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 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.

Student Credit Cards Beneficial…

Earlier this week, the Daily Illini, an independent student newspaper for the University of Illinois, ran a feature about how new state and federal credit card regulation is likely to affect students. Having described the probable impact, the piece went on to observe that “Some students at the University said they think the laws are overprotective.”

And it went on to quote from an interview with Oana Toma, who is a 21-year old sophomore in Engineering. She pointed out that it is not only those who are under 21 who find themselves in trouble with credit card debt. Many much older people encounter similar problems. And she went on to remark:

This is the time we all need to be building credit. We will need good credit to buy a house or a car in the future. A lot of students just use it [a credit card] like a debit card. They are responsible with it, and they monitor how much they are spending.

…But the Drawbacks Are Serious

Of course, Ms. Toma is right to highlight the many benefits that credit cards can bring to students. But others take a sharply different view. They argue that young people, who, by definition, are relatively inexperienced in financial matters, are especially vulnerable to what they see as predatory credit card companies. And a recent study by Gallup for Sallie Mae suggests they may be right.

Sallie Mae’s report, published last April, but based on a 2008 survey, certainly contained some scary statistics:

• Half of all students had four or more cards
• Only 15 percent of freshmen had a zero balance
• The median credit card debt carried by freshmen nearly trebled between 2004 and 2008–from $373 to $939
• The average credit card debt on graduation was $4,100
• Nearly a fifth of seniors had balances totaling more than $7,000
• Sixty percent of students were surprised at how high their balances had grown
• Balances were carried forward–and finance charges paid–by 82 percent of all students surveyed

Student Credit Cards: Some Good Advice

The Consumers Union last August issued advice to students who are considering making a credit card application. It identified seven key rules that can help young people (and, come to think of it, everyone else) to steer clear of trouble:

1. Don’t fall for the credit card companies’ slick marketing campaigns
2. Make sure you can really afford to borrow money with a credit card
3. If you decide to get a credit card, shop carefully and make sure you understand your contract
4. Don’t be tricked by the teaser rate
5. Don’t use your credit card to finance your education
6. Use your card wisely
7. Don’t co-sign for your friends

Whether or not you’re a student, the first step to a happy relationship with your card is to shop around for the best credit card rates.

Credit Card Trends Under Fire from Fox News

New Year’s day’s guest host on Neil Cavuto’s show was Stuart Varney. At one point he interviewed Paula Albertson, CEO of Albertson Financial Group, a firm that specializes in financial planning and retirement planning services.

Their topic was credit card trends, and Mr. Varney had his own particular views of what was already happening as a result of new regulations to further control the industry, which take effect in February.

Credit Card Terms to Favor the Irresponsible?

Perhaps the point that upset him most was the idea that those who clear their statement balances in full every month were about to be required to pay more than their fair share for credit card use. He complained that many of these “good” customers had recently seen annual fees introduced, their spending limits lowered, and their credit card rewards reduced. And, among many questions, and remarks on this point, he commented:

I think what will get people really upset is when the people with good credit, those who pay off everything at the end of the month, they never borrow anything, if they get hit, if they have to subsidize those people who borrow constantly, that will create a ruckus.

Who Is Subsidizing Whom?

But it’s those who have struggled to manage their credit card debt, to live within their credit limits, and to make payments punctually who have, for many years, been subsidizing those who are richer, and/or better at managing their finances.

In what sort of enterprise is a high-cost customer who generates zero revenue defined as “good,” while those who pay most of the companies’ bills, and make much of the profit are called “bad?” Yet that’s precisely how credit card companies work. Those who pay no interest, no fees, no charges, no penalties, but take free transaction processing, free statements, interest-free grace periods, and expensive credit card rewards programs are lauded. And yet they are the ones who are being subsidized by the less well off.

In fact, the Wall Street Journal last week quoted Robert Hammer, an industry analyst, as saying, “Credit card issuers collected $22.9 billion in penalty fees–such as those assessed for late payments–in 2009, up from $19 billion in 2008.”

It’s How It Works

Of course, there’s no point in worrying about whether or not this situation is fair. It works. At least, it has right up until recently.

But with so many Americans unemployed or in low-paid jobs, and with so much gut-wrenching financial hardship in every corner of the nation, there are simply too few poor and feckless left with the necessary resources to subsidize more responsible credit card users. And those “good” customers are likely to have to get used to paying–at least in part–their own way.

None of which means that anyone should pay more for using their cards than they have to. So it’s always a good idea to keep an eye on current credit card offers.

Credit Card Rates Through the Roof

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

Credit Card Regulation Triggered the Rate

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

Eye-Wateringly High Charges

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

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

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

Credit Card Rates Remain Unregulated

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

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

Attracting Those with a Poor Credit Report

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

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

Usury or a Necessary Evil?

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

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

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

Credit Card Applications In-Store Are Easy Now

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

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

Credit Card Regulation May Change All That

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

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

Credit Card Rewards Denied?

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

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

How Desirable Are Store Credit Cards?

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

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

One More Thing

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

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

Credit Card Rewards Must Suit You

It would be nice to think there’s not someone out there who’s never been on an airplane–and never plans to–who has a card that earns them air miles. However, you just know that somewhere precisely such a person exists.

But before you laugh too loudly, you might just want to check your own wallet. Because a combination of changing lifestyles, and amended credit card terms and conditions may mean that many, many Americans are currently signed up for credit card rewards programs that don’t really suit them.

Credit Card Debt and Credit Card Rewards Don’t Mix

To start with, most people who don’t pay off their balance in full every month should probably select a credit card based on the lowest interest rates possible and not on the credit card rewards program.

But you might not be getting the best deal, even if you do pay off your balance every month. More and more credit card companies are imposing annual fees on their cards that carry valuable rewards programs (and on some that don’t), and a little cold arithmetic is necessary to see if a card that was once a winner is now somewhere toward the back of the pack.

Credit Cards & Lifestyle

Another factor that could have made one of your cards less attractive without your really noticing is a change to your lifestyle. If you’re one of millions of Americans who fly less frequently, stay in hotels less often, and have cut down on car rentals, then perhaps you should be looking for cash rewards rather than freebies.

Of course, if your lifestyle still involves a great deal of travel, then a rewards program with travel perks could still be highly valuable. The American Express’s Starwood Preferred Guest card is a good example of a card that can return real value to the right person.

Research Before You Do Anything

If you find that you ought to change one or more of the cards in your wallet, then you should obviously search out the deals that most closely suit your way of life. That could involve finding a different rewards program, or it could simply mean exploring the range of low interest credit cards–as far as such things still exist.

But think before you sign that new credit card application. You need to have an excellent credit score to get a new card, so it could be a mistake to burn your bridges.

And simply cancelling an existing card can damage that credit rating, as can making multiple applications. So it’s often better simply to cut an existing card in half, and let the account die slowly and naturally through disuse.

Credit Card Offers Clogging Up Mail Less

You’re probably very nearly as happy that credit card companies are sending you fewer offers as your long-suffering mail carrier is.

In the third quarter of 2009, credit card issuers sent out 391 million pieces of marketing direct mail. That averages out at about 30 million items of junk mail a week, which sounds quite a lot.

But no. In the same quarter of 2008, credit card companies sent out 1.3 billion mailshots. And that works out at a hundred million items a week.

Credit Card Deals Getting Worse…

That reduction is great news if you’re a tree that’s scheduled to be cut down to make paper pulp. But it’s not so good if you want to apply for a credit card.

The direct mail figures come from Mintel, a leading market research company.

And Andrew Davidson, who’s a senior vice president at Mintel Comperemedia, points out that there’s more to this story than just numbers. He says: “Credit card issuers are cautiously navigating Credit Card Accountability Responsibility and Disclosure (CARD) Act regulations. In addition to adjusting their direct marketing strategy by sending less mail, they’re raising rates and fees on existing and new cards. The credit card offers we see today are undeniably less attractive than they were one year or even six months ago.”

…Much Worse

Andrew Davidson’s team found that:

• Although prime rates remain static and low, variable purchase Annual Percentage Rates (APRs) in credit card mailings jumped by more than a full percentage point between the first and third quarters of this year
• This time last year, 27 percent of mailings offered fixed rate credit card deals. This last quarter, that figure was six percent.
• Introductory purchase APRs are being offered for briefer periods. Last year, half of mailings provided introductory periods of 13 months or longer. This year, just five percent did. And 21 percent gave less than six months.

Credit Still Available–If You Don’t Need It

These credit card trends don’t apply to everyone. If you’re rich, secure, and have a great credit score then you probably still receive credit card offers. In April through June of this year, Mintel says that card issuers sent out 28 percent more offers that they did in January through March. But only for premium credit cards, and only to those who presumably don’t need credit.

As Andrew Davidson says: “Credit card companies are competing to attract people with high credit scores and big spending habits. Because premium credit cards often have high associated fees and low risk, issuers see them as an excellent way to restore profitability in today’s economy.”

The Problem

Back in May, the President signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act into law, which was intended to make the relationship between cardholders and issuers fairer, and to reduce the $15 billion a year that Americans pay in penalty fees.

Trouble is, full implementation of the law was delayed until February 2010. And some credit card companies appear to be using that delay to tilt the playing field in order to maintain their future profitability.

A New Era

Understandably, this approach hasn’t gone down well with consumers. But now there are signs that the credit card companies are recognizing this, and are reinventing themselves in more consumer-friendly ways.

Of course, you can’t expect them to become warm and cuddly overnight. But three new credit card company products may represent the shape of things to come.

Bank Americard Basic Visa Card

According to the bank’s press release, the Basic Visa credit card is going to offer the following key features:

• Same interest rate for all transactions. This includes purchases and cash advances, which makes it easy for customers to keep track of their interest rate at any given time.
• One interest rate. U.S. Prime plus a margin of 14 percent, which never changes for the life of the account. Rate increases and decreases only occur if the Prime Rate changes.
• No over-the-limit fee.
• Understandable disclosure. Easy- to-understand and single-page, it explains terms and conditions.
• One flat fee of $39 for late payments.

Chase Blueprint

Blueprint isn’t a credit card. It’s a set of tools that help you manage your Chase cards better. And it’s intended to make it easier to reduce balances and avoid interest charges. The Chase press release that unveiled the new product describes the four principal tools:

1. Full PaySM. Enables customers to decide which expenses they want to pay in full every month–items like groceries, gasoline, prescriptions–and those they want to set aside and avoid paying interest by paying them in full each month
2. SplitSM. Provides customers with a way to better manage larger purchases like home improvement projects or a new appliance. They can select the number of payments or monthly payment amount that works for them. Chase does the math and makes it clear on each statement so they can stay on track to meet their goals
3. Finish ItSM. Gives customers the flexibility to create a plan to pay down their current balance faster, which allows them to choose a goal date for pay-off. Chase does the math, calculating the monthly payments, sets up the plan, and charts progress toward achieving the payment goal on each monthly statement and online
4. Track ItSM. Provides customers with a snapshot of all of their Chase card purchases. Customers can track their spending online by category whenever they want, not once a year like some card companies offer. Spending snapshots are available online daily, which allows customers to track their progress toward achieving goals in real time

Citibank’s FORWARDThe Citibank FORWARD Visa card replaces the credit card industry’s traditional stick with a carrot. If you follow the rules, you can gradually reduce your annual percentage rate (APR) by 25 percent. And there’s no annual fee.

Things Can Only Get Better

It may be too early to say that the credit card industry has seen the light. But the rest of us may just be witnessing a new dawn.