Category: Credit Cards

The rate at which consumers allowed their credit card debt to be passed on to collections by their lenders after repeated failure to pay their bills fell once again in August.

The national credit card default rate slipped inAugust to a rate of 5.26 percent of all balances, down significantly from July's rate of 5.64 percent, according to the latest monthly statistics released jointly by S&P Indices and the credit monitoring firm Experian. That rate is also down considerably on a year-over-year basis, as credit card defaults stood at 7.87 percent of all balances in August 2010.

Meanwhile, consumers also had a better time getting out of debt problems for other loan types in August as well, the report said. The composite default rate for all types of credit slipped to 2.04 percent, down slightly from July's 2.06 percent, but significantly from August 2010's rate of 3.32 percent.

Some experts caution that while credit card defaults have fallen considerably over the last year, increased rates of spending in recent months might lead to an increase as cash-strapped consumers struggle to pay higher bills.

Many consumers have worked hard in recent months to reduce debt loads, and a new poll finds that many have been successful.

The total percentage of consumers who say they are carrying more debt now than they were at this time last year slipped to 23 percent, according to a recent Rasmussen Reports survey. That's the lowest total observed since the company began keeping track of these statistics in April 2009. Meanwhile, 37 percent say they now owe less money than they did a year ago, up from 31 percent in the previous poll. Finally, 36 percent say they owe about the same.

Meanwhile, most Americans have seen the interest rates they pay on their debts either hold steady or decrease, the report said. Just 21 percent of consumers believe they're paying higher interest rates these days, while 56 percent say they're the same and 17 percent think they're lower.

However, recent economic troubles have forced many Americans to begin taking on credit card debt once again to make ends meet, which could be problematic for those who do not pay their balances in full every month.

Recent data shows that consumers are once again spending more money on their credit cards, leading to higher debt levels, the likes of which haven't been seen since the recession ended.

The latest 2011 Credit Card Debt Study from the consumer comparison site CardHub.com revealed that consumers added $18.4 billion in credit card debt during the second quarter, up 66 percent from the same period in the previous year, and 368 percent more than 2009's second quarter, according to a report from Daily Finance. Americans are expected to end the year with $54 billion more owed on their credit cards than they started with, potentially leading to renewed credit problems.

"A debt increase of $18.4 billion during a single quarter is mind boggling, especially when you consider that this increase is 368% higher than what we witnessed in the same quarter two years ago," says Odysseas Papadimitriou, CEO of CardHub.com, told the site.

Many consumers have been forced to begin using their credit cards more often in the last few months as a result of rising prices for necessities coupled with stagnant wages and unemployment figures.

The number of consumers who were looking to get out of debt increased once again in August, leading one of the nation's top lenders to write off fewer accounts as being uncollectable.

The latest monthly regulatory filing from Discover Financial Services reveals that it saw its credit card charge off rate – the number of accounts 90 days or more behind on payments that are no longer considered collectable – fall to a new all-time low of 3.6 percent of all balances in August, down from July's total of 3.83 percent. Meanwhile, the company also dealt with fewer accounts that went 30 days or more without payments, which now total just 2.49 percent of all balances, less than July's 2.6 percent rate.

The company has seen charge offs decline steadily over the last six months, and the latest round cost the company $50.8 million, the report said.

Typically, changes in the rate of early-stage delinquencies are reflected in those for charged off accounts several months down the line, indicating that the continued improvements in the former will eventually lead to even fewer defaults.

The rate at which Americans fell severely behind in paying down their outstanding credit card debt increased in August, marking the first time in four months the national charge off rate rose.

Fitch Ratings recently reported that the national charge off rate spiked to 6.41 percent after months of declines, due largely to problems experienced by major lenders Citi and Bank of America, according to a report from Dow Jones Newswires. That rate was up from the 6.31 percent observed in July, but still 35 percent lower than the one observed during the same month last year. Further, the increase wasn't significant enough to push the rate far from the all-time historical average charge off rate of 6 percent.

Meanwhile, the rate at which consumers fell behind on their accounts by 60 days or more slipped to just 2.15 percent in August, down from July 2.46 percent, the report said. It was the 19th straight month in which delinquency dropped.

Typically, experts view fluctuations in the rate of delinquency to be an indicator of future charge off rates, but sometimes the two factors will move in opposite directions as consumers continue to try to get out of debt.

Some critics have said that agreements between lenders and colleges or affiliated groups can be damaging to consumers, but they may also be able to save them money.

Deals between colleges and universities or groups are often used to generate revenue that is put toward marketing costs, according to a report from USA Today. However, the total amount generated dropped to more than $73.3 million in 2010, down from the more than $84.5 million the previous year, due in large part to new federal regulations on the way those under 21 can obtain new credit cards.

"The new laws regulate marketing to students, but the special card offers still need to be monitored," said Edmund Mierzwinski, consumer program director for U.S. Public Interest Research Group, a non-profit consumer watchdog organization. "While some schools have converted their contracts to simply allow card access to alumni, undergrad students remain a holy grail for card companies."

Many critics worry about that type of marketing because efforts to reduce debt among those who are still in college are having some effect. Currently, the average undergrad leaves school with thousands of dollars in credit card debt across several accounts in addition to their student loans.

Consumers who have seen their financial situations improve in recent months to the point where they are comfortable taking on additional credit card debt once again may still have a difficult time doing so.

Even as the national economy continues to improve, a small amount of all credit card issuers relaxed their lending standards on new accounts during the second quarter of the year, according to the latest Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve Board. In all, just 9.3 percent of all lenders and 16 percent of large banks said their standards "eased somewhat" during the three-month period.

Further, a larger number of banks tightened the limits on new credit card accounts, rather than loosened them, the report said. In all, 11.1 percent of all lenders and 17.4 percent of big ones restricted credit limits, while 8.3 percent and 13 percent, respectively, relaxed them.

Given that a large number of consumers have worked diligently to reduce debt over the last several months or more, many may still be wary of once again adding to their total balances.

One of the nation's largest financial institutions recently began informing borrowers that a popular feature created to help consumers avoid being stuck with fraudulent credit card debt would soon be discontinued.

Discover Financial Services recently emailed many of its credit card customers saying that the Secure Online Account Number program it runs to help consumers avoid credit card fraud will be discontinued as of September 8, according to a report from the Consumerist. The program was used to create unique credit card numbers that could be used for different retailers or even different transactions, so that consumers didn't have to turn over their actual sensitive account information.

The SOAN program is being discontinued because Discover has recently increased its security measures across the board, making those for the popular feature redundant, the report said. However, those consumers who have generated and stored unique numbers for specific online shopping sites will be able to retain those numbers through their card's expiration date.

Online credit card security has become a major issue for many institutions, and many are stepping up measures that will protect sensitive consumer financial information.

Hurricane Irene displaced tens of thousands of consumers and put many in danger of being unable to handle their finances properly. As a result, many lenders are allowing victims to make late payments into their credit card debt with no penalty.

Chase recently announced that it would waive fees for all credit card and banking customers in 13 states up and down the eastern seaboard through Sunday, September 4, according to a report from the Associated Press. This includes credit card due dates, and fees it would charge to banking customers for using out-of-network ATMs or overdrawing their accounts.

Other major credit card lenders, such as Bank of America, Capital One, Citi and PNC, will also waive fees and credit card penalties, but on a case-by-case basis rather than across the board, the report said. Customers facing hardships as a result of the storm should contact their local bank branches to find out if they can receive any such assistance.

One way the banks say they may be able to help affected consumers is by lowering their interest rate temporarily, which may make it easier for them to get out of debt.

When consumers choose to pay for a purchase with their debit card, they are usually asked, "Debit or credit?" But the choice doesn't make much of a difference, except in the way the consumer verifies it – by PIN or signature.

But now, one major U.S. financial institution is launching a card that will make the choice matter, according to a report from the Associated Press. Fifth Third Bank, which is well known throughout the Midwest and Southern U.S. and based in Cincinnati, Ohio, will soon launch its new Duo MasterCard, which allows consumers to load not only their debit card information onto the plastic, but also link it to a credit card account. This means that consumers who want more flexibility in their purchases will be able to take on credit card debt with it, and those who want to keep spending under control can still use it as a normal debit card.

To make a purchase using funds in their checking account, consumers would choose debit as normal, and the card can still be used at ATMs to withdraw money, the report said. However, they would no longer be allowed to sign for their debit transactions, and would have to use their PIN to verify the purchase. But to complete the transaction using their credit card account, the consumer would simply choose credit and sign for it as they would with any other such purchase. However, all online transactions using the card would only be able to be made as credit.

And because this card uses two separate accounts, consumers who use it would also receive separate monthly statements, the report said. Depending on the checking account, Fifth Third Bank charges between $7.50 and $15 for monthly fees, but these are often waived if consumers maintain certain minimum balances. Meanwhile, the credit card account can carry an ongoing interest rate of between 13 and 24 percent, but also comes with a 0 percent introductory rate for the first 12 months.

Meanwhile, MasterCard has not indicated whether it would offer this type of dual-purpose debit and credit card for any other banks, the report said.

This type of card may be useful for consumers who are looking to get out of debt but still need some flexibility in their purchasing power for emergencies.