.

Credit card contracts impenetrable

Of course, everyone knows that you shouldn’t sign anything that you haven’t read, but that piece of wisdom tends to go out the window when people make credit card applications. Most just cross their fingers that the agreement doesn’t contain outrageous terms, and anyway know that the chances of their successfully negotiating any variation in the standard-form contract are negligible. So nearly all of us simply sign and hope for the best.

Now all that could be about to change. On Dec. 7, the Consumer Financial Protection Bureau (CFPB), a federal regulator, unveiled a draft credit card agreement that it hopes will become a template for future contracts. By comparison with existing documents it’s unrecognizable:

1. It’s short: just 1,100 words across two pages, rather than the 5,000 or so that current contracts average.
2. It’s easy to read: no long words or incomprehensible legal jargon — just plain English.
3. It’s simple to navigate: you can find everything you need to know easily, thanks to its easy-on-the-eye layout.

More than just credit card rates

The top half of the first page concerns different credit card rates and other costs that apply in different circumstances: balance transfers, cash advances, foreign transaction fees, introductory APRs and so on. The lower half has four headings:

1. What do I have to pay and when?
2. What if I pay late?
3. Special promotions
4. How is interest calculated?

Turn over, and there are details of the circumstances in which credit card rates and other charges can change, followed by “Additional Information,” which includes:

1. The company’s rights
2. The consumers’ rights
3. How disputes should be resolved
4. Other terms and conditions
5. Privacy

Credit card companies cautiously welcoming

Credit card companies aren’t always welcoming of government interference in their businesses, but their initial reaction to this suggestion hasn’t been wholly adverse. True, some are concerned that a lack of legalese in their contracts could open them up to expensive litigation. But this was how Kenneth Clayton, chief counsel at the American Bankers Association, greeted the CFPB’s proposal in a statement:

For more than 20 years, the banking industry has strongly supported efforts to provide consumers with a short, easy-to-understand summary of their credit card agreement. The model released by the Bureau is a good first step, but could be made even shorter, as well as less susceptible to costly lawsuits and the higher consumer prices that come from them. We look forward to working with the Bureau to ensure disclosures provide exactly what our customers need and want to know, while maintaining consumer access to competition and choice in the marketplace.

Maybe some day soon virtually all of us are going to understand the card contracts we sign.

After several years of declining use, credit cards are poised for resurgence. Despite the nation’s very rocky economic recovery, consumers appear to have halted their belt-tightening and bank incentives to use credit cards rather than debit are gaining appeal.

- Beth Robertson, Director of Payments Research, Javelin Strategy & Research, Nov. 28, 2011

Credit card use set to explode

The press release from which that quote was taken includes some other interesting predictions. Javelin Strategy & Research forecasts that credit card use for online purchases is going to grow by 63 percent over the five years from 2011 to 2016. The same figure over the same period for debit cards is just 2 percent. “Alternative” online payment methods, such as prepaid cards and gift cards are expected to rise, but even by 2016 they’re set to account for only 19 percent of all online purchases. By that time, Javelin expects, debit cards will account for 21 percent.

It’s not just online that credit cards are coming back into their own. On Dec. 5, First Data Advisors recalled that it had first noted a change in credit card trends back in February, and since August had seen year-over-year growth in credit card spending outstripping that for both signature and PIN debit card transactions. During Thanksgiving Thursday and Black Friday this year, the value of all credit card transactions was more than 10 percent higher than over the same two days in 2010.

Rewards credit cards and credit card offers

So why the turnaround? It would be nice to think that it was because consumers had read “7 ways in which credit cards beat debit cards,” an article that appeared on IndexCreditCards.com just about a year ago. But the real reasons are probably different. Since the Durbin Amendment reduced the cut that banks receive of each debit card transaction (but left that for credit cards at the same level) there’s been a strong reason for financial institutions to push consumers towards credit card use. And that’s most obviously revealed itself in two ways:

1. On Dec. 5, CNNMoney quoted data from Mintel Compermedia that suggested that 1.3 billion credit card offers were mailed to consumers during the third quarter of 2011. That’s an 85-percent increase over the level at the start of 2010.
2. Rewards credit cards are now a lot more generous, by and large, than they were a year or two ago. Credit card companies see these as key ways both to build market share and to drive up their customers’ use of their products.

Credit card debt not yet a problem

Javelin’s study tossed up one troubling statistic. People using debit cards for single online purchases on average spend $58.29 on each transaction. However, those using credit cards in the same circumstances spend $82.10. Now, there could be a number of explanations for this, but one may be that consumers are tempted to spend more when buying on credit.

So how scared should we be by the prospect of Americans getting carried away with their card spending, and loosening their belts too much? Well, not too scared, at least according to research published Dec. 7 by TransUnion, one of the big-three credit bureaus. In a press release, Steve Chaouki, group vice president in the company’s financial services business unit, remarked:

Credit card delinquencies are expected to remain fairly steady in 2012 ranging between 0.69 percent and 0.76 percent — levels far below those typically observed in the last 15 years. In today’s uncertain economy, consumers have found that credit cards are among their most valued assets due to the flexibility they provide. As a result, consumers have made a concerted effort to make on-time payments and maintain relatively low balances. In fact, credit card debt per borrower in the third quarter of 2011 stood at $4,762, approximately $1,000 less than the second quarter of 2009, the quarter in which the recession ended.

So maybe we can relax a little. But the specter of credit card debt still haunts many of us, so if you choose to use your plastic, you may want to do so with prudence.

Top credit card complaints

The CFPB broke down complaints into 33 categories (including one called “other”), so it gives us a chance to see the things about credit card companies that bother people most. Perhaps surprisingly, only three of these each made up over 10 percent of the total:

1. Billing disputes: 13.4 percent
2. Credit card rates: 11.0 percent
3. Identity theft/fraud/embezzlement: 10.8 percent

The fourth largest category was that “other” one, and no other (other than “other”) accounted for more than 4.4 percent of all complaints. One interesting observation is the low levels at which the three fee-related categories (late fee, overlimit fee and other fee) appear. When you add them all together, they make up less than 8 percent of all complaints. Before the Credit Card Act was implemented, you might have expected the ultra-high penalty fees that issuers used to charge to have topped the list.

Credit card interest rates

At first sight, consumers’ beefs with credit card rates seem strange. We all know what rates we have to pay on our cards, so what’s the problem? Unfortunately, the CFPB doesn’t provide an answer, but it may be that penalty rates are the issue. These can be triggered by late payments, and often result in a doubling of the APR that a consumer is used to paying. You can see someone being outraged if such a hike were to be imposed (and one usually would be) after they’d provided their credit card issuer with a perfectly reasonable and innocent explanation for a one-off slip.

Of course, credit card interest rates could easily become an increasingly common cause of complaint in the future. Most credit cards today have variable rates, and when these eventually begin to climb–and some believe they might do so steeply once the economy gets fully back on its feet–then many who carry forward significant balances could well find themselves suffering real pain.

Balance transfer credit cards

It was encouraging to see that only 83 complaints (1.7 percent of the total) were received concerning balance transfer credit cards or balance transfer fees. Many see these as important tools that can help them head off financial problems before they get too serious, so it’s important they work well.

However, you have to recognize the limitations of the data. If only 83 balance transfer credit cards were to have been issued during the period the figures covered (an incredibly unlikely scenario) then that would mean that every one of them was a cause of complaint. The thing is, we don’t know how many were issued, so we can’t make more than intelligent guesses about how well they’re performing for cardholders.

There is another weakness in the CFPB report: it provides only a snapshot of the period covered. Of course, that’s inevitable for the first data from any tracking study. What will be even more interesting in the future is to watch trends develop. The CFPB, the credit card companies, and you as a cardholder should then be able to identify problem areas of the business as they emerge, and address them. So, for example, you might one day see that complaints concerning cash advance fees have suddenly jumped (they account for only 0.3 percent in the current report), and that might prompt you to check whether your issuers have bumped up their fees recently and, if so, consider switching to a different card.

A truly free market can only exist when all parties have access to full, accurate and timely information. Anything that improves the flow of knowledge, even imperfectly, should surely be welcomed. The CFPB is surely a step in the right direction.

Credit card debt paid down more slowly

Of course, everyone knows that making only minimum payments is a very slow, and, with credit card rates the way they are, a very expensive way of paying down plastic. But, with so many other more immediate demands on household income, it’s understandable that many cardholders choose to take this route, often while promising themselves that they’ll pay off more next month.

New research published in the Journal of Marketing Research suggests that, just by showing the minimum payment required on monthly statements, credit card companies are actually encouraging people to pay down their debt more slowly.

The study, conducted by the Boston College Carroll School of Marketing in conjunction with three English universities, found that for many consumers “including the minimum required payment information on their account statements can reduce the amount they pay each month by as much as 24 percent – about $120 less on a $2,000 balance.”

Linda Salisbury, a Boston College assistant professor, says, “The mere presence of minimum payment information acts like an anchor on borrowers’ repayments, pulling them downward.”

Credit card companies not to blame

Credit card companies have little choice but to show minimum payments. Salisbury explains that “this presents a tricky balancing act for lenders: removing the minimum required payment may increase repayments overall, but it would also put lenders at greater risk of increasing default levels.”

You can see her point. It’s the reason so few restaurants invite diners to pay what they think a meal is worth, and why those that have tried the experiment have tended to pull down their shutters so quickly. Plenty will pay more than necessary to keep the restaurateur in business, but plenty of others will pay way too little. If card issuers effectively made the repayment of credit card debt voluntary, an awful lot of people might not put their hands up.

How much interest will I pay? I don’t care!

The Credit CARD Act of 2009 obliged credit card companies to show on monthly statements the potential cost of interest over the long term, along with different payment scenarios. You might think that giving consumers this additional information would empower them to make smarter choices. But no. Sadly, and surprisingly, the Boston College study found, “Disclosing future interest costs significantly increased the likelihood a cardholder would pay only the minimum required.”

Since October 1, that cut has been capped for debit card use, a move that’s likely to cost banks upward of $6 billion a year. Merchants say they are going to pass on that savings to consumers in the form of lower prices and/or better service, although it’s too soon (if it ever proves possible) to measure how many are doing that, and how many are simply adding the cash straight to their bottom lines.

Credit card swipe fees to fall?

Fresh from their victory in persuading Congress to cap debit card swipe fees, some retailer trade bodies now have credit card interchange fees in their sights. The Retail Industry Leaders Association is already active, and, last month, the National Retail Federation (NRF) unveiled a $10 million lobbying campaign that is largely devoted to capping credit card swipe fees, according The Hill earlier this week.

Yesterday, David French, who’s a senior vice president at the NRF, wrote a blog on the federation’s website in which he argued:

…reforming debit card swipe fees was only the first step. It is estimated that credit card interchange fees generate about $30 billion per year for banks and card providers – for comparison’s sake, debit card swipe fees will now generate “only” about $14 billion per year. And the vast majority of these exorbitant fees go directly to the biggest handful of banks and the Visa and MasterCard duopoly.

Now that the banks’ unfair practices regarding debit card swipe fees have been highlighted and addressed, it is clear that banks are hoping to use higher fees on debit cards to push their customers toward credit cards in order to maintain their bloated revenue lines. As this transition occurs, it is crucial that Congress once again shine a spotlight on bank-interchange practices. Swipe-fee reform is a two-part job, and we are only halfway done.

Rewards credit cards at risk

That argument may sound powerful, especially as French reminds us that a quarter of U.S. jobs and one-fifth of the nation’s GDP rely on the retail trade. However, if you enjoy the benefits of cash back credit cards, travel rewards cards or gas cards, you may want to think again.

That’s because all these rewards programs are largely funded by interchange fees. And credit card companies are likely to have to scale back or even abolish them if a significant cap is imposed. Indeed, they could even have to impose higher annual fees, just as some banks have done on checking accounts as a result of the debit card cap.

There’s also an excellent argument why credit card swipe fees should be higher than those for debit cards. Retailers receive the full value of a transaction often pretty much instantly. But credit card companies effectively have to lend that money for nothing until the next statement due date. That’s a genuine additional cost that compensates credit card issuers for putting money at risk, justifying, at least in part, today’s interchange fees.

More credit card regulation unlikely

It’s hard to imagine the current Congress buying into additional regulation for the banking sector. Although with Congress, apparently nothing is impossible. It’s one thing to resist lobbying from consumer groups, and quite another to turn down a rich and powerful lobby such as the retail industry. Its ability to sway public opinion and make tactical campaign contributions rivals even that of credit card companies.

However, whatever happens legislatively, it’s likely to take years for any new regulation to take effect. So, in the meantime, enjoy all the benefits that your rewards credit cards can bring.

The great debate over swipe fees

On Friday, The Augusta Chronicle quoted David Oliver, a spokesperson for Georgia Bankers Association, as saying: “As a result of the Dodd-Frank Act, the cost of debit card payment services has shifted from retailers and merchants to consumers.”

And that’s certainly one valid way of looking at it. Another is that few merchants ever shouldered the burden of swipe fees themselves, but instead raised prices to cover them. And those higher prices were paid by all customers–including poor, unbanked ones who use cash. Looked at that way, you could see such fees as a sort of private-sector sales tax by which the poor subsidized better-off people’s free banking and rewards programs.

Which view is correct? You pays yer money and you takes yer choice, though you’d probably be better off using a credit card when you do so.

Credit cards are better

That’s because, generally speaking, credit cards have always been the best way to pay for purchases. Toward the end of last year, this credit card news blog identified 7 ways in which credit cards beat debit cards, and three of those were:

1. Better statutory protections if you’re a victim of fraud
2. Better statutory protections if you need to dispute transactions because of shoddy, misdescribed or undelivered goods or services
3. Better benefits from rewards credit cards

As banks scale back or abolish debit card rewards, that last point is likely to become even more significant. That’s because rewards credit cards (indeed, all credit cards) are exempt from the Dodd-Frank Act’s provisions, so there’s no reason why they shouldn’t remain as generous as ever.

Rewards credit cards improving

Indeed, as this blog recently pointed out, the rewards on offer from many credit card companies are actually getting better. In particular, recently launched cash back credit cards and travel rewards cards often offer superior benefits compared with older ones.

Among the new cash back credit cards now available are the Capital One Cash card, and BankAmericard Cash Rewards™ card. Recently launched travel rewards cards include the Citi Executive^SM / AAdvantage^® World Elite^TM MasterCard^®, and the United MileagePlus^® Explorer Card from Chase.

“Here’s the best piece of advice I got when I was a teenager,” Kutcher said. “Don’t ever charge anything on a credit card if you don’t already have the money in the bank to pay for it.”

Gather.com, a news blog, reports that Kutcher followed up his remark in a tweet: “Thank you all for the award and the love! And I’m serious about thy [sic] credit card thing. #tca.”

Credit card debt and the young

Kutcher is married to Demi Moore, and it seems likely that between the two of them they have money in the bank to pay for pretty much anything that they feel like charging to their credit cards. And he must be aware that a multimillionaire preaching to the less fortunate about financial responsibility could be taken as “let them eat cake.” But that just makes his statement more brave. Because his was a message that needed saying.

Some weeks ago, IndexCreditCards.com explored (see “I owe, therefore I am” say many young adults) the shocking results of a serious academic study that found “a significant number of young adults–and especially those who came from poorer backgrounds–reported that the higher the amount they owed in education and credit card debt, the better they felt about themselves.”

Credit card regulation and rates

However, it’s not just Kutcher’s teenage audience who could benefit from following his advice. On Friday morning, this blog warned of the new dangers faced by everyone who has serious credit card debt (When the sky is falling, pay down credit card debt).

At the time, the biggest threat appeared to be from falling markets, which might have triggered–and still might trigger–the second phase of a double-dip recession.

Later that day, Standard & Poor’s downgraded America’s credit rating, a move that not only could make that threat greater, but that also could bring about a rapid rise in credit card rates. Yesterday’s Washington Post put it this way:

The interest rate the United States pays on its short-term loans is determined by the market for Treasury bills. The downgrade could increase the yields on those bonds, forcing the government to spend more to borrow the same amount of money. Many consumer loans, such as credit cards and mortgages, are linked to the yield on Treasuries and therefore would also rise.

The good news is that credit card regulation, in the form of the Credit CARD Act of 2009, prevents card issuers from increasing rates on existing balances except in rare circumstances, and new rates should generally apply only to new purchases.

Keep credit card use in check

However, you’d be brave–borderline foolish–to see this as an opportunity to make purchases now in an attempt to lock in low credit card rates. Yesterday’s New York Times warned:

If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around. Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession… with most major measures of economic health… worse today than they were back then.

And that means that you might find yourself either struggling to keep up payments on your plastic, or in desperate need of as long a line of credit as you can get. Either way, you could regret ignoring Kutcher’s advice.

However, there is a danger in throwing so many brickbats and passing out so few bouquets. Namely: it’s easy to forget just how powerful credit card use can make you, and how consumer-friendly credit cards are.

Credit card use and emerging technologies

On Aug. 2, Consumers Union issued a press release that was a sharp reminder of just how much better credit cards are than other methods of payment. The release contained details of a new Consumer Reports study into emerging payment methods, such as charging purchases to your cellphone, or to soon-to-be-launched digital wallets. At the end of May, IndexCreditCards.com looked at Google’s version of these wallets in Credit cards minus plastic equals Google Wallet? Maybe.

Jeff Blyskal, a senior editor with Consumer Reports, made an important point: “As these new forms of payment grow more popular, consumers must be careful to understand the costs, and disparities in protections associated with the promise of new convenience.”

You see, you have to link these electronic payment media to some form of traditional account, usually plastic in the form of a credit card, debit card or prepaid card. And the consumer protections to which you’re entitled when you flash your smartphone or use your virtual wallet are likely to match those provided by the account to which it’s linked. Or, as the Consumer Reports press release puts it:

A consumer’s right to get their money back when something goes wrong–errors, goods not delivered as promised, fraud–varies by the payment option used. Again, the underlying method of payment tied to your mobile device will govern their rights in such instances.

Credit card offers the best protections

But the next sentence in that paragraph is the most interesting: “Cell phone and digital wallet payment services linked to a credit card offer consumers the most protection.”

Why should that be? Simple. Because a credit card offers the most protection whether or not you’re paying using an exotic new device. Now, it’s true that some banks are generous enough to provide consumer protections that actually or nearly match those of credit cards. But generous is precisely what they’re being, because there’s no law that says they have to.

And even if those protections are included in a contract, the chances are they could be withdrawn virtually overnight. Credit card companies, on the other hand, are forced to provide protections by acts of Congress. They have no choice, and are unable to wriggle out of properly compensating their customers when transactions go wrong.

So there’s still no opportunity to present a bouquet to credit card companies, because they’re motivated to help you by federal law rather than altruism. Still, you have to love their credit cards.

Credit card complaints

The “File a credit card complaint” section of the CFPB’s website looks fairly straightforward and user-friendly. It’s broken down into five stages:

1. What happened?
2. Desired resolution
3. My information
4. Credit card information
5. Review

And the bureau promises: “We’ll forward your issue to your credit card company, give you a tracking number, and keep you updated on the status of your complaint.” It remains to be seen how much more useful this process is going to be than simply complaining to credit card companies directly. However, if enough complaints about a particular card issuer or problem are received, that could presumably trigger a wider CFPB investigation.

Credit card regulation becomes proactive

Up until now, credit card regulation (and that for other financial products) has always been conducted by agencies, notably the Federal Reserve, that seem to regard their principal duty as being toward banks and businesses rather than consumers. The CFPB was designed to mirror that priority, placing greater emphasis on the needs of individual citizens, many of whom may be disadvantaged by the small print in standard-form contracts that are written by bank lawyers.

Of course, in an ideal world, the interests of consumers and credit card companies would converge. In theory, competition should drive out bad players in the supply end of the market, leaving credit card terms that balance the needs of both parties. However, in the real world the market is far from pure. It costs a huge amount to start a new card issuing business, and this often-insurmountable barrier to entry has left what some may regard as an oligopoly that has little incentive to moderate price gouging and “gotcha” clauses.

Two views of credit card regulation

The Credit CARD Act of 2009 intervened in the market to stop issuers’ worst excesses, and there’s little doubt that credit card terms are more reasonable now than they were before that legislation. However, government intervention in free enterprise often has unintended consequences, and many believe that the CFPB is a step too far in rebalancing the relationship between issuers and consumers.

That (along, possibly, with the substantial campaign contributions sometimes made by the banking lobby) is why a numerically significant group in Congress is demanding reforms to the CFPB’s structure in exchange for approving the President’s nomination for the bureau’s directorship, Richard Cordray, a former attorney general of Ohio and a famously energetic consumer advocate.

Cordray: brave campaigner or crazy zealot?

If you believe Faiz Shakir in today’s Washington Post, Cordray is a paragon:

President Obama has chosen an articulate, dedicated professional whose well-regarded record has earned him the opportunity to serve the American people. As Ohio’s attorney general, Cordray cracked down on big, mortgage-lending banks for constructing what he described as a “business model built on fraud.” He fought the practice of predatory payday loans and prosecuted unlicensed lenders. A former “Jeopardy” champion, he’s smart, savvy and genial.

However, Collections & Credit Risk, a trade journal for debt collectors, yesterday reported a rather different view:

Cordray, now the director of enforcement for the new bureau, was immediately painted by industry insiders as a strong consumer crusader. While critics had viewed [Professor Elizabeth] Warren–the architect of the bureau–as a zealot, observers said privately they would take her over Cordray.

So assuming Cordray is confirmed, is his CFPB going to be a just and powerful regulator, or an interfering meddler who ends up short-changing both credit card companies and their customers? That’s for you–and time–to decide.