Mixed blessing: credit card reform may shock some

[alienlovechild 75]

Now, thanks to a long-awaited law that goes into effect Monday, you'll know that if you pay the minimum on a $3,000 balance with a 14 percent interest rate, it could take you 10 years to pay off.

During the past nine months, credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.

It wasn't supposed to be this way. The law that President Barack Obama signed last May shields card users from sudden interest rate hikes, excessive fees and other gimmicks that card companies have used to drive up profits. Consumers will save at least $10 billion a year from curbs on interest rate increases alone, according to the Pew Charitable Trust, which tracks credit card issues.

But there was a catch. Card companies had nine months to prepare while certain rules were clarified by the Federal Reserve. They used that time to take actions that ended up hurting the same customers who were supposed to be helped.

In 2007, the top 12 card issuers earned a combined $19 billion from credit cards, according to The Nilson Report. A year later, amid the financial meltdown, profits for those companies fell more than 65 percent to $6.32 billion. The plunge was largely because defaults ballooned as unemployment soared.

Profit figures for 2009 aren't yet available. But banks wrote off about $35 billion in credit card debt last year, as the unemployment rate topped 10 percent. Analysts predict the default rate will remain at least twice as high as normal through this year, and longer if unemployment stays high.

At the same time, the law is expected to cut into future profits. FICO Inc., the company best known for its credit scores, projects the average card will generate less than $100 a month in revenue within three years, down from $200 a month before the law.

That helps explain why the industry reacted so aggressively to the legislation. Among the moves it made:

- Resurrected annual fees.

Annual fees, common until about 10 years ago, have made a comeback. During the final three months of last year, 43 percent of new offers for credit cards contained annual fees, versus 25 percent in the same period a year earlier, according to Mintel International, which tracks marketing data. Several banks also added these fees to existing accounts. One example: Many Citigroup customers will start paying a $60 annual fee on April 1.

- Created new fees and raised old ones.

These include a $1 processing fee for paper statements for cards issued by stores such as Victoria's Secret and Ann Taylor. Another example is a $19 inactivity fee Fifth Third Bank now charges customers who haven't used their card for six months.

Other banks increased existing fees. JPMorgan Chase, for instance raised the cost of balance transfers from one card to another to 5 percent of the transfer from 3 percent.

- Raised interest rates.

The average rate offered for a new card climbed to 13.6 percent last week, from 10.7 percent during the same week a year ago - meaning cardholders had to pay almost 30 percent more in interest, according to Bankrate.com.

For millions of other accounts, variable interest rates that can rise with the market replaced fixed rates. The Fed is expected to start raising its benchmark interest rates later this year, which would likely trigger an increase on those cards.

The number of Visa, MasterCard and American Express cards in circulation dropped 15 percent in 2009, for example. Rarely used cards were among the first cut off. Some cards linked to rewards programs for purchases like gasoline were likewise shut down.

Card companies also slashed credit limits for millions of accounts that remain open. About 40 percent of banks cut credit lines on existing accounts, according to the consultant TowerGroup, which estimated that such moves eliminated about $1 trillion in available credit. Much of that was unused.

Credit lines were frequently cut in regions most affected by the housing crisis and high unemployment, such as Florida and California, said Curt Beaudouin, a senior analyst at Moody's Investors Service. "They're not doing it willy nilly, they're doing it systematically," he said.

Companies are also making fewer solicitations. Mailed offers for new cards increased in the final three months of 2009 for the first time in two years, but there were only about 575 million. That's about a third of the average number of quarterly offers from 2000 through 2008, according to Mintel.

Because the law makes credit cards less profitable, some subprime borrowers may not be able to get cards at all, at least for the next few years. There's no fixed definition, but subprime borrowers generally have a FICO score below 660. For a good portion of this group, options may be limited to alternatives like PayPal and other electronic payment services, prepaid cards and payday lenders.

Joining those who won't easily get cards: college students and others under age 21. The law strictly limits card marketing on campuses, ending giveaways like T-shirts and pizza Cards can only be granted to applicants who show they have the means to repay, or those who have a co-signer who can pay.

In the meantime, there is one group of consumers that banks will chase after - those who carry a balance from month to month for at least part of the year, and pay their bills on time. They're the most profitable and least risky group for banks.

Also a target customer: anyone willing to do more business with the bank that issues their card, say opening a checking or savings account or taking out a mortgage.

"What we want is a deeper relationship with our customers," said Andy Rowe, an executive vice president with Bank of America's card business. Customers willing to stick with a single bank may even be able to get annual fees waived or get a better interest rate, he said. "That's where the competition will be."

http://hosted.ap.org/dynamic/stories/U/US_...EMPLATE=DEFAULT

[Ban Hammer 14,640]

makes me happy that i closed 2 accounts several years ago - one a citibank mastercard and the other a store credit card. didn't use them anyways, but they'd probably be very happy to charge me fees for inactivity.

[SMR 368]

Is anybody surprised? Credit Card companies and banks are businesses, after all. They have to make a profit or they close. If the government makes legislation that makes it more difficult to make a profit, they will pass those costs on to their customers. Nobody is going to make unsecured loans without a large profit incentive, especially not in the current economic climate of default and job loss.

If you thought credit card companies were there to help you buy things you can't afford, you're a little dense. If you don't like paying out the mouth to credit card companies, save money and then buy things with money you already have. I really don't understand the current outrage with credit card companies. The terms may be ridiculous, but the only thing that is outrageous is that people accept them and then complain later.

I get a little fed-up every time I hear commercials on the radio about companies that help people re-negotiate their credit card debt. These companies are in effect twisting the arms of the credit card companies to make them accept lesser payments. The credit card companies accept a loss to avoid a larger loss caused by default. That's why the terms of credit cards are so unfavorable. They have to pay for all the deadbeats.

[one...two...tree 2,762]

Is anybody surprised? Credit Card companies and banks are businesses, after all. They have to make a profit or they close. If the government makes legislation that makes it more difficult to make a profit, they will pass those costs on to their customers.

Actually, the new laws are essentially going back to the previous that were in place for decades until they were repealed under the Bush Administration. I've been alive long enough to know what credit cards were like back when they had more regulations...and I can tell you the terms and conditions were a lot better than they are now currently.

[one...two...tree 2,762]

The credit card reform act has passed Congress and will now go off to President Obama to be signed into law. Clark calls this a sweeping victory for the American people. (Editor's note: This has since been signed into law and will go into effect at the end of February 2010.) But what exactly does it mean to you? Here are some highlights:

• 45 days notice will be required to raise the interest rate on future purchases.

• Bills must mail to you no later than 21 days before the due date.

• The new daily cutoff for a lender to receive payment via the mail is 5 p.m.

• Payments must be applied to your highest interest rate if you have multiple open accounts.

• It will be illegal for a bank to let a transaction run when they know you'll go over your limit -- unless you give them written permission to do so.

• Teenagers can no longer apply for a credit card unless a parent expressly signs as guarantor on that account. Certain waivers apply for economically independent teens.

• Sellers of debit gift cards must clearly disclose the rip-off fees that are passed on to the user. Such cards will now have a 5-year lifespan.

[SMR 368]

Actually, the new laws are essentially going back to the previous that were in place for decades until they were repealed under the Bush Administration. I've been alive long enough to know what credit cards were like back when they had more regulations...and I can tell you the terms and conditions were a lot better than they are now currently.

That may be. Honestly, I'm not old enough to remember. All I'm saying is that I don't understand why people expect credit card companies not to take money from them. That is where they get their money from.

[one...two...tree 2,762]

That may be. Honestly, I'm not old enough to remember. All I'm saying is that I don't understand why people expect credit card companies not to take money from them. That is where they get their money from.

No one is arguing that point. Typically, competition drives down costs, but credit card companies have been able to hide costs to the consumers making it difficult to cost compare. Now they'll have to disclose those fees up front making it easier for the consumer to choose a credit card that offers the best options for the price. I'm not going to shed any tears for the CC companies because there's now a spotlight on all the costs. Hooray for consumers.

Edited February 22, 2010 by Galt's gallstones

[Ali G. 37]

These new laws are there to protect the consumer from being exploited and held for ransom. One guess which party voted against these measures, in particular, why they took so long to implement. The more I see who votes for what, the more I realize that to a certain party talks up being pro America, however, actual Americans seem to come last.

The biggest con this reform tackled was bait and switch. For example, if you sign a deal to borrow $5K and the interest rate is 6.99%, you expect to pay it back at this rate. You certainly don't expect the rate to jump to 16.99%, just because they can. This is also why such cunning shenanigans are banned in most other first world countries. No one has a problem with a business making a buck, they're a business after all, however, people should have the right to be protected from being conned by T&C and fine-print. Fine-print that the majority of folks simply cannot comprehend.

Like many things, what I find funny about those against this is that they hate government debt, loathe it, but have no problem with the consumer being held in bondage and servitude because of debt and ridiculous interest rates. Apparently that debt is different and must be good debt. _{Cough cough Hypocrites..}

[SMR 368]

These new laws are there to protect the consumer from being exploited and held for ransom. One guess which party voted against these measures, in particular, why they took so long to implement. The more I see who votes for what, the more I realize that to a certain party talks up being pro America, however, actual Americans seem to come last.

The biggest con this reform tackled was bait and switch. For example, if you sign a deal to borrow $5K and the interest rate is 6.99%, you expect to pay it back at this rate. You certainly don't expect the rate to jump to 16.99%, just because they can. This is also why such cunning shenanigans are banned in most other first world countries. No one has a problem with a business making a buck, they're a business after all, however, people should have the right to be protected from being conned by T&C and fine-print. Fine-print that the majority of folks simply cannot comprehend.

Like many things, what I find funny about those against this is that they hate government debt, loathe it, but have no problem with the consumer being held in bondage and servitude because of debt and ridiculous interest rates. Apparently that debt is different and must be good debt. _{Cough cough Hypocrites..}

I'm not necessarily against this legislation. I don't incur unsecured debts, so it doesn't make much difference to me.

However, your parallel between people against national debt and people against consumer debt is a little strange. I am against the government borrowing money and feel similarly about unsecured consumer debt. I have little sympathy for those who borrow and don't repay. Ditto for those who don't read and understand the fine print. What kind of dark hole did people just come out of? Read things before you sign and don't borrow money you can't pay back. That applies to congress and poor, defenseless, deadbeat consumer "victims."

[one...two...tree 2,762]

These new laws are there to protect the consumer from being exploited and held for ransom. One guess which party voted against these measures, in particular, why they took so long to implement. The more I see who votes for what, the more I realize that to a certain party talks up being pro America, however, actual Americans seem to come last.

The biggest con this reform tackled was bait and switch. For example, if you sign a deal to borrow $5K and the interest rate is 6.99%, you expect to pay it back at this rate. You certainly don't expect the rate to jump to 16.99%, just because they can. This is also why such cunning shenanigans are banned in most other first world countries. No one has a problem with a business making a buck, they're a business after all, however, people should have the right to be protected from being conned by T&C and fine-print. Fine-print that the majority of folks simply cannot comprehend.

Like many things, what I find funny about those against this is that they hate government debt, loathe it, but have no problem with the consumer being held in bondage and servitude because of debt and ridiculous interest rates. Apparently that debt is different and must be good debt. _{Cough cough Hypocrites..}

That's why I think as long as the Republican Party keeps paying lip service to the regular Joe's while letting the agenda of the Far Right knuckleheads dominate, they'll never hold on to populist support. For all the talk of Obama and the Democratic Party needing to move to the center, the reality is the GOP needs to step away from the end of the plank and move itself more to the center where most Americans are.

[Ali G. 37]

I'm not necessarily against this legislation. I don't incur unsecured debts, so it doesn't make much difference to me.

However, your parallel between people against national debt and people against consumer debt is a little strange. I am against the government borrowing money and feel similarly about unsecured consumer debt. I have little sympathy for those who borrow and don't repay. Ditto for those who don't read and understand the fine print. What kind of dark hole did people just come out of? Read things before you sign and don't borrow money you can't pay back. That applies to congress and poor, defenseless, deadbeat consumer "victims."

I remember seeing a documentary were a Harvard Law professor, Harvard as in best university in the world, could not understand for the life of her what the heck much of the content in these credit contracts actually meant. To me that is trickery. It's all too easy to assume the person who uses the credit is a deadbeat and refuses to pay, yet in reality, most Americans are a paycheck or medical bill away from being on the street. When someone is heading to the street, the last thing they need is a 29.99% interest rate, on top of fee after fee.

A contract should be very easy to understand. For example, you are allowed to borrow x amount and your interest rate will be x. It should also be reasonable. A five hour late payment should not result in a $39 fee and a interest rate increase to 29.99%. I do like the payoff information they have added in this legislation, as it will illustrate to the financially illiterate how long it will take to pay off a balance, when only the minimum is paid.

Remember, keeping Americans in the bondage of debt does nothing for the growth of the country. So it's all good and well to hate on people who rely on it but it does no good for any of us to see them tank because of ridiculous rates. People also don't seem to understand that we are all in this together. Hating on others or labeling them deadbeats does nothing to improve a bad situation. Ultimately, prevention is always better and much cheaper than cure. Had we regulated lending standards, the majority of this mortgage mess would have been avoided. A mess that has affected even those without a mortgage, in terms of a drastic drop in property value.

[one...two...tree 2,762]

I remember seeing a documentary were a Harvard Law professor, Harvard as in best university in the world, could not understand for the life of her what the heck much of the content in these credit contracts actually meant. To me that is trickery. It's all too easy to assume the person who uses the credit is a deadbeat and refuses to pay, yet in reality, most Americans are a paycheck or medical bill away from being on the street. When someone is heading to the street, the last thing they need is a 29.99% interest rate, on top of fee after fee.

A contract should be very easy to understand. For example, you are allowed to borrow x amount and your interest rate will be x. It should also be reasonable. A five hour late payment should not result in a $39 fee and a interest rate increase to 29.99%. I do like the payoff information they have added in this legislation, as it will illustrate to the financially illiterate how long it will take to pay off a balance, when only the minimum is paid.

Remember, keeping Americans in the bondage of debt does nothing for the growth of the country. So it's all good and well to hate on people who rely on it but it does no good for any of us to see them tank because of ridiculous rates. People also don't seem to understand that we are all in this together. Hating on others or labeling them deadbeats does nothing to improve a bad situation. Ultimately, prevention is always better and much cheaper than cure. Had we regulated lending standards, the majority of this mortgage mess would have been avoided. A mess that has affected even those without a mortgage, in terms of a drastic drop in property value.

Well stated.

[Ali G. 37]

That's why I think as long as the Republican Party keeps paying lip service to the regular Joe's while letting the agenda of the Far Right knuckleheads dominate, they'll never hold on to populist support. For all the talk of Obama and the Democratic Party needing to move to the center, the reality is the GOP needs to step away from the end of the plank and move itself more to the center where most Americans are.

The average Joe republicans folk are good honest hard working people, with many spiritual in nature. Unfortunately these folks have been duped by certain others into thinking the government you have power over and vote in is the enemy, while the private sector is the answer. Now add in the libertarian lunacy and you are asking for some real trouble and hurt for the American people. Accordingly to Matt, the free market should somehow (magically) fix these issues with credit exploitation. History tends to suggest otherwise, that the unregulated market is what leads to a handful of families calling the shots. It's almost human nature to end up with a pyramid of wealth. E.G. Kings and Queens. Basically first in best dressed and screw the rest; which is also why civilized countries have rules and laws to prevent this exploitation from happening again.

Edited February 22, 2010 by Booyah

[spookyturtle 9,466]

That's why I think as long as the Republican Party keeps paying lip service to the regular Joe's while letting the agenda of the Far Right knuckleheads dominate, they'll never hold on to populist support. For all the talk of Obama and the Democratic Party needing to move to the center, the reality is the GOP needs to step away from the end of the plank and move itself more to the center where most Americans are.

[SMR 368]

The average Joe republicans folk are good honest hard working people, with many spiritual in nature. Unfortunately these folks have been duped by certain others into thinking the government you have power over and vote in is the enemy, while the private sector is the answer. Now add in the libertarian lunacy and you are asking for some real trouble and hurt for the American people. Accordingly to Matt, the free market should somehow (magically) fix these issues with credit exploitation. History tends to suggest otherwise, that the unregulated market is what leads to a handful of families calling the shots. It's almost human nature to end up with a pyramid of wealth. E.G. Kings and Queens. Basically first in best dressed and screw the rest; which is also why civilized countries have rules and laws to prevent this exploitation from happening again.

Why do you think you have more control over the government than the free market?

I try to judge all organizations by the same standards. It doesn't really matter to me whether they call themselves businesses, non-profit organizations, charities, clubs, gangs, governments, or any other name they want to have.

In reality, the average American has little to no recourse when wronged by the American government. Your individual vote is meaningless and any complaint will most likely get mired in re-tape. Anyone who is familiar with the immigration process knows this. There really isn't much you can do.

Large businesses are mostly the same. If I don't like something, there isn't much I can do. The difference is, the business has no power if I chose not to do business with them. The government, on the other hand, takes a large part of my paycheck, regulates what I am allowed to do, and doesn't really make me any sort of concrete promises in return.

So, it's not that I trust business or the free market more than government. It's just that businesses don't have any power that you don't give them.