Credit Card Debt Shows Overall Reduction

Last Friday, the Federal Reserve published its Consumer Credit statistical release for September 2009. It showed that American consumers are paying down what they owe. In fact, they reduced their indebtedness by $15 billion during that month alone. Unfortunately, they still owe $2,456 billion.

Still, the Fed’s figures show that outstanding revolving credit (which is largely made up of credit card debt) dropped 10 percent in the third quarter of 2009. And that can’t be bad.

Credit Card Debt a Growing Problem

How can credit card debt be both going down and be a growing problem? Well, the debt that’s being reduced belongs mainly to people who can afford to repay it. For them–and for those who lent to them–it wasn’t a problem in the first place.

Those who do have a problem are the unemployed, and 10.2 percent of Americans now fall into that category. Add in those who are working part-time jobs because they can’t find full-time employment, and those who have given up looking for work because they’ve given up hope of finding anything, and that number jumps to 17.5 percent.

That’s causing credit card companies all sorts of problems. And when credit card companies face difficulties, their first instinct is to pass the pain on to their customers.

Credit Card News Not Good

Last week, CNN Money carried a report entitled Credit card issuers fight for more profit. It said that: “A good rule of thumb is that the level of credit card losses is usually about one percent higher than the unemployment rate.” And it went on to quote predictions from Moody’s that growing losses for credit card companies would continue until mid-2010, when they’re expected to peak at 12 percent.

Bank of America’s Special Pain

Bank of America (BofA), which is the nation’s second largest issuer of Visa products, and third largest issuer of MasterCard-branded cards, faces particular difficulties. Its credit card “charge-off rates” (the debts that it thinks it won’t recover) are currently running at 14.25 percent, against an industry average of about 10 percent.

And last Friday, BofA took the unusual step of including a new risk factor in its third quarter report. Companies have a legal obligation to reveal new risk factors only in their annual reports, and rarely offer them up part way through a year. So it’s likely that the bank perceives this new risk as posing a serious threat to its business.

And what is the risk? Looming legislative and regulatory pressure.

Look on the Bright Side

Increased regulation may cause banks pain, but it just may also protect consumers. BofA reckons that it’s likely to lose $200 million in revenue in the fourth quarter because it’s made its overdraft rules fairer. And that move anticipated legislation.

Credit card regulation, in the form of the Credit CARD Act, is going to be implemented soon. It should be interesting to see whether it makes credit card terms fairer.

Students Wave Goodbye to Credit Cards

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 is going to introduce new protections for students when it goes into effect in February 2010. These include:

• A ban on issuing cards to those under 21 years old, unless they have either a co-signer or proof that they can make repayments
• A ban on the gifts and incentives (free food, T-shirts, Frisbees, and so on) that card issuers “give” to students who fill in credit card applications
• A ban on the marketing of cards on all campuses that are frequented by those under 21

How Bad is Student Credit Card Debt?

In April of 2009, Sallie Mae, which describes itself as “the nation’s leading provider of saving, planning, and paying for education programs,” published the results of a study it conducted in the spring of 2008.

Among the findings were:

• The large majority of undergraduates (84 percent) had at least one credit card, and half of college students had four or more
• At $3,173, the mean balance was the highest since the study began in 1998
• Only 15 percent of new students had a zero balance on their credit card, compared with 69 percent in 2004
• More than 80 percent did not pay off their balance in full each month, and consequently incurred interest charges
• Forty percent of respondents admitted to charging items to their cards, even though they knew that they lacked the funds to pay the bill
• The average credit card debt of a senior on graduation was more than $4,100, up from $2,900 in 2004

A Worrisome Picture

All of this adds up to a disturbing picture of high credit card debt, and irresponsible card usage among the people who will be running this nation in the future. And you can see why legislators want to remove the temptations posed by cards.

But there is another side to this coin.

Punishing the Innocent Along with the Guilty

Perhaps the most obvious argument against greater regulation is that it punishes the innocent–those students who use their cards responsibly–along with the guilty. Of course you can say that effectively banning many students from holding credit cards protects those in the minority who use them inappropriately.

But if that’s the case, why not ban all credit cards? That would protect those in the minority of adults in the general population who use them inappropriately. What’s the difference?

Real Hardship

Of course, credit card debt can cause real hardship. But denying access to credit can have just as damaging effects.

The Sallie Mae study found that 92 percent of respondents put textbooks and other educational necessities on their credit cards. And 30 percent charged tuition. What happens to those students when access to this line of credit is denied them?

And, what happens to the 84 percent who charge food and the 70 percent who charge clothing?

Will some of them go hungry? Will some have to quit education altogether? Will some be driven to take out even more expensive, sub-prime personal loans from unscrupulous lenders? These are all questions that need to be asked to determine whether CARD is really a good deal.

1. A Debit Card Isn’t Always Better than a Credit Card

People often think that they can keep better control of their finances if they use a debit card instead of a credit card. Certainly, that’s what Peter Means thought when he went back to graduate school.

But the New York Times reports that he later lost track of his balance and used the card seven times in one day when he didn’t have the funds to cover the transactions. None of his purchases came to more than $12, but his bank still charged him $34 each time. That’s $238 in a single day’s charges.

2. Check Out a Credit Union Credit Card

For-profit credit card issuers usually make significant income from fees and penalties for late payments and exceeding credit limits. Generally, credit unions either don’t levy these charges or charge much lower rates. Their annual fees are generally cheaper and they often provide longer grace periods.

3. Take an Interest in APRs

The annual percentage rate (APR) is the single most important factor when choosing your best credit card deal–but only if you don’t pay your balance in full every month. If you’re unlikely to incur penalties for late payments or exceeding your credit limit, but you sometimes keep a balance running over a number of months, then you should choose a card because of its low APR.

4. Know Your Credit Card Issuer’s Balance Computation Method

Credit card issuers use different balance computation methods:

• Adjusted Balance
• Average Daily Balance excluding new purchases
• Average Daily Balance including new purchases
• Average Daily Balance double-cycle

According to the Federal Trade Commission, that list is in order of preference, with the best method from a consumer’s point of view at the top. If your credit card issuer uses the double-cycle method, you could end up paying over 400 percent more in finance charges than you would if it uses the adjusted balance method.

5. If You’re Worried about Your Finances

If your personal finances are already in a mess, then you probably won’t be able to get a new credit card. However, if you currently have a good credit score, but are worried that could change soon (and right now millions of Americans are in that position), then you need to shop around for a card with low penalties.

There’s no point in getting a great APR if it’s going to shoot up to something ruinously expensive if you have to skip a payment or exceed your credit limit.

6. Take an Overview

You may have to live with your credit card for many years, so take your time choosing the best deal for you. There’s no single criterion but consider all the factors listed above and a few more–annual fees, grace periods, and rewards programs.

Before you start filling in applications, think how you plan to use the credit card, and calculate how much it could cost you over a year. Be realistic about your likely spending and repayment patterns, and take into account any penalties that you may incur. That’s the only way to ensure that you find the best credit card for your needs

May 26, 2009

President Obama on Friday signed into law a “Credit Cardholders Bill of Rights” that will constitute a major change in the way credit card issuers can treat their customers. In particular, issuers will lose the ability to increase interest rates “any time for any reason” as they have in the past. Many other common practices will also be curtailed or eliminated altogether. Among the major changes:

• Card issuers will no longer be able to hike interest rates on existing credit card balances, unless you are over 60 days past due on a payment. Even then, they will be forced to restore your old rates if you pay on time for the following 6 months.
• If issuers plan to increase rates, they must give customers 45 days notice, up from the previous 15 days.
• Card issuers will not be allowed to raise rates in the first year after a consumer obtains a new card.
• Card issuers will no longer be allowed to let a cardholders go over their card’s credit limit — and be charged an over-the-limit fee — unless the cardholder approves it.
• If a customer has balances at different interest rates — for example, a balance from a 0% introductory offer and a higher-interest balance — any payments must be applied to the higher interest balance first.
• Credit card issuers must send bills 21 days before the payment due date, up from 14 days.
• College students can no longer be issued cards if they are under 21, unless they can show proof of income or have a parent or guardian co-sign.
• Fees on subprime credit cards for poor credit customers will be severely limited.

While the new law obviously is good news for many cardholders who’ve been stung by interest rate increases despite “good behavior,” it will undoubtedly have other consequences as card issuers look to recoup profits that are being taken away by the new law. Among the possibilities:

• General interest rates could rise across the board, as issuers have less latitude to increase rates on riskier customers.
• Fees may increase on late payments, balance transfers, cash advances, international transactions, and other activities.
• Annual fees, rare in today’s environment, may reappear, especially for consumers with less-than-excellent credit histories.
• New fees not covered under the law may be created.
• Poor credit customers may not be able to obtain credit at any price.

The new law takes effect in about 9 months, but most credit card issuers have already begun taking steps to adjust to the new reality, with interest rates rising steadily in 2009. While some of these rate increases are in response to overall credit market difficulties, some are undoubtedly tied to the more regulated future that card companies were already anticipating.

May 12, 2009

Advanta Corp, which specializes in small business credit card issuance, has taken the drastic step of completely shutting down the issuance of credit beginning June 10. No new Advanta credit cards will be issued, and current Advanta customers will not be allowed to make further purchases with their cards. (Current customers will of course be liable for debts they’ve incurred.) While Advanta is leaving the door open to conducting business in the future, the new mode of operation will be to collect receivables from past customers and use that capital to pay off shareholders in Advanta’s securitization trust.

Advanta’s uncollectable debt had reached 20 percent and the company reported a loss of $76 million in the first quarter. At least one stock analyst predicted the company was headed for bankruptcy.

Advanta’s current small business customers will likely be scrambling for new credit lines, as the business credit card market has shrunk significantly. Credit card issuers that once saw the small business market as fertile ground for growth have scaled back their offers. Among the cards still marketed, interest rates have risen and card reward programs have been discontinued or watered down.

Using government debt data and census data, IndexCreditCards.com has determined that the average American adult is carrying $4,150 in revolving debt (mainly credit card debt) and the average American household is carrying $7,980 in such debt.

Data released earlier this month from the Federal Reserve Board estimates that revolving consumer debt in the United States totals over $955 billion. Using census data from 2006 to the present, IndexCreditCards.com estimates the adult (18 and over) population of the U.S. at 230,265,970 and the total number of households at 119,756,270. Dividing the total revolving debt by the population/household figures gives the resulting debt averages.

(Federal Reserve surveys suggest that about 75% of households have at least one credit card, and 25% have none. If we count only those households that report actually having one or more credit cards, the average household credit card debt would be $10,640.)

While still quite high, these numbers are actually down from the averages we reported back in October of 2008, when the average debt per adult was $4,150 and the average per household was $8,188. While the bleak economy might suggest that credit usage would increase, the economy has also caused many lenders to pull back on credit offers. In addition, many consumers have severely cut back on spending as their earning outlooks have become more cloudy.

Revolving debt is mainly debt from credit cards, although related revolving consumer debt such as home equity lines of credit are included as well. A caveat: Not all revolving debt is long-term debt accruing interest — some of this debt is paid off each month. (Although pinpointing how much debt gets paid off every month is difficult, various surveys have reported that 40% to 55% of card holders say they pay off their full balances every month.)

Weekly Averages:

• Average consumer credit card rate, overall market: 14.17%
• Average credit card rate, non-reward consumer cards: 12.80%
• Average reward credit card rate: 14.76%
• Average student credit card rate: 14.15%
• Average business credit card rate (non-reward): 11.77%
• Average business reward credit card rate: 12.84%

Interest rates on consumer credit cards jumped significantly this week, with Bank of America raising rates on some of its main offers, as well as a few hikes by other issuers. The average rate for credit cards across all consumer sectors jumped to 14.17%, the highest rate thus far in 2009, and up from 13.89% three weeks ago.

(In pinpointing a single “average” rate, IndexCreditCards attempts to include all of the various rate tiers that card issuers offer based on an applicant’s credit history, as well as the different rates associated with non-reward versus reward cards. Consumers with better credit histories can often find offers well beneath this average, while those with bad credit histories will likely be offered rates higher than the average.)

The average credit card rate for non-reward consumer credit cards increased to 12.80%, up from 12.47% previously, while the average rate on credit cards with rewards jumped to 14.76%, up from 14.50%.

While the averages listed above attempt to take into account the multiple tiers that many credit card issuers offer, IndexCreditCards.com also tracks the very lowest listed rates, those reserved for customers with the very best credit. This week those averages were also up, to 11.21% for the market as a whole (previously 10.84%), with a 9.77% average for non-reward cards (previously 9.29%) and a 11.83% average for consumer cards with rewards (previously 11.50%).

Bucking the trend, curiously enough, were student credit cards, whose average rate fell to 14.15% from the previous average of 14.26%. Are students really getting these lower rates, or are card companies using them as teasers before offering higher rate cards? It’s hard to say, but published offers do suggest that student rates have become virtually equal to those of the consumer market in general. If this is indeed true, it would be unprecedented, as student rates are generally much higher than those offered to older adult consumers.

Business credit card rates, which have been on the rise recently, have stalled, with no changes since last month. The average rate for non-reward business credit cards remain at 11.77%, while the average rate for business credit cards with rewards remains at 12.84%.

Financial institutions represented in the survey include Advanta, American Express, Bank of America, Capital One, Chase / Washington Mutual, Citi, Discover, PNC/National City, Pulaski Bank, U.S. Bank, Wells Fargo, and more.

March 31, 2009

American Express last week announced a new perk for holders of its consumer charge cards — double Membership Rewards points on gas and grocery purchases for the next year or so. (The program began March 22 and runs through March 15, 2010.) Double points can be earned on up to $1000 of gas and grocery purchases per month.

The increase in rewards is not automatic — American Express consumer charge card holders must either register at www.americanexpress.com/counttwice or call 1-800-794-1308 and use the promotional code 139150001 to receive the extra rewards.

Consumers that sign up for American Express consumer charge cards between April 1, 2009 and June 30, 2009 will get the extra rewards automatically for one year upon approval.

March 6, 2009

In what may be a sign of these tough financial times, Citi has launched a new credit card, the Citi Forward Card, that rewards cardholders for paying on time and staying beneath their credit limits.

Specifically, the Citi Forward offers the opportunity to get a quarter-point reduction in the card’s interest rate every time the cardholder goes three months making on-time payments and staying under the assigned credit line. (Cardholders can get the quarter-point reduction up to eight times, for a total maximum reduction of 2 percentage points. The initial interest rate on the card is 12.24%. (UPDATE: Initial interest rate is now 14.24%.) In addition, the card offers 100 extra Citi ThankYou points each month for these same behaviors.

The Citi Forward’s standard rewards program offers 5 ThankYou Points for every $1 spent on restaurants, books, music and movies, and 1 ThankYou Point for every $1 spent on other purchases.

Concurrent with the launch of the Citi Forward Card came the launch of Citi Forward by MySpace, a card with the same benefits listed above but also rewards its cardholders “for completing socially responsible acts, such as donating to a local food drive, going paperless, switching to energy efficient light bulbs, volunteering and more.”

For more information or to apply, click for the Citi Forward Card or Citi Forward by MySpace.

February 10, 2009 By Justin McHenry

American Airlines announced today that it will begin to transition to a “cashless cabin” this summer during flights within the United States and to and from Canada. Flight attendants will only accept credit cards and debit cards for purchases of food and beverages, headsets, etc.

Other airlines that have gone cashless onboard include Southwest Airlines and Alaska Airlines.