Credit Card Industry Prepares for Shuffling

There has been much grumbling among credit card execs who oppose the pending changes in the way they do business. The new credit card laws will put severe limits on how much and how often interest rates can be raised. This is bad news for big corporations like CitiGroup and Bank of America, who generate much of their revenue from interest income.

On the other hand, smaller players like JP Morgan Chase, Discover, and American Express are in pretty good shape, even with the changes at hand. That's because these companies didn't expand their lending as quickly as their larger competitors. As a result, they haven't suffered as much from the sub-prime credit crisis and the upcoming credit card reform.

JP Morgan Chase is the largest issuer of Visa credit cards. American Express and Discover have their own card networks, and don't rely heavily on repricing and interest for their revenue. AMEX has reported losses, but the company has managed to stay profitable throughout the turmoil.

What will a restructuring of the big credit players mean for the average cardholder? Hopefully it will mean more competitive credit card terms, but it could also mean an end to "easy credit".

The Credit Card Industry Will Survive, Says Study

With all the talk of reform and banking woes, you might be wondering if the credit card industry is really in trouble. While industry insiders would like you to believe that credit card reform is the death-knell of their business, the truth is that the industry will live on.

A recent study from Keefe, Bruyette and Woods suggests that credit cards will continue to be a primary source of bank revenue even after the new laws go into effect. And there's more reform on the horizon; Congress is deciding what to do about interchange fees, those fees that merchants have to pay for the ability to accept credit card payments.

The study's analysts believe that interchange fee reform will affect Capital One, American Express, and Discover more harshly than Visa and MasterCard. The latter two companies will be more affected by interest rate reform, but experts predict that all of the primary card issuers will survive the meltdown.

Credit card stocks are on the rise again, a hopeful sign that the economy is clawing its way out of the grave. This is a great opportunity for new card holders to learn from the mistakes of their predecessors.

Credit Card Borrowing Declined 13.1% the Annual Pace in February

As more individuals make an effort to pay back their debt, consumer borrowing has been declining. Revolving credit – mostly credit-card borrowing, has declined at 13.1% the annual pace in February, while non-revolving credit, like car loans and school loans, dropped at 1.6% the annual rate in the same month.

The American Bankers Association released survey results that showed defaults on consumer loans dropped greatly during the fourth quarter. It’s too soon to say the worst is over though, as the credit card defaults are still at historical highs. J.P Morgan Chase (as well as other credit card lenders and loan lenders) predict they will continue operating at a loss for the rest of 2010.

Credit card issuers are continuing to reduce credit lines when issuing credit, canceling cards for their riskiest customers and closing unprofitable credit cards. Banks are writing off more credit card debt as noncollectable. Bank of America Corp reduced the affinity card programs typically targeted to college alumni associations, charities and social groups by 12%.

As consumers reduce their spending to focus on paying back debt, the recovery of the economy will also be slowed. While individual households may benefit from less debt, less consumer spending hurts the economy as it accounts for about 70% of the economy’s financial picture.

Credit Reform and Consumer Responsibility

With all the headlines lately, you'd think that the upcoming credit card reforms are the cure-all for the debt that plagues modern Americans. And you'd be half right; credit card companies should play fair, and if it takes a rolled-up newspaper (in the form of tough legislation) to make them behave, so be it! But reform is only one half of the equation. All the legislation in the world isn't going to do much if consumers don't control their spending.

If there's one good thing to come out of the recession, it's the fact that millions of us have had to take a good, hard look at our financial situations. It's scary at first, especially if you've been buying things here and there and making minimum monthly payments. You might be shocked to see how much of your income is being eaten by interest, bank fees, and finance charges. The sour economy has given us an opportunity to rethink our spending habits, and the upcoming credit card reforms will make it even easier for us to reduce our credit card debt.

With that in mind, it's important for us to remember what we've learned once the economy struggles back to its feet and credit becomes readily available once more: don't carry more cards than you need; don't carry a monthly balance on your cards; and don't spend beyond your means. Cardholders will soon have new, more enforceable rights. Let's live up to those rights with a new level of responsibility.

Will Banks Survive the Coming Wave of Credit Card Write-Offs?

It's a scenario we're all too familiar with: consumers take on too much debt and, because of a combination of shady lending practices, a soft job market, and the increasing cost of living, find that they have no hope of paying off that debt. It happened with mortgages, and now the scenario is poised to repeat itself with credit cards as more and more cardholders give up hope of ever paying off their balances.

In the past, credit card write-offs stayed pretty much on par with layoffs. Now lenders are seeing their number of uncollectible debts increase more rapidly than job losses.

The bank stress-test predicts that America's 19 major banks could lose at much as $82.4 billion in bad debts by the end of 2010. Experts believe that the figure could go much higher if the national unemployment rate reaches 10% (it's currently at 8.9%). In such a scenario, the credit card industry could lose as much as $186 billion.

In recessions past, homeowners were able to tap their home equity to stay afloat. That's no longer an option for millions of homeowners. And, in a survival situation, "optional" bills, like credit card payments, are often the first to go. This doesn't paint a very optimistic future for the banks. Only time will tell which ones survive and which ones fold.

Some Salvation Army Kettles Now Take Plastic.

It’s that season again: the leaves are falling, the holidays are coming, and the Salvation Army’s red kettles will soon be out in force. If you’ve got the holiday spirit but don’t like to carry cash, consider donating with your credit or debit card. You can swipe your card right in person at certain locations, or you can make a donation online at the Salvation Army web site.

Salvation Army members say that this convenient new payment arrangement was put in place to help young adults give more. The organization is also branching out online by incorporating social networks such as Facebook.

The nation's high unemployment rate has caused many families to turn to the charity for aid. The Salvation Army helps feed and clothe 4.5 million people during the holiday season, and they accept donations of money and goods all year long.

The Red Kettle campaign will kick off on Friday, November 13th. To find out more, visit the Salvation Army’s web site today.

Will New Credit Card Law Cause a Rush to Get New Cards?

Beginning in February 2010, it will become more difficult to get credit cards for those who are under the age of 21. That is because under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, that restriction will be imposed on those who try.

The only exceptions for this are if a parent, guardian our spouse is willing to co-sign the application which makes them liable for the charges on the account as well. Or, there must be proof of sufficient income to meet the financial obligations of the card.

The fear is that before this law goes into effect in February, there will be a run to apply for and obtain credit cards since once one is issued, it will fall outside of the law's provisions.

In 2004, over 75 percent of undergraduates had at least one credit card. And now, that number is over 84 percent. Most do not pay off their balances every month and the median debt amount held by this group is $1,645 as opposed to around $950 in 2004.

Students in this age category show a clear need for guidance when it comes to using credit cards and paying their balances. Yet, one of the overriding protests to this law is that since they are able to vote, drive and enlist in the armed forces, they should be able to get credit cards, too.

The better course of direction with regards to credit cards and their used would be to educate about the merits of using them responsibly. But, ultimately, it is up to the students and their parents to make sure that their use of credit cards is based on sound logic and with forethought to the consequences.

Bank of America Slammed by ‘Debtor’s Revolt’

Ann Minch started a debtor’s revolution on YouTube when she told Bank of America to stick her credit card debt in their bailout pipe and smoke it. Angered that her interest rate had jumped from 12.99% to 30% for no good reason, Minch went on an angry video rant targeting the bank.

The result? Bank of America renegotiated her interest rate within 5 days, and lots of other angry cardholders jumped on the bandwagon with horror stories of their own.

Some debtors are determined not to repay a cent of their credit card debt until the bank lowers their interest rates. Others want their accounts settled immediately, without the 180-day delinquency that Bank of America requires before settling an account. Many are angered that Bank of America continues to charge such high interest rates after receiving billions of bailout dollars - especially at a time when so many customers are struggling to find work and pay their bills.

YouTube user ‘efrasier21mbf’, a former assistant branch manager for Bank of America, posted a video of his own in which he supports the debtor’s revolt. He has harsh words for Bank of America due to the practices he witnessed during his time as an employee, and his own experience with an interest rate that jumped from 5.1% to 32% — even though he was never late on a payment. At the end, he offers the bank a deal: settle his account now for a large cash sum, or never see another penny on the loan.

Want to witness the debtor’s revolt? You can watch Minch’s original video here. Huffington Post also featured several follow-up videos here. (Warning: Some videos contain strong language.)

The Credit Card Industry Will Survive, Says Study

With all the talk of reform and banking woes, you might be wondering if the credit card industry is really in trouble. While industry insiders would like you to believe that credit card reform is the death-knell of their business, the truth is that the industry will live on.

A recent study from Keefe, Bruyette and Woods suggests that credit cards will continue to be a primary source of bank revenue even after the new laws go into effect. And there's more reform on the horizon; Congress is deciding what to do about interchange fees, those fees that merchants have to pay for the ability to accept credit card payments.

The study's analysts believe that interchange fee reform will affect Capital One, American Express, and Discover more harshly than Visa and MasterCard. The latter two companies will be more affected by interest rate reform, but experts predict that all of the primary card issuers will survive the meltdown.

Credit card stocks are on the rise again, a hopeful sign that the economy is clawing its way out of the grave. This is a great opportunity for new card holders to learn from the mistakes of their predecessors.

Reducing Credit Limits Across the Board

The credit industry is in the midst of a financial storm and while battening down the hatches might keep the elements at bay for now, another impeding storm is on the horizon. Barack Obama's new credit laws have already sent shockwaves through the credit industry and with further laws about to be unleashed it seems that the once serene landscape for the credit companies is about to become a lot more cloudy.

The new laws restrict the credit companies from making profits in the same way as before, which why they are now trying their best to cut as much waste away as possible.In the past lenders have lured potential customers with low interest rates and no annual fees that's about to change, however, and companies are now scrambling to find ways to cut their credit lines.

Many companies are now embarking on a mass detox program, purging all inactive accounts in an effort to reduce their liabilities.Experts predict that in the coming months 20% or $1.2 trillion worth of credit will be cut and by the end of 2010 that figure is set to rise to $2.7 trillion or 50%.

It's not just inactive accounts that are going to be cut; borrowers who are deemed "subprime" could see their credit lines disappear, as could those weak credit and switch lenders.This recent information highlights the precarious nature of the industry and the vulnerability of the credit card companies. For those who potentially face having their credit limits revoked, these are worrying times and another sign that money lenders are adopting a much more ruthless stance towards both current borrowers and prospective clients. Making sure you don't fall into the red zone and that you maintain a good credit history is now more crucial than ever because one too many mistakes and you could find your credit line cut.

2010 Credit Card Reform: Will Good Cardholders Get the Shaft?

We’ve all been warned not to carry a balance from month to month on our credit cards, and especially to avoid making minimum monthly payments. That’s because minimum payments, especially on large balances, can take half a lifetime to pay off, at which point you’ve probably paid more in interest than in capital.

The new credit card laws will compel credit card issuers to spell out just how long it will take to pay off your balance by making minimum monthly payments. While this will surely be an eye-opener for many people, there’s one group that won’t benefit from the new rules: the responsible cardholders who paid off their balances on time and in full every month.

Rather than being rewarded for their good behavior, these cardholders will suffer as interest rates and fees continue to skyrocket, and credit limits and reward programs are scaled down.

If you’re a responsible cardholder, continue to pay off your balance at the end of every month. Even if the card companies aren’t recognizing your self-control, you will maintain a good credit score - and that will come in handy in the coming days when credit isn’t as readily available as it once was.

Will Europe Follow in America’s Financial Footsteps?

When it comes to living beyond one’s means, Americans are legendary. But that doesn’t mean we’re alone. In fact, the Financial Times has recently reported that Europeans are going through pretty much the same debt fallout that Americans are experiencing, due to many of the same factors - namely, overspending and easy credit.

Now European lenders are preparing for a tsunami of debt default similar to the one that hit American banks last Fall. Some estimates expect that 7% of Europe’s consumer debt will go bad. With total consumer debt topping $2.5 trillion, that’s a lot of default waiting to happen.

The same article reveals that households in the UK have a higher percentage of debt to disposable income than US consumers. Still, debt default in the UK is expected to be about half that of America.

If you have a heavy debt load and think you might be in danger of defaulting on your credit cards, call your company’s card services division and let them know what’s going on. They might set you up with a payment plan that will help keep your payments at a manageable level.

American Express Helps Families Control Spending

 American Express has announced a new service that helps families stay within their budget. Now, primary account holders can set spending limits on each additional card on their account. This is especially helpful for parents who give extra cards to their teens and college-age children. Instead of receiving an unpleasant surprise when the monthly bill comes, account holders can choose to be notified by text or e-mail when anyone on the account has reached their designated limit. Primary cardholders can even choose to raise or lower authorized users' spending limits at any time.

American Express believes that this new service will enable families to take control of their finances and live within their means. Instead of doling out cash, parents can simply open a card in their child's name and impose a reasonable spending limit. Both cards will earn reward points, and the child can begin to cultivate a good credit history at an early age.

To learn more about this new feature, contact American Express card member services.

More Credit Card Reforms to Come?

While the credit card industry has criticized the changes that will go into effect in 2010 - including an end to double-cycle billing, universal default, and other practices deemed unfair to consumers - more changes could be quicker to come. Consumer advocate groups and many legislators have voiced their displeasure regarding the 2010 timeline. Representative Carolyn Maloney of New York, a vocal supporter of credit card reform, said, "If practices are labeled unfair, deceptive and anti- competitive, Congress should act immediately to stop them, not force consumers to wait another year and a half before they get relief.”

Now new legislation has been proposed which will go into effect within 90 days of the president’s approval. The new laws focus on exorbitant fees and interest rate increases. They would also eliminate restroactive interest rate hikes for existing balances unless the consumer is 30 days behind on their payments.

The proposed laws are very similar to ones that failed to pass in the Senate last year. This year, however, the bill’s supporters are optimistic because they consider the new Senate to be more favorable.

Watch Your Back: Upcoming Changes to Credit Card Legislation May Cause Cards to Increase Rates Now

With the upcoming changes in credit card rules scheduled for July 2010, credit card companies are looking at the months between now and then to consider how to recoup what will be lost revenue for them.  Cardholders can expect to see increases in their interest rates, lower credit limits and changes to the terms and agreement of their card - particularly if they hold credit cards designed for the subprime market of credit card users.

Come July 1, 2010, new laws will make it extremely difficult for credit card companies to change how interest rates are calculated in order to make more money off cardholders - but there is a great deal of time between now and then which you can expect to see your interest rates climb as credit card issuers attempt to recoup what they’re sure to lose once the changes go into effect.

When the rules do go into effect, predictions by experts say that the credit card companies will begin decreasing their operating costs in order to maintain their profitability.  While new reward programs are constantly being rolled out now and is the primary way a credit card company competes with other companies to attract new cardholders - we are likely to see a decrease in rewards programs once the credit card changes take effect.

Credit Card Issuers Increasing Rates Before the Federal Reserve Finalizes Rules Prohibiting Credit Card Unfair Practices

In the last several months, The Federal Reserve has received more than 62,000 comments on the upcoming rules designed to prohibit certain unfair credit card practices and overdrafts, mostly from consumers who support the rules. It expects to finalize them before Jan. 1st, 2009. 

The proposed changes to credit card rules would prohibit banks from increasing the rate on existing credit card balances (except under limited circumstances).  Right now, most credit card terms and agreements state that the issuer can increase the interest rates on existing and future purchases any time they want. 

Credit card issuers seem to be responding to the new rules by increasing consumer credit card rates now, before the new rules go into effect.  Individuals who don’t make late payments but carry a balance from month to month are seeing increases to their credit card interest rates when in the past, rate hikes were typically only given out to individuals who made a late payment or two.

Banks do have to notify consumers if they plan to increase interest rates, so keep your eye out for notices that warn you of the rate hike.  If you get a notice - call the bank and ask to lower the rate.  You will be successful about 50% of the time, because it is cheaper for a bank to keep an existing customer than it is to find new ones.

Bank of America: Trouble Ahead?

Bank of America announced last week that credit card executive Bruce Hammonds will retire at the end of December. Hammonds has worked in financial services for four decades, and was one of the original founders of credit giant MBNA. When MNBA was acquired by Bank of America in 2006, Hammonds became head of the bank's global card services.

What does Hammonds' retirement mean for Bank of America? CEO Ken Lewis said of Hammonds, "We have all marveled at his coolness under fire, his incredible knowledge of the credit card industry and his quiet but effective way of communicating with associates, customers and investors."

Maybe Bank of America could learn a few things from Hammonds. Namely, it's not a good idea to keep offering easy credit in today's economic climate, especially with record losses looming over the credit industry and more losses predicted to follow. Still, Bank of America has been reportedly offering up to $50,000 in unsecured credit lines with an introductory 0% APR.

A spokeswoman from Bank of America stated, "[We] believe that Bank of America is well positioned to work through this current economic cycle." For the sake of their customers, let's hope so.

Federal Reserve to Announce Changes Tomorrow

With the Fed poised to announce stringent new credit card industry laws tomorrow, the future of credit cards might be changing. Banks are waiting to see how tough the new legislation will be. So far, it sounds like a good deal for consumers, but not for card companies.

Most of the controversy surrounding the new laws centers on one rule: that credit card companies cannot raise interest rates on existing balances as long as the card holder doesn’t fall 30 days behind on their payments. Insiders speculate that this rule alone will cost the industry $12 billion per year.

Consumers, who have long felt that banks use unfair practices in regard to credit cards, wrote in to the Federal Reserve when the legislation was still in its planning stages. More than 60,000 people told the Fed how they felt about the industry – and most of them demanded change.

How will such a change affect future card holders? Edward Yingling, chief executive of the American Bankers Association, says, “[The new legislation] will in some fundamental ways change the product.” That is, new card holders probably won't see the low-interest teaser rates that were so common before. Rates in general will probably go up for new customers as the credit industry tries to recoup some of its losses.

The market is changing, and we'll just have to wait and see how much of it changes for the better.

American Express Downsizes, Becomes a Bank

It’s been a busy and somewhat dismal season for American Express. After reporting a 24% drop in quarterly profits, AmEx announced that it would lay off 7,000 employees. That’s not exactly surprising, considering the company is trying to cut costs wherever it can to survive the drawn-out economic downturn. AmEx also stated that it would reduce costs by spending less on consultants, business development, travel, entertainment, and rewards programs. The company seems determined to make ends meet despite experts’ speculation that it’s not strong enough to stay the course.

Perhaps the most surprising move by American Express was the decision to become a bank. Chief Executive Kenneth Chenault said of the maneuver: “Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced or may introduce to support U.S. financial institutions.”

The Federal Reserve gave its blessing for AmEx to shift from credit card issuer to bank holding company. The move will give AmEx more stable funding in the form of deposits, as well as greater access to government relief, though representatives did not say whether or not American Express would be taking part in the $700 billion bailout package. Goldman Sachs and Morgan Stanley also made the switch following the Lehman Brothers bankruptcy.

CitiGroup Goes Back on its Word

“Citigroup is reneging on a promise it made to tens of millions of credit card customers in good times.” If that lead-in to this New York Times article sounds a bit harsh, that’s because it is.

Citigroup once vowed before Congress that it wouldn’t raise rates until an account expired. That was in the early part of 2007. Now it’s late in 2008, and the credit crisis has caused Citigroup to go back on its promise, earning them a harsh tongue-lashing from critics.

If you’re a Citi cardholder who hasn’t had a rate hike in the past two years, you can bet that one’s coming. Customers will see their interest rates jump 3%, putting some of them over the 20% interest mark. It might be a good time to shop around for a new credit card.

On the other hand, the economic climate is making many companies do things they deem necessary to retain profitability. American Express has hiked rates and laid off thousands of employees, and some financial institutions have folded altogether. Still, Citi is finding very little sympathy.

Representative Carolyn Maloney of New York says that she understands why Citi is doing this, but she doesn’t like it. Says Maloney, “Apparently a deal is only a deal when it doesn't cost the financial institution too much money." Ouch.