Category: Credit Cards

The newly created Consumer Financial Protection Bureau is now accepting the public's suggestions for changes to the credit card lending industry, and is soliciting ideas via a number of online channels. Suggestions can be sent through its new website, www.consumerfinance.gov, as well as throughemail, Twitter and even YouTube.

In conjunction with this, the agency recently launched a Facebook page, Twitter account, YouTube channel and Flickr gallery to help consumers stay abreast of any changes it makes that could affect their credit card debt, the report said.

"We want to make sure that the American people are with us all the way while we build it," said Elizabeth Warren, the law professor tasked with setting up the CFPB.

The CFPB has already suggested a number of changes to the way companies can handle consumers' credit card debt, but will not gain full regulatory power over the lending industry until the summer.

While these Americans were likely unable to find lines of credit for some time following such an incident, they may find that they are once again being approved by lenders.

However, consumers with spotty credit histories may find that the new lines of credit for which they are now being approved will have heightened interest rates on credit card debt that need to be carefully monitored, according to a report from CNN Money. Often, lenders will draw in consumers desperate for lines of credit with relatively low introductory interest rates – usually around 29.9 percent – before hiking them as high as 59.9 percent or in some cases even 79.9 percent.

"A lot of the people ran up the card, defaulted and went directly to charge off," First Premier Bankcard chief executive officer Miles Beacom told the news site. "We also tested it at 23 percent, 33 percent, 45 percent, but 59.9 percent is the one that shows the best performance and where the organization can market the product."

First Premier Bank has had almost 700,000 consumers sign up for its bad credit account, and more than half carry a balance from one month to the next, meaning consumers are quickly adding to their credit card debt, the report said. However, this practice is not illegal.

The Credit Card Accountability, Responsibility and Dislcosure Act, passed in 2009, only prohibits lenders from retroactively raising interest rates, the report said. But because these consumers agreed to them initially – likely without reading the agreement's fine print – they are stuck with the high interest rate.

Beacom also noted that First Premier cards for consumers with bad credit histories used to charge high fees in addition to the high interest rates, at least until the Credit CARD Act altered the rules related to how high these charges could climb, the report said. Currently, it opens about 50,000 new accounts every month.

Consumers with a history of struggling with their credit card debt will likely have an easier time dealing with their accounts if they spend less with the cards and pay off their entire outstanding balance every month.

The idea of being able to use a smartphone equipped with a near-field communication chip to take on credit card debt when making purchases has gained prominence in recent months, as many companies have tested such systems in small groups, according to a report from CNBC. However, it's a question of "when," not "if," this technology will catch on with cardholders, meaning banks will have to adapt to the popularity of the payment method.

Already, most major financial institutions offer mobile banking applications for smartphones, and despite their popularity, customers may find them frustrating to use, the report said. For example, Bank of America's app has been downloaded 6 million times and is used by 100,000 people a day, but is only rated 1.5 out of 5 by cardholders.

This change in consumer attitudes toward mobile banking and credit card debt will force lenders to try to keep up with consumer demand for the latest technology.

Only 48 percent of small businesses sought accounts that would allow them to take on credit card debt to grow their companies in 2010, down from 55 percent in 2009, according to a new survey from the National Federation of Independent Business. This decrease was likely because 15 percent of those polled thought they would be unable to qualify for a new line of credit.

However, those that did seek new accounts that allowed them to take on credit card debt were approved at a higher rate than they were in 2009, the report said. Just 16 percent of applicants were denied altogether, while 41 percent got all the credit they sought.

"Unfortunately, the economic atmosphere for small businesses did not improve much in 2010," said Denny Dennis, NFIB Research Foundation senior fellow and report author.

A number of studies have shown that if small businesses are able to take on credit card debt, they are in a better financial position to turn a profit and increase payroll. 

Both Visa and MasterCard posted significant profit increases in the final three months of last year as consumers used the companies' branded debit cards and took on more credit card.

MasterCard saw its profits surge 41 percent in the fourth quarter of 2010 as the number of transactions it handled rose 6.3 percent over the previous three months, to 6.2 billion, according to a report from The Associated Press. Net profits for the payment processing network rose to $415 million, up from $294 million in the fourth quarter of 2009.

The value of all purchases made the company's its branded cards rose 11 percent from 2009, to $567 billion, the report said. The rate at which consumers took on credit card debt rose 3 percent, and debit card use rose nearly 4 percent.

For Visa, MasterCard's bigger rival, quarterly profits climbed 16 percent, alsothanks to increased consumer spending in terms of both value and transaction volume, according to the company's latest regulatory filing. Overall, transactions in which consumers took on credit card debt or used their debit cards were valued at $897 billion in the quarter, up 15 percent over the same period in 2009. That was also a significant increase from the previous quarter, in which the company saw a transaction volume of $829 billion.

The company also saw service revenues increase 22 percent over the previous year to $1 billion, the report said.

"Visa is in a strong position to continue to accelerate the migration to electronic payments, particularly in economies where cash and check remain predominant," said Joseph Saunders, the company's chairman and chief executive officer. He added that Visa is attempting to expand payment services to mobile phones and ecommerce.

Many credit card companies are preparing for their profits to be dampened by greater federal regulation of the payment processing industry, which has targeted debit card swipe fees for significant caps. A proposed rule from the Federal Reserve Board would limit debit card interchange fees to just 13 cents per transaction, rather than the current 1 or 2 percent of the purchase's value.

Elizabeth Warren, the special advisor in charge of setting goals for the Consumer Financial Protection Bureau ahead of its official start, recently said that the agency will make clarifying credit card agreements its top priority when it gains regulatory powers on July 21, according to a report fromthe Associated Press. In particular, she wants the CFPB to weed out tricky tactics that add to consumers' credit card debt, and minimize fine print.

"Think about how long a credit card agreement has become – it's become pages and pages and pages of largely incomprehensible fine print," Warren told the news agency. "In effect, it's paperwork that says 'Don't read me,' and that's a real problem. Because hiding in that fine print can be anything."

The so-called Schumer Box is already found on all credit card agreements, and spells out its basic terms, but critics say that lenders still find a way to add hidden fees and interest rates to consumers' credit card debt.

Recent proposals from the Federal Reserve Board, intended to better protect consumers from the dangers of excessive credit card debt, may have the unintended result of making it more difficult or even impossible for those without their own income to obtain a line of credit, according to a report from MarketWatch. The rule would, if passed, require lenders to consider a person's individual income, rather than that of their household, when determining whether they are creditworthy.

This rule would likely make it more difficult for people like stay-at-home parents to qualify for a line of credit, which could put them in a dire situation down the road, the report said. For example, if that person is faced with divorce or the death of the household's primary earner, lenders may disqualify them from accounts that allow them to take on credit card debt because they lack the proper individual borrowing history.

"We are concerned that the board’s proposal will hamper a stay-at-home mom's ability to establish her own independent credit history by applying independently for a card," a letter from New York Representatives Carolyn Maloney and Louise Slaughter said, according to the news source. "Many stay-at-home moms have a strong work history, yet the proposed regulations ignore their demonstrated credit-worthiness because of their lack of current market income."

However, the Federal Reserve believes that there are some instances in which this rule would not prevent those without their own income from obtaining accounts for credit card debt, the report said. For example, they may be able to apply jointly for an account with the household's primary earner, thereby maintaining a credit history in some way.

On the other hand, some experts warn that even in these cases, a person without their own income may still be able to qualify for accounts, but only those with sky-high interest rates. This would in turn make it more difficult for them to manage their credit card debt, the report said.

Lenders may also be more cautious about lending to those with spotty credit histories because they have a greater chance of defaulting, something that has plagued the entire industry in the past.

Capital One recently began sending new credit card bills to consumers who had long since defaulted on their accounts, according to a report in the Los Angeles Times. In one case, a person who had $2,000 in credit card debt charged off more than a decade ago recently received a bill for nearly $5,200. This is because the company continued to compound interest on the account even after it was technically written off.

The company said the effort is part of its attempts to become compliant with the Credit Card Accountability, Responsibility and Disclosure Act, which mandates that lenders send statements for defaulted accounts that are still accumulating interest.

Typically, these accounts would have sold defaulted credit card debt to a collections agency, but these companies have no ability to actually add to a consumer's debt total, as a lender might.

While no one region of the country has been more affected than another, several states have residents that are struggling more than others under the weight of their outstanding credit card debt, according to a report from credit reporting bureau Equifax. Californians currently carry the greatest debt burden, with nearly $90.6 billion in outstanding balances, well ahead of the next-closest state.

Residents of Texas and Florida have the second- and third-most credit card debt in the nation, with more than $48.8 billion and nearly $47.6 billion, respectively, the report said. Ohio was next with almost $29 billion. North Carolina (close to $22.4 billion) and Washington (slightly less than $18.3 billion) rounded out the list of the most troubled states. Overall, consumers are reducing their debt, but some still owe as much as 17 percent of their income to credit card lenders.

"The good news is we're seeing Americans paying off their debts and becoming more fiscally fit," says Dianne Bernez, senior vice president for corporate communications at Equifax. "However, the numbers show that while people's intentions are good, Americans still have a lot of debt to tackle and often don't know where to start."

However, overall consumer debt, which includes credit cards as well as that for mortgages and auto loans, has now slipped by 8.2 percent from its all-time record high of $11.5 trillion in October of 2008, the report said. Meanwhile, credit card lenders are currently owed $800 billion by more than 54 million American households.

To help encourage homeowners to make a greater effort to reduce their credit card debt, Equifax also announced a partnership with popular financial expert David Bach, the report said. Together, they are encouraging 1 million Americans to shed $1 billion in debt in the coming year.

Overall, many Americans have cut their credit card debt over the last year, leading to fewer instances of delinquent or defaulted accounts for all major lenders. However, some financial experts say this is the result of not only sound fiscal responsibility from borrowers, but also the large number of consumers who have been flushed from the lending system as a result of past charge offs.

American Express enjoyed an income of $1.1 billion in the final three months of 2010, an increase of 48 percent over the same quarter in 2009, according to the company's latest regulatory filings. This was largely due to its U.S. Card Services division pulling in $701 million in the quarter, up 70 percent from the previous year, as consumers were more conscientious about paying their monthly bills and losses to defaulted credit card debt decreased.

"With cardmember spending up 15 percent this period, we reached all-time records for the quarter and the full year," said American Express chairman and chief executive officer Kenneth Chenault. "Credit indicators strengthened and the amount we needed to set aside for problem loans declined significantly from a year ago. Unemployment levels and housing remain a concern, but other aspects of the economy continue to show signs of improvement."

American Express saw the amount of money it had to set aside to cover defaulted credit card debt fall to $111 million in the quarter, the filing said. That was a decrease of 68 percent from the $346 million worth of charge offs it dealt with in the fourth quarter of 2009. The company noted the declines were largely the result of improved credit quality.

It also observed an 18 percent increase in revenues, to $3.8 billion from $3.2 billion, on interest expense, the report said. This was the result of greater securitization for the company, as well as higher consumer spending with these accounts, though the latter was offset by a smaller number of accounts overall.

Many consumers have made a greater effort to avoid taking on credit card debt over the last several months, as they have become more conscious of how these accounts affect their overall finances. Some have begun to rely more heavily on debit cards and cash to make everyday purchases. However, the holiday season may have caused Americans to use their credit accounts to purchase gifts, leading to increased fourth quarter profits for most major lenders.