Credit Cards in the News

In an attempt to generate additional giving this holiday season, the Salvation Army is giving patrons the opportunity to use their credit card when passing by donation kettles. In all, over 500 kettles will have credit card processing capability and are located in higher traffic areas throughout the United States.

However, before swiping your credit card, we recommend that you ask the Salvation Army representative, how your personal information is being secured. If your credit card information was stolen, you would likely not be held responsible for unauthorized charges, but in the case of a debit card which is tied to your checking account, you have little to no liability protection in these cases. For a small donation of a couple of dollars, identity theft is quite a price to pay.

From an innovation perspective, when patrons would place money in a kettle and not receive formal recognition for their donation, these kettles are equipped to print out a receipt which can be used for tax deductions. We applaud this advancement in technology which benefits a worthy cause. If you come across one of these “eKettles” this holiday season, just make sure that  you feel confident your credit information won’t be compromised.

The long lost retail art of using layaway instead of credit is making a comeback. A layaway program benefits consumers because it allows them to make payments in installments without incurring interest charges. Retailers are able to capture the sale and they don't have to release the item until it has been paid for. Therefore, consumers can reserve products early in the Holiday season, setup a payment program, and have the item paid in full by the time Christmas rolls around.

Because of the ease in obtaining credit and the associated purchase rewards, layaway programs had been viewed as archaic until recently. K-Mart reintroduced the concept last month based on customer feedback. Other retailers are reporting spikes in their layaway programs as well. WalMart abandoned their layaway program two years ago and doesn’t have plans to bring back, given the recent surge in interest. Retailers also report that an advantage of layaway programs is that they bring customers back into their stores.

With the recent credit crunch and consumers feeling cash strapped, it makes sense that layaway programs are becoming more popular. Oprah captured current conditions best: “Remember Layaway? That is where we are heading.” 

Other Resources:

• Wikipedia: Definition of Layaway
• NY Daily News:  Stores Drag Layaway Out of Storage
  

While it could be convenient to pay out of pocket medical expenses on your personal credit card, Consumer Reports states that this is a dangerous trend that could result in significantly higher interest rates for consumers. If a consumer misses a single payment or a promotional rate expires, card holders could be stuck with hefty fees on non-insurance covered items.

According to Consumer Reports, credit card companies have started targeting doctors and other medical professionals to encourage new credit card products on patients in order to avoid the hassles of bill collection. Often consumers are confused about what medical expenses their insurance will cover and what is truly considered “out of pocket”. Often it can take months for a doctor to receive payment for all services. By offering a “0% credit card offer”, medical professionals can receive payment right away, patients can pay on credit versus cash and credit card companies can obtain a new customer.

Consumer Reports notes that consumers could charge an estimated $135 Billion of out of pocket medical costs on credit cards by 2015. While potentially convenient, medical related charges on credit cards can add up quickly and end up leading to poor financial health. Rather than carry medical credit card debt, the best practice is to speak with your doctor’s staff up-front and try to negotiate a payment plan that avoids the use of plastic credit.

Consumer Reports: New Market for Credit Cards

JP Morgan Chase received high marks from industry experts given their ability to steer clear of the sub-prime mortgage mess. However, the declining financial health of American consumers has caused the bank to suffer losses in their credit card division. A recent regulatory filing by the bank warns of the potential for substantial credit related losses in the future.

In Q3, JP Morgan's credit card portfolio had a delinquency rate of around 5% which is lower compared to recent reports by competing firms. Given that the highest delinquency rate in the past twenty three years was 7% in March of 2002 (last recession period), it appears that the credit card industry is headed for difficult times in 2009.

The US State Department has issued a warning to approximately 400 passport applicants in the Washington D.C. area of a security breach in one of their databases. The information that was compromised by a State Department employee and a Postal Service employee could be sold to thieves to commit credit card fraud.

In response to the security violation, the State Department is offering the applicants free credit monitoring for a year as well as assuming liability for any charges which are incurred as a result of illegal activity. This black mark for the State Department comes on the heels of additional breaches in which State officials were accused of reviewing the passport records for popular US figureheads.

Because of the increase in "hacking" of the State Department systems, lead officials have ordered a complete revamp of their internal security systems.

   

In recent weeks, we have heard about rising delinquency rates among the largest issuers of credit cards. According to the Federal Reserve Board, the delinquency rate on credit cards for all banks reached 4.9% in Q2 of 2008. This delinquency rate is at the same level as in late 2001 when the US economy was facing difficult times.

 

Now, a group called the Financial Services Roundtable which represents over 100 of the largest banks is recommending a pilot program to federal regulators that would forgive up to 40% of outstanding credit card balances for approximately 50,000 consumers who are having a difficult time paying down their balances. Such a program would not only give some relief to those who are also having difficulty with paying mortgages or car loans, but it would provide banks with the opportunity to receive a write-off on their financial books. With average consumer credit card debt hovering around $10k, this would equate to roughly $200 Million in write-offs - representing 0.02% of the estimated total American credit card debt.

Those who support the pilot program aren't advocating the behavior which drove consumers into the inability to pay their debt obligations. However, some relief will soften the black cloud hanging over these consumers from getting on the right track or implementing an effective program toward a debt free lifestyle. As a spokesperson from the Financial Services Roundtable put's it from an interview with the Associated Press, "Both parties win".

Discover just got a huge victory heading into a potential difficult year of declining credit card use. Late Monday, Mastercard and Visa settled with Discover for up to $2.75 Billion over an antitrust lawsuit filed in 2004. Mastercard will pay Discover nearly $900 Million in 4Q of 2008, while Visa will pay Discover around $500 Million quarterly in 2009.  

American Express received a larger settlement in the pas year for more than $4 Billion from Mastercard and Visa based on a similar lawsuit. In each suit, American Express and Discover claimed with the Department of Justice that Visa and Mastercard prevented banks from issuing debit or credit cards under the Amex and Discover networks, thereby violating antitrust laws.

The largest of credit card issuers aren't the only ones seeing the number of monthly delinquencies rise. Target stores announced last week that the company's annualized percentage of write-offs had jumped from 8.7% in July to 10.1% for September ( at total of $668 Million) - quite a large percentage increase in a three month period.

Following other credit card companies, Target has tightened its credit criteria by reducing open lines and increasing the credit criteria to establish a new account. While the 2008 holiday season for retailers appears bleak, issuers like Target don't want to be hit with a double whammy - lower sales and losses on sales due to non-paying customers.
 
William Blair & Co. lowered their earnings estimates on Target based in part on the company's delinquency rate falling sharper versus companies like Citi Bank, Amex, Chase and Discover.

Instead of relying on credit lines to make payroll or cover short-term operating expenses, a growing number of small businesses are using credit cards to fund cash flow. The Miami Herald recently published an article quoting the dangers of this approach from various university sources. They also reported that according to the National Small Business Association only 28% of small businesses sought loans from banks during the prior twelve months.

The biggest problem that small business owners might not be aware of is teaser rates charged by credit card companies. A teaser rate is used to lure prospective card holders by offering a promotional or introductory interest rate on purchases or transfers for a period of time (e.g. 6 months). After the teaser rate expires, an account holder's interest rate changes to a regular interest rate, which can rise in some cases from 0% to as high as 18%.   Teaser rates became wildly popular during the recent mortgage boom and bust when adjustable ARM rates were offered to potential home buyers. A large reason for the sub-prime mortgage crisis is attributed to customers who couldn't make their mortgage payments after their interest rates adjusted from the introductory ARM to the regular rate.   

American Express OPEN recently published the results of a 602 respondent survey in which 63% of small businesses reported being impacted by the tightening of credit versus 50% in August. Not only do small businesses risk paying more in interest due to using their credit cards to finance operations versus lines of credit, but in most cases, small business card holders personally guarantee their business credit cards which can have an adverse effect on their credit scores.

Other Resources:

• Common Sense and Law about Credit Cards
• Teaser Rate Mortgage Defined

As mentioned previously, Congress is working on a credit card bill of rights intended to protect consumers from the onslaught of fees and restrictions imposed by credit card companies. While the intention of government is to regulate how credit card issuers manage or structure credit card accounts, the new legislation could make it much more difficult for a consumer with poor credit to get a credit card.
 
The majority of credit cards for bad credit contain higher than normal fees for establishing a new account. The primary reason for charging higher fees to open a new account is that it reduces the future risk of credit card issuers losing money. Remember, these companies are extending credit or trust to individuals who don't have a sound credit history. Price controls on low-limit credit cards would make it more difficult for these companies to break-even or grant credit to those with a poor credit history. The legislation proposes that new account fees cannot exceed 50 percent of the credit line. In other words, if a credit card for bad credit offers a $500 credit line than the startup fees cannot exceed $250.
 
To open a new credit card for $250 is an expensive proposition, especially for someone who is likely to have a lower income. However, the delinquency rate for these types of accounts is over 40%, so only 60% of the time do issuers actually get repayment on the credit or funds that they have issued. Issuers must cover the risk associated with lending to this credit segment some way and one of the most practical ways lies in high up-front fees.
 
Credit cards have become a necessary device for carrying out everyday living. If issuers of credit cards for bad credit are given further restrictions on fees which would prohibit them from offering a profitable credit card product, the net effect could be far fewer credit card options for those with a credit score under 580. Moreover, it will be even more challenging to repair or improve a bad credit score.