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.

Capital One announced yesterday the launch of the Venture Card, a travel rewards Visa credit card that offers double miles on all card purchases, with no restrictions on which types of purchases qualify for miles, and no restrictions on how and when miles are used — miles are good on any airline at any time, with no blackout dates. In this post Credit Card Act world, however, there is one feature consumers may not enjoy quite as much — an annual fee (waived for the first year, but $59 thereafter).

In addition to two miles per dollar charged, Venture Card customers can also get 10,000 bonus miles when they spend at least $1,000 in purchases with the card in the first three months of having it. Like all Capital One credit cards — and unlike almost all competitors’ cards — there are no extra transaction fees on purchases made outside of the United States.

The process for redeeming miles with the Venture Card may be a bit different than some consumers are used to, but in keeping with Capital One’s “no hassle” theme, it is straightforward. Cardholders pay for their travel purchases with the Venture Card, then contact Capital One via phone or over the Internet to redeem their miles against those purchases. Miles are essentialy worth a penny each in this formula — for example, a $300 travel purchase would require 30,000 miles if a cardholder wanted to completely pay with miles.

Interested consumers can apply for the Capital One Venture Card at http://www.capitaloneventure.com.

Credit Card Companies Wooing the Creditworthy

Last week, this column explored the theory that credit card companies are trying to lure the best customers from competitors by offering valuable new services, and benefits at extra cost. Well, as everyone knows all too well, some of those extra costs are already in place. And CNN reported Friday that the wooing has already begun with a number of credit card rewards programs being enhanced.

For example:

• The Chase Freedom credit card will now pay five percent (instead of three percent) cash back on certain types of purchases
• Citibank’s American Airlines-branded card has increased its reward from a mile a dollar to 1.2 miles a dollar
• JPMorgan Chase’s co-branded Marriott, and British Airways cards have had their rewards schemes upgraded

Credit Card Rewards–Why They’re Getting Better

As card issuers are finding their profitability squeezed by the writing off of bad loans, and new credit card regulation, they’re searching around for business models that will deliver more to their bottom lines. Right now, attracting new, creditworthy customers is their favorite strategy.

And, as CNN points out, credit card rewards programs have three key advantages for the companies:

1. They build customer loyalty
2. They attract people who are unlikely to default
3. They expand transaction volumes, so increasing the “interchange fees” (the charges levied on merchants) that benefit issuers by between one and two percent of the value of each purchase

Secured Credit Cards–an Innovation

Usually, the cheapest credit card rates are reserved for those with secured cards. That’s because the lender holds sufficient collateral to cover the balance, so the risk of default is close to zero. And now a company has come up with a novel idea that could give a whole meaning to the phrase “gold credit cards“.

Earlier this month, Gold Solutions Marketing, Inc. unveiled plans for secured credit cards that would be backed by gold bullion. The idea is that you would deposit your gold coins or bars in the company’s insured vaults, and then would be permitted to borrow up to 75 percent of their value. Any balances that are carried over would then attract interest at a rate of eight to 13 percent APR, which is certainly competitive when compared with most unsecured credit cards.

Some Limits

One potential drawback is that the price of gold fluctuates. That shouldn’t affect credit card rates under the scheme, but it does mean that your credit limit could rise or fall as the price changes. As a general rule, the price of gold drops as the economy improves, so–if the current recovery is sustained–it’s likely that those holding these cards will eventually find their spending power curtailed.

But Jeff Silver, who’s one of the company’s vice presidents (and who has one of those amazing, job-appropriate names), sees–unsurprisingly–only positives. He says:

The Gold Bullion Card is the ultimate win/win/win situation for the consumer, the bank and the economy. The consumer finds a new source of credit from assets he may already have, the bank issues credit cards to individuals without the bank incurring any risk of default, and into the economy pours a new source of credit and liquidity.

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 Regulation to Tighten?

Yesterday, the Federal Reserve unveiled fresh proposals that it hopes will provide new protections for credit card users. These are intended to prohibit many unreasonable fees, and they will also require banks to “reconsider” recent hikes in credit card rates. In a statement, Federal Reserve Governor, Elizabeth A. Duke said:

This proposal addresses two key costs of using a credit card–fees and interest rates. The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year.

Credit Card Terms

The Fed’s ideas (they’re a long way from being implemented) for regulating fees fall into three broad categories:

1. Every penalty fee would be capped to the dollar amount of the transgression that triggered it. So, for example, the fee for the late receipt of a $20 minimum payment could not exceed $20.
2. All inactivity fees to be banned.
3. One violation of credit card terms = one fee. So no more multiple fees for a single transgression.

Credit Card Rates

When it comes to credit card rates, the Fed has two proposals:

1. Credit card companies must advise customers why a rate has increased.
2. “Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.”

Nobody Loves the Fed

The Fed’s suggestions seem to have been met by near-universal derision, which can in itself be a considerable recommendation for any regulatory announcement. In covering the story, the New York Times and the Washington Post reported negative reactions from both bankers and consumer groups.

Kenneth J. Clayton, for instance, a senior vice president of the American Bankers Association, told the Times: “The issues addressed by this proposal are complicated and, despite good intentions, may mean higher prices for credit card customers, and some may see their accounts closed.”

Meanwhile, Nick Bourke, manager of the Safe Credit Cards Project at the Pew Charitable Trusts, complained to the Post: “They didn’t fully seize the opportunity.”

Credit Card Regulation Remains Challenging

So far, trying to make credit card use more fair has been like trying to produce a ballet for cats. As soon as the main players learn what’s required of them, they set about finding ways to do their own thing. Certainly, credit card companies have been exceptionally creative in getting around each new wave of regulation.

And some believe that–owing to its close connections to the banking industry–the Fed is the wrong body to regulate card issuers. So when it was recently suggested that the proposed new Consumer Financial Protection Agency should be housed within the Fed, many were unhappy.

For example, House Financial Services Committee Chairman, Barney Frank (D-MA), said in an email sent to this reporter yesterday: “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.”

Credit Cards Vital

One thing’s for sure. Living without credit cards in modern America is difficult. And a fair way to make them affordable needs to be found.

Credit CARD Act

When, last year, legislators wanted a sharp acronym for the law that would create this week’s credit card regulations they came up with “Credit CARD”, which stands for “Credit Card Accountability, Responsibility, and Disclosure.” And consumers are about to find out just what the last of those, Disclosure, means.

Because, from now on, every monthly statement must contain two additional pieces of information. First, they must tell cardholders how long it will take them to pay their current balances down to zero, assuming they continuously make only minimum payments. And secondly, the statements must reveal how much they would have to pay each month if they wanted to pay off their balances over the following three years.

Credit Card Companies Unhappy

Few credit card companies are likely to welcome this innovation. The website of BB&T, one bank that has for years been candid with its customers about these matters, explains why:

Credit card companies usually calculate the monthly minimum payment due as a percentage of your outstanding balance. The percentage is usually more than the interest rate they are charging on your balance, but low enough to make the minimum payment amount seem attractive. After all, they make money by charging interest on what you owe.

Credit Card Debt That Keeps on Taking

And the site goes on to give an example of someone with a $5,000 balance taking virtually 25 years to pay off their credit card debt making only minimum monthly payments. That’s with absolutely no new transactions, penalties, or other fees.

That wasn’t a real-life example, because the bank deliberately chose simple figures to illustrate its point. But those figures are sensible, if not conservative (the credit card rate, for example is 12 percent) and the scenario is all too real.

And Then There Were Two

Most of the provisions of the new Credit CARD Act came into force Monday. And that was the day that Discover Financial Services chose to unveil its new website, which is designed to promote responsible credit card use among its customers.

This website, according to a company press release, offers a number of informative articles and videos that could assist cardholders in managing their money better. And it also provides some online tools that genuinely could be helpful. The press release describes these:

• The Spend Analyzer: this tool offers cardmembers a clear, visual way to track and compare their card spending so they can make informed spending choices
• The Paydown Planner: this option helps cardmembers create a simple plan to pay down their balances
• The Purchase Planner: this tool helps cardmembers understand how a large purchase can affect their account

Good Credit Card News

Not everyone welcomes this week’s new credit card regulations. Some believe that government regulation is rarely effective and often brings unintended consequences.

But it is hard to see how the greater openness and transparency ushered in by the Credit CARD Act’s Disclosure provisions can be anything other than widely beneficial. And, anyway, Credit CAR Act would have been a terrible acronym.

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–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.