Credit Card News: Regulator Wants Your Views

According to yesterday’s Washington Post: “the Federal Reserve wants to know what consumers think” about its latest proposals for future credit card regulation, which it published earlier this month. Regulations covered credit card rates, fees, and terms. The Fed wants your views? Yeah, right.

Navigating the Fed’s website is never easy, but finding a way to comment on the new proposals defeated this writer completely. True, it’s not too hard to find a press release that says: “Comments on the proposal must be submitted within 30 days after publication in the Federal Register, which is expected shortly.” And that press release has a link to a dense, 43-page Federal Register PDF extract on the proposed credit card rules. But, personally, finding a way to actually to comment proved impossible.

Credit Card Consumer Consultation in Action

So it was back to the Post to learn:

If you want to comment on the proposals, send an e-mail to regs.comments@federalreserve.gov. Include “Docket No. R-1384″ in the subject line. You can also comment by fax to 202-452-3819; remember to include the docket number. Comments must be received on or before April 14.

Very consumer-friendly. A cynic might almost wonder if the Fed really wants to hear from those who actually use credit cards, or whether it would rather just receive comments from the credit card companies’ lawyers.

Credit Card Companies Fed’s Priority?

You can find such cynics among the New York Times’s editorial staff. The paper carried a leader Monday that said: “The Fed has a long history of putting the credit card industry first and consumers far behind, and a draft of the rules released this month is disturbingly weak.”

And the Times isn’t alone in thinking that the Fed’s ties to credit card companies are too close. Earlier this month, Rep. Barney Frank (D-MA), who is chairman of the House Committee on Financial Services, issued a statement in which he said:

I do not support housing the Consumer Financial Protection Agency in the Federal Reserve. I continue to vigorously support the House-passed bill that establishes an independent agency with strong rule-writing authority and enforcement powers to implement consumer protections… My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.

Have Your Say on Credit Cards

If you want to have your say on credit card rates, terms, fees, and so on, the Consumers Union can help. Its creditcardreform.org site has a form that allows you easily to submit your views to the Fed.

Credit Card News: Regulator Wants Your Views

According to yesterday’s Washington Post: “the Federal Reserve wants to know what consumers think” about its latest proposals for future credit card regulation, which it published earlier this month. These cover credit card rates, fees, terms, etc. The Fed wants your views? Yeah, right.

Navigating the Fed’s web site is never easy, but finding a way to comment on the new proposals defeated this writer completely. True, it’s not too hard to find a press release that says: “Comments on the proposal must be submitted within 30 days after publication in the Federal Register, which is expected shortly.” And that press release has a link to a dense, 43-page Federal Register PDF extract on the proposed credit card rules. But, personally, finding a way actually to comment proved impossible.

Credit Card Consumer Consultation in Action

So it was back to the Post to learn:

If you want to comment on the proposals, send an e-mail to regs.comments@federalreserve.gov. Include “Docket No. R-1384″ in the subject line. You can also comment by fax to 202-452-3819; remember to include the docket number. Comments must be received on or before April 14.

Very consumer-friendly. A cynic might almost wonder if the Fed really wants to hear from those who actually use credit cards, or whether it would rather just receive comments from the credit card companies’ lawyers.

Credit Card Companies Fed’s Priority?

Such cynics can be found among the New York Times’s editorial staff. The paper carried a leader Monday that said: “The Fed has a long history of putting the credit card industry first and consumers far behind, and a draft of the rules released this month is disturbingly weak.”

And the Times isn’t alone in thinking that the Fed’s ties to credit card companies are too close. Earlier this month, Rep. Barney Frank (D-MA), who is chairman of the House Committee on Financial Services, issued a statement in which he said:

I do not support housing the Consumer Financial Protection Agency in the Federal Reserve. I continue to vigorously support the House-passed bill that establishes an independent agency with strong rule-writing authority and enforcement powers to implement consumer protections… My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.

Have Your Say on Credit Cards

If you want to have your say on credit card rates, terms, fees, and so on, the Consumers Union can help. Its creditcardreform.org site has a form that allows you easily to submit your views to the Fed.

Credit Card Use to Change?

There are whispers circulating around credit card companies about fundamental changes ahead. A few are forecasting the effective death of the industry, but most predict something less radical.

The majority expect to see a new era in which banks take time to discover what consumers need–and value–in their credit card use, and respond with offers that both cost and deliver more. At the moment, card holders tend to see products as a commodity, and–in all but exceptional circumstances–make buying decisions based exclusively on cost–credit card rates and fees.

The hope is that, by offering (and charging for) new, valuable services, card issuers will move from being “fear-based” enterprises to “value-based” ones. But it’s hard to see how that can work out unless the companies drastically reduce the number of credit cards they issue, and cancel many of the accounts held by less profitable customers.

Credit Card Regulation Behind Move?

The industry would have you believe that recent and proposed credit card regulation is behind the possible changes. And they’d be right, at least in part. Earlier this week, the New York Times reported that JPMorgan alone could “lose income from legislation limiting credit card and overdraft charges, perhaps as much as $1.25 billion.” However, most card issuers are more exposed to unrepayable credit card debt than to regulatory issues, and double-digit rates of “charge offs” (when banks write off debts as uncollectible) have been routine for many card companies for some time.

But obviously it’s easier to rail against the government than come to terms with one’s own past unwise lending policies. And there’s a better chance of lobbyists heading off further regulation if the card companies focus on on the financial impact of the recent Credit CARD Act.

Credit Card Debt Main Driver?

When it comes to higher credit card rates and fees–and to any future structural changes in the industry–it seems likely that the main driver will be poor lending decisions in the past. And it’s not clear that things are getting much better today.

Last Friday, the Federal Reserve published its latest data on consumer debt and, on first reading, it contained good news. Outstanding revolving credit (which mostly comprises credit card debt) stood at $864.4 billion in January. Of course, that’s a huge amount, but it’s $70.7 billion less than it was in the first quarter of 2009, and a whopping $93.7 billion down on its highest recent level in the last quarter of 2008.

So surely that means that Americans have responded responsibly to the credit crunch, and have been paying down their credit card debt. Well, maybe not. Yesterday, the Associated Press ran a story that contained a sobering figure. It said: “In 2009, banks wrote off a record $83.27 billion in credit card debt.”

Credit Cards in the Future

It’s hard to see how that sort of charge-off rate can be sustained. And, if the economy picks up, it won’t have to be. But credit card companies are unlikely to want to put themselves in the same position ever again, so a restructuring of the industry is very much in the cards.

It may be that in the future many fewer Americans will have credit cards, and that those who do will pay more, and receive new and valuable benefits. But, as long as other financial products are created to fill the gaps, that may not be such a bad thing.

Credit Card Regulation Proposals Watered Down?

Last week, this column quoted a statement made by House Financial Services Committee Chairman, Barney Frank (D-MA). Speaking about the proposed Consumer Financial Protection Agency (CFPA), he said: “My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.”

But, just days later, Senator Chris Dodd (D-CT), who’s steering CFPA-enabling legislation through the Senate, implied that he was ready to cave into Republican pressure, and override Rep. Frank’s concerns by housing the new regulator in the Fed. He told CNBC:

Where it [the CFPA] is housed, where it rents space is important, but more importantly is what authority, what power does it have, how much independence. And again, I think we’re getting a good chance for some strong bipartisan cooperation on that.

Credit Card Rates–a Story

Yesterday, the Philadelphia Inquirer ran a feature under the headline: “Why Consumers Need an Independent CFPA.” And it told the story of an academic at the University of Pennsylvania who used to have a credit card with a $15,000 limit and an eight percent rate. When the professor decided to carry a $10,000 balance over for a couple of months, the issuer doubled the rate. Of course, he protested, at which point the bank pointed to a clause in his agreement that allowed it to increase credit card rates “at any time for any reason.”

The Inquirer pointed out that this was common practice, but that it took a year for a regulator to “advise” credit card companies that it was inappropriate, and another four years for legislators actually to ban it. And the feature, written by Jeff Gelles, one of the paper’s business columnists, concluded:

Consumers need a cop on the beat: a truly independent agency that can write and enforce rules to protect families today and nip new abuses in the bud – before they sow the seeds of tomorrow’s financial catastrophes.

Credit Card Regulation and the Fed

It’s certainly true that the Fed hasn’t in the past covered itself in glory when it has attempted credit card regulation. Even its latest proposals, announced last week, have met with a decidedly mixed response.

For example, Gail Hillebrand, director of the Consumers Union’s Defend Your Dollars campaign, commented:

The Fed’s proposal will help to bring down penalty fees and stop some of the most unreasonable new fees. But it doesn’t go far enough because it does nothing to rein in penalty interest charges and lets banks wait another year before reviewing the sky high interest rates imposed on many consumers over the past year.

And the Associated Press quotes Nick Bourke, manager of the Safe Credit Cards Project at The Pew Charitable Trusts, as saying: “The Fed left a lot of leeway for issuers to determine on their own what to do.”

Credit Card Companies Asking for Cancellations

With their recent imposition of higher credit card rates and new annual fees–not to mention inactivity fees–it feels as if some card issuers are actively encouraging their customers to cancel accounts. Certainly, large numbers of consumers resent being asked to pay for something that was previously offered free and are asking themselves whether they need so many cards.

But before cutting up any plastic, you should think twice. Because closing a card account may well adversely affect your credit reports.

Credit Score Calculations

Your FICO credit score–the one that most lenders use–is calculated using five criteria, and the importance of each is represented by the percentage weighting shown in the following list:

1. Your payment history (35 percent)–mostly affected by late payments
2. How much you owe (30 percent)–most importantly, the difference between the amount you’re currently borrowing and your available credit
3. Length of your credit history (15 percent)–generally speaking, the longer your credit history, the higher your score
4. New credit (10 percent)–your score is likely to suffer if your credit report shows multiple recent applications for new credit
5. Other factors (10 percent)–a whole list of these, including whether your mix of credit types (mortgage, auto loan, credit cards) is healthy

Credit Scores and the Cancelling of Credit Cards

The reason your FICO score might suffer if you cancel a credit card is associated with the second factor in that list. The relationship between your available credit and the amount you actually owe is called your “utilization ratio.” When you reduce your available credit by closing an account (and so losing that card’s limit), you’re likely to increase that ratio and potentially harm your score.

Of course, if your use of credit is already low, then the effect is likely to be minimal. But if you transfer balances, the impact could be more damaging.

One expert gave yesterday’s Washington Post an example. Suppose someone closed card accounts in a way that increased their utilization ratio from seven percent to 85 percent. If that person’s credit score had previously been in the 800s, it could end up in the low 700s, or even in the high 600s, solely as a result of the ratio rise.

Credit Scores Matter

The U.S. General Services Administration’s website explains the impact that a poor credit score can have on all borrowers. This particular scenario shows the effect on a couple who are buying their first home:

Let’s say they want a thirty-year mortgage loan and their FICO credit scores are 720. They could qualify for a mortgage with a low 5.5 percent interest rate. But if their scores are 580, they probably would pay 8.5 percent or more–that’s at least 3 full percentage points more in interest. On a $100,000 mortgage loan, that 3 point difference will cost them $2,400 dollars a year, adding up to $72,000 dollars more over the loan’s 30-year lifetime.

Of course, interest rates (and property prices) have changed since that example was written. But the point remains valid. And that is–credit reports matter.

Credit Card Regulation Has Limits

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

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

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

Credit Card Terms Already Changed

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

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

More Loopholes

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

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

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

Credit Card Rates Up

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

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

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

Credit Card Companies Feeling the Pinch

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

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

Credit Scores Down

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

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

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

Credit Card Debt in the Larger Picture

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

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

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

Credit Card Companies Look to Brighter Future?

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

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

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

Credit Card Offers Increasing

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

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

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

Credit Card Regulation Only a Week Away

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

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

Credit Card Companies on Campus

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

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

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

New Protections

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

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

Giving Leverage to Parents

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

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

Credit Cards and the Young

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

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

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

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

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

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

Identity Fraud Soaring

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

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

Credit Card Users Especially Vulnerable

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

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

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

The Most Vulnerable of All

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

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

Some Good News

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

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

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

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

Credit Card Trends Are Toward Lower Balances

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

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

Credit Card Use Changing?

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

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

Credit Card Companies Less Popular?

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

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

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

A Hard Habit to Kick

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

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

Good Times Starting Again?

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

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

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