Credit Cards in the News

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.

According to current reports, its likely that credit card companies will be spending less on television spots in 4Q. The service which tracks advertising spends by industry, Nielsen Monitor-Plus, forecasts that ad spending for credit card services could continue to fall 20% from just a year ago.

In September, the ad volume for companies that promote a Mastercard, Visa or other brand was down 24% versus September of 2007. Advertising volume had been higher during mid-summer, but the recent financial meltdown has caused a shift in increased cost control.

Not surprisingly, marketers of mortgage services dropped by 50% in September, which was consistent with mid-summer declines for the segment.

  

Most everyone trusts the independent product opinions of ConsumerReports.org. In the October issue, which is now in newsstands, Consumer Reports gives their opinion as to the best and worst credit cards for consumers. Without question, they reference that the industry is changing and card holders will experience shifts in their accounts.  

According to Consumer Reports, a list of some of the best and worst credit cards are listed below.  

Best Credit Cards:  

• Capital One Platinum Prestige
• Capital One No Hassle Cash Rewards
• Chase Freedom Visa
• Discover More
• Chase Perfectcard  

Worst Credit Cards:  

• First PREMIER®
• HSBC American DreamCard
• New Millennium Visa or Mastercard  

In order to counteract modifications to your credit card count, Consumer Reports recommends that regardless of your credit, you should contact your credit card company. Greg Daugherty, Executive Editor of Consumer Reports, mentions mentions "Some issuers have doubled or tripled interest rates even on those with good credit and an account in good standing."   Some tips that Consumer Reports recommends for sound credit card management are:

(1) Consolidate to lower interest rates on credit cards with balances near their credit limit

(2) Review letters from credit card companies that look like promotions, but in actuality have account changes in them

(3) Call your credit card company on a routine basis, just to check in

(4) Consider your local bank or credit union as a credit option - they are offering interest free products to lure new accounts

Start checking your mail! With the recent credit crunch and tightening of credit criteria for new credit card account holders, credit card companies are sending out fewer direct mail credit card offers. Most consumers are probably thrilled to be receiving less of these unsolicited offers for new credit, however its a real sign of the poor financial times we are in. It's not unusual for Individuals with good to excellent credit to receive over 5 offers for a new credit card per week!

According to market research firm Synovate, in Q2 of 2008, credit card companies sent 17% fewer solicitations to potential card holders versus Q2 of 2007. This equates to around 180 Million fewer pieces of "junk mail" that flowed through the United States Postal Service (USPS). If there is one organization that really felt the impact of this, it would be the USPS which would have received $75.6 Million less in revenue.

When I started looking into this, I too realized that I have seen a drop in solicitations over the past 3 months. While credit card companies have reduced offline direct mail marketing efforts, they are still eager to sign up potential cardholders that have a credit score over 720. You can still expect that these individuals will qualify for a higher credit line or lower interest due to the fact they are most likely to avoid defaulting on payments which causes quarterly profits to sink.

The state of Ohio treasurer, Richard Cordray, and Democratic Attorney General candidate hopeful are campaigning together that they will restrict the aggressive or "predatory" credit card marketing of credit card companies on college campuses. Both men recently spoke during a press conference on the Ohio State University campus in Columbus. There are currently two bills before the State Congress. This follows a similar effort by the Illinois treasurer to close in on "The Sandwich Loophole" that we posted last week.

Credit card companies are particularly fond of the college demographic because most students are living on their own for the first time (18 to 21 years of age) and searching to establish a credit history. They also are somewhat naive to all their credit options. Typically, when students graduate from college not only have they racked up debt, which can lead to an ongoing interest income stream for card issuers, but they also tend to demonstrate brand loyalty into their twenties. In other words, they continue to stick with a financial institution for many of their personal finance needs.

By focusing solely on the novelty items that come with signing up for a new credit card, some cardholders forget that they ever applied for a credit card, which can damage credit scores due to unknown fees; like an annual fee that is charged to the account. Young people are particularly short on finances, so getting a Free T-Shirt or free novelty item is nice to have. At the start of the school year, when marketers are on campuses throughout the United States, students even post on message boards where they can get a cool giveaway just for providing their social security number. By legislating credit card marketers on college campuses, this will hopefully reduce the number of negative instances in which students find themselves in when they graduate. 

The best advice is simple: sign-up for a credit card because you need it and you like the terms. Remember, nothing is free in life.

With the volatility in the stock and financial markets, word on the street is that credit card companies will look to reduce potential bad debt exposure by reducing credit lines on credit cards. A spokesperson from the American Bankers Association, Carol Kaplan, commented "Banks are cutting their credit limits, they're doing it to everyone."  

 

This means that cardholders will have less credit which they can use toward monthly purchases or for making balance transfers to more attractive interest rates. By law, your credit card issuer must inform you of changes to your account. Therefore, you will want to be on the lookout for changes to your credit report, email notifications and those fine print Terms and Conditions letters that you receive periodically in the mail, but throw away because of all the legal jargon.

If negative changes are made to your credit card account, many banks will still love to have a consumer with good credit / income as a new customer, so remember you still have the option to transfer your business elsewhere; in these times, just wait until you are approved first.

The public comment period recently closed for new credit-industry regulations proposed by U.S. Agencies. The goal of the Federal Reserve is to finalize new regulations by the end of this year.
 
As more consumers begin to rely on their credit cards to meet their family's cash-flow needs, this becomes a very important topic. Consumers have been complaining that that the credit card companies are nothing more than institutional loan sharks who seem to raise interest rates and add fees and penalties arbitrarily -- forcing consumers to rely on the cards even more.
 
Some of the proposed changes are as follows:

• Prohibiting a rate increase on an outstanding balance
• Prohibiting companies from applying additional payments in a manner to maximize interest charges
• Allowing consumers to opt-out of automatic overdraft payments before any fees or charges are imposed (on deposit accounts)
• Requiring that institutions give consumers a reasonable amount of time to make payments
• Cap fees on secured credit cards
• Put an end to "two-cycle" billing in which finance charges are imposed on card balances before payments are subtracted
• Require that institutions offer the option of a fixed credit limit that cannot be exceeded

The Credit Card Companies are digging in for a fight and certainly won't accept this proposal quietly. They are already trying to offset future losses by freezing and reducing their consumers' credit limits; a reduction in the interest and fees they can charge will certainly cause some additional financial problems for these institutions.

Other Resources:

• FTC.gov

It was recently reported that John McCain and his wife Cindy may have as much as $250,000 in credit card debt. They also reported that they have an American Express card for a "dependent child" that is carrying a balance of between $15,000 and $50,000. On the flip side, Barack Obama reported no credit card debt in his annual financial disclosures. On the surface, one may argue that John McCain is fiscally irresponsible with his personal finances by carrying such a high debt load. A stretch would be to propose that McCain would carry his debt-loving ways into office increasing this Country's overwhelming deficit. Obama, on the other hand, who has no debt would be careful not to overspend the tax payers money.
 
Upon closer examination, John and Cindy McCain has a net worth of over $40 Million dollars. To put things in perspective, his current consumer debt situation is the equivalent of someone with a net worth of $250,000 having less than $1,600 in credit card debt. Hardly seems worth mentioning his debt when you look at it that way.
 
Does McCain's use of Credit Cards impact your opinion of his political value?

Other Resources:

• Debt Consolidation Credit Cards
• McCains Report More Than $100,000 in Credit Card Debt
• McCains Money