According to the National Retail Federation, gift cards will be–for the third year running–the most requested gift this holiday season. Meanwhile, the New York Times recently quoted analysts who believe that, by 2012, Americans will be loading more than $100 billion on all forms of pre-paid card, including Visa- and Mastercard-branded pre-paid “credit” (more accurately “debit”) cards, and retailers’ gift cards.

Given this appetite for these types of cards among consumers, it is unsurprising that the Credit CARD Act of 2009 included provision for their regulation. And, last week, the Federal Reserve published its proposals for protecting the public.

Credit Card Rates Not an Issue

Of course, most of the things that bother consumers most about traditional cards–credit card rates, spending limits, late payment penalties, and so on–don’t apply to pre-paid and gift cards. But that doesn’t mean that these financial instruments don’t raise concerns of their own.

The Fed’s discussion document points to a number of these:

Concerns have been raised regarding the amount of fees associated with gift cards, the expiration dates of gift cards, and the adequacy of disclosures. Consumers who do not use the value of the card within a short period of time may be surprised to find that the card has expired or that dormancy or service fees have reduced the value of the card. Even where fees or terms are disclosed on or with the card, the disclosures may not be clear and conspicuous.

The Fed’s Proposals

Unfortunately, any new consumer protections will not be in place in time for this holiday season. However, it is the Fed’s intention that they are going to be active for the end of 2010. And the principal areas that are likely to be covered are:

• Restrictions on dormancy, inactivity, and service fees
• Expiration date restrictions
• Additional disclosure requirements regarding fees

Credit Card Companies Calm

Credit card companies that issue pre-paid cards responded to the Fed’s discussion document with surprising–not to say worrying–equanimity. In a statement, Kirsten Trusko, who is president of the Network Branded Prepaid Card Association, said:

While we are still digesting the full impact of the Federal Reserve Board’s newly proposed rules related to gift cards, our general feeling is that the Fed’s proposal seems tough but fair and reasonable. In fact, much of what is being proposed related to expiration dates, clear and conspicuous disclosure of fees, restrictions on certain kinds of fees, etc., is already being done by many members of the industry. We look forward to working with the Board in the coming weeks to provide comments for improving on certain aspects of the proposed rules and resolving any unanswered questions they may have.

Credit card news reporting–including that in this column–tends to concentrate on consumer issues. But many small businesses rely heavily on their corporate credit cards to keep going. So why isn’t more attention paid–both by the media and legislators–to corporate cards?

After all, what’s good for small businesses is good for the American economy–and so for us all.

Failings of New Legislation

The new Credit CARD Act, which is due to come into force in February 2010, is expected to provide some powerful protections for consumers. Yet it ignores small businesses completely.

That’s because that law is an amendment of the Truth in Lending Act, which protects only: “a natural person who seeks or acquires, goods, services, or money for personal, family, household use other than the purchase of real property.”

Credit Card Regulation Could Help Small Businesses

So Rep. Neil Abercrombie (D, HI) introduced the Small Business Credit Card Act of 2009 (H.R. 3457). That, according to Mr. Abercrombie’s website, is:

…bipartisan legislation to protect small businesses with 50 or fewer employees from abusive practices, such as double-cycle billing, unannounced changes in payment due dates or interest rates hikes on existing balances. The Credit CARD Act will protect consumers from these practices.

So What’s the Problem?

On Friday, the New York Times reported that Mr. Abercrombie’s measure is facing opposition from his own side. The article claimed that, according to some congressional aides (although not her own), it is Representative Nydia Velázquez (D, NY) who is blocking the bill.

Nobody on Ms Velázquez’s team is confirming her opposition. But some others on the Hill are suggesting that she is unwilling to blur the line between individual consumers and corporate America.

Credit Cards Critical for Small Businesses

The National Small Business Association (NSBA) recently published its 2009 Small Business Credit Card Survey. It included an overview, penned by the NSBA’s chair, which said:

When asked in December 2008, 49 percent [of small businesses] reported using credit cards in the past 12 months to finance their firms. In late-April, however, that number jumped to 59 percent. This increase is occurring despite a rise in the number of small businesses reporting worsening credit-card terms. Asked to evaluate their credit-card terms over the last five years, 79 percent reported worsening terms–up from 69 percent in December 2008. Even more eye-opening: when asked if their credit card terms had worsened in the last six months, a whopping 75 percent reported that they had.

Credit Card Trends for Small Businesses Not Good for Lenders

As always, there are two sides to every story. Credit card companies have been tightening their terms at least partly because they too are suffering.

Indeed, only last week, Advanta, a lender that specialized in small business credit cards, filed for Chapter 11 bankruptcy, five months after it ceased lending. Since then, it’s been collecting on $2.7 billion that it’s owed, but has encountered increasingly serious default levels.

A Way Forward

According to the government’s U.S. Small Business Administration, small firms:

• Represent 99.7 percent of all employer firms
• Employ just over half of all private sector employees
• Pay 44 percent of the total U.S. private payroll
• Have generated 64 percent of net new jobs over the past 15 years

In these circumstances, protecting a line of credit that is so critical to so many small businesses may not be a luxury. Some would argue that it’s an economic necessity.

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.

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.

The U.S. House voted yesterday to bring forward the provisions of the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act). If passed by the Senate (and few would today place a bet on the likelihood of that), the Expedited Card Reform for Consumers Act would implement regulations very soon that are currently due to take effect only in February 2010. In particular, they would greatly restrict a card issuer’s ability to increase credit card rates or vary credit card terms and conditions.

As the two sides–legislators, and lenders–face off, their sheer blank-eyed, mutual incomprehension would be almost comical were it not so potentially harmful.

Credit Card Regulation Always Bad; Government Interference Always Evil

On the one hand, credit card companies believe absolutely that they have done nothing wrong. A period of grace between the signing of the Credit CARD Act, and its implementation has been used most constructively to ensure full compliance with the new law. As a statement from the American Bankers Association put it earlier this week:

The CARD Act represents the most sweeping reform of the credit card industry in decades and banks are working diligently to implement its provisions by next February, as Congress required. But this is an enormous task, requiring the complete reworking of internal operations, risk management models, funding calculations, employee training, and computer coding, all of which are necessary for servicing hundreds of millions of accounts every day.

Accelerating the time frame for implementation of the CARD Act will be extremely difficult, if not impossible, for card issuers.

Credit Card Regulation Always Good; Credit Card Companies Always Evil

Meanwhile, some legislators say that they have been inundated with complaints from constituents who claim that they’ve been gouged by their credit card companies during the grace period between the signing of the act and its pending implementation.

Rep. Carolyn Maloney (D,NY) commented yesterday:

Card companies have redoubled many of the abusive practices that brought Congress to pass my original reforms last Spring. Rather than use the time–time they asked for–since the bill’s signing in May to prepare for the changes, they’ve raised rates and fees with absolutely no regard for the dire position of millions of their customers.

I believe the card issuers have heard the message loud and clear today: their practices can no longer be tolerated. These reforms are crucial changes which level the playing field between card issuers and card holders.

The Good, the Bad, and the Evil

As is usual in such matters, both sides are both right, and wrong. It would have been totally impossible for the industry to have complied instantly with the Credit CARD Act’s requirements, so legislators had no choice but to provide a lengthy grace period.

But it was obvious from the start that credit card companies–already shaken by what seemed at the time to be a near-complete financial meltdown–were genuinely spooked by the prospect of new regulation. The idea that they would not take advantage of the grace period to protect their shareholder’s interests, and their profitability, lies somewhere on a continuum that has naivety at one end and stupidity at the other.

Allowing an unpoliced grace period before the implementation of financial services regulations is like installing a shark tank in a children’s petting zoo. The outcome is unlikely to be pretty, but you can’t really blame the shark.

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.”

This week, the Hill’s latest attempt at credit card regulation passed out of the key Senate Banking Committee. The Expedited CARD Reform for Consumers Act–which would bring forward the regulation of credit card rates to December 1–may have cleared its first legislative hurdle, but its chances of passing into law are not good.

Indeed, the Wall Street Journal yesterday described its enactment as an “unlikely event.”

Credit Card Rates Ever Upward

As described in Monday’s column, legislators claim that the months between the Credit CARD Act being signed into law, and its full implementation in February 2010, were meant to be a grace period. As Senator Mark Udall (D-Colorado) put it, it was intended to allow credit card companies: “…ample time to update their computer systems and implement the new, consumer friendly policies.”

But research by the Safe Credit Cards Project at The Pew Charitable Trusts suggests that companies have instead used the time to duck new regulation by substantially increasing credit card rates while they can.

Credit Card Terms and Conditions Also Questioned

But it’s not just rising interest rates that bother the people at the Pew project. They’re also concerned by certain credit card terms and conditions that have been described by the Federal Reserve as “unfair, and deceptive.”

When he recently gave evidence to a congressional committee, Nick Bourne, who manages the Safe Credit Cards Project, revealed a number of worrying practices. In particular, he highlighted:

• “Hair-trigger” penalties that result from occasional, minor infractions
• The application of payments in a way that maximizes interest, fees, and penalty costs
• Unrestricted overlimit fees
• Disproportionate penalty rate increases that can add thousands of dollars to a cardholder’s annual costs

Credit Card Companies Doing What Comes Naturally?

Some argue that credit card companies are merely taking the opportunity to manage their risks responsibly in advance of government regulation that threatens to destabilize their traditional business models. An editorial in yesterday’s Wall Street Journal, for example, said: “If customers are being taken to the cleaners, it is because lawmakers like Mr. Dodd [Senate Banking Chairman Chris Dodd (D-CT), out of whose committee the bill just passed] sent them there.”

The WSJ editorial continued:

In the unlikely event that Mr. Dodd’s new legislation passes, banks would limit their risk in other ways, such as canceling cards or refusing to extend credit to marginal customers. The unavailability of credit can also be a burden on struggling families, not to mention having a depressive effect on the economy.

That is a good point. But others might argue that card issuers are simply making up in the only way they know for the losses that they themselves created through irresponsible lending: by gouging customers.

But whoever is correct, greater transparency and honesty in the credit card market can surely only be a good thing.

In the past few days, two U.S. senators have in effect accused credit card companies of gouging their customers. First up, last Thursday, was Senator Mark Udall (D-Colorado), and he was followed on Sunday by Senator Charles “Chuck” Ellis Schumer (D-New York).

Both spoke out in support of a new bill, the Expedited CARD Reform for Consumers Act, which was introduced by Mr. Udall, and which–if passed–would bring forward the date on which credit card regulation under the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act) is going to become law.

Credit Card Legislation Failing Consumers

According to Senator Udall’s statement:

The Credit CARD Act was set to take effect in February of 2010 to give the credit card industry ample time to update their computer systems and implement the new, consumer friendly policies.

Instead, credit card companies have taken the time to game the system and get rate hikes in under the wire. As a result, millions of responsible credit consumers have been victimized by unfair rate increases and dishonest practices.

Credit Card Rates Up

In their remarks, the two senators both cited work carried out by the Pew Charitable Trusts’ Safe Credit Cards Project. Between December 2008 and July 2009, the Project monitored the deals advertised by America’s 12 biggest card companies, which between them account for some 90 percent of the nation’s credit card debt.

It found that the median annual percentage rate (APR) on offer in July was between 13 and 20 percent higher than that available in December.

Credit Card Terms Tougher

But higher credit card rates isn’t the only issue facing consumers according to the Pew Project. In evidence to a congressional subcommittee earlier this month, Nick Bourne, who manages the project, said:

Since passage of the Credit CARD Act, the situation has only become worse for cardholders. Americans remained exposed to widespread practices that the Federal Reserve deemed “unfair and deceptive,” and a variety of hefty penalty charges.

The Credit CARD Act of 2009 includes many important new consumer protections that are not currently scheduled to take effect until 2010. Until then, banks may continue to raise rates on outstanding balances, impose what the Federal Reserve called “hair trigger” penalty repricing, apply payments in a way that maximizes interest costs and charge unrestricted overlimit fees.
Our latest research shows that practices labeled “unfair or deceptive” by the Federal Reserve - practices at the core of the consumer protections provided in Title I of the Credit CARD Act - remain widespread, with some policies worsening since our December 2008 study.

Unreasonable Penalties

Among the least fair practices that Nick Bourne and his team uncovered were penalties for late payments and exceeding credit limits, which appear disproportionate.

This column plans to revisit those issues soon.

Nobody should expect credit card terms to settle down until the Credit Card Accountability, Responsibility and Disclosure Act (CARD) comes into force, probably in February 2010. Until credit card companies are forced to do so by the new legislation, they’ll continue to protect their profitability in every way they can.

Just this month, Bank of America wrote to some of its credit card customers who pay off their balances every month, warning that in future they’ll have to pay a new annual fee of anything between $29 and $99.

Meanwhile, in a similar move, Citigroup says that it plans to charge fees to those customers who fail to spend a minimum of $2,400 a year on their cards.

Credit Card Customers Outraged

People who pay their credit card bills in full each month are used to seeing themselves as the good guys. They’re responsible. They don’t incur late fees because they always settle their monthly bill on time. They don’t get charged for exceeding their credit limits because they never do so. They never pay any interest because they never have a balance beyond the end of the interest-free period.

In other words, they never pay anything for the convenience that carrying a card brings.

But, of course, administering their credit card usage, processing transactions, printing and mailing out bills, and all the other costs associated with running a credit card company have to be paid by someone.

While Others Struggle

Trouble is, the someone who pays is usually the person who can afford it least. And they’re not always the feckless, indolent caricature of popular myth.

Demos–which describes itself as “a non-partisan public policy research and advocacy organization”–has been studying credit card debt for some years. Earlier this summer, it published its latest report, which contains some uncomfortable reading.

Those Who Pay Already

Of course, some in low- and middle-income households have made bad decisions, and are living with the consequences. But many of those who lived responsible, exemplary lives were struggling before the credit crunch began to bite.

Between 2000 and 2006, the cost of living jumped 27 percent. But during the same period average household incomes were either stagnant or actually fell. No surprise then that so many people refinanced their homes, and ran up credit card debt to bridge the shortfall.

Last year, on average, low- and middle-income households owed $9,827 in credit card debt.

Old Enough to Know Better–But Little Choice

And, surprisingly, it’s seniors who are most quickly getting themselves into trouble. On average, people aged 65 years and over owed $8,138 to credit card companies in 2005. By 2008, that had jumped by 26 percent to $10,235, by far the biggest increase of any age group.

Less surprising is the reason for senior’s credit card spending. At $3,988 per household, they have more than twice as much medical-related debt on their credit cards than anyone else.

Take Some Credit for Compassion

Of course it’s irritating when a credit card issuer asks you to pay for the privilege of carrying a card. But remember that, if you don’t, someone’s grandmother may have to do without her prescription. Or somebody else’s grandfather may have to skip a vital visit to the dentist.

Credit card companies have, over the last few months, almost gone out of their way to make consumers hate them. They’ve increased rates, slashed credit limits, introduced fees, unilaterally amended credit card terms, and switched deals from fixed-rate to variable-rate. There’s been no end to the pain they seem to have been willing to inflict on cardholders.

Small wonder, then, that consumers are reducing their credit card debt by paying down balances. And they’re avoiding those increased credit card rates by turning to alternative payment methods.

Are Debit Cards Better?

But should you follow suit? Debit cards, for example, seem to have just as many highly expensive traps for the unwary as credit cards are.

The Center for Responsible Lending (CRL) has been campaigning against high overdraft fees for some years. And it points out that 46 percent of all overdrafts are triggered by debit card rather than credit card use.

Keep on Debiting

In the old days, your bank would decline a transaction if you had insufficient funds to cover it. Now, without giving you any warning, it allows the purchase, and charges you a substantial fee. The CRL found one student who’d made seven small purchases on his debit card when he hadn’t realized he was overdrawn. The total value of all seven transactions was $16.55. The total value of the charges levied by his bank for those purchases was $245.

And, as a recent New York Times editorial pointed out: “Credit card companies, for example, were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the FDIC, overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent.”

Even a payday loan would be cheaper. But, for a more reasonable comparison, earlier this month, indexcreditcards.com reported on credit card fees. It found that the average credit card late fee is $34.35, while the average over-the-limit fee is $36.74.

Credit Card or Prepaid Card?

You’d think that prepaid credit cards (they’re really prepaid debit cards) would be a cheap option. But that’s not necessarily so.

You can pay up to $99 just to activate the card. And after that there can be fees for just about everything: monthly fees, transaction fees, ATM fees, and balance enquiry fees. One man was so shocked by how much his prepaid card was costing him that he went back to the store to complain. There he was presented with a list of more than 24 different types of fees and charges for which he had unknowingly signed up.

It’s Who You Are, Not How You Spend

The CRL did research back in 2005, well before the credit crunch. It found that more than 70 percent of the $10.3 billion charged in overdraft loan fees that year had been paid by “…chronic borrowers, living on the margins of solvency.”

If you’re a member of that group, then you almost certainly ended up paying a great deal no matter which payment method you choose. But, if you’re not–if you are good at managing money and disciplining yourself financially–then the opposite is true.

So why not just stick with the credit card you know?