Category: Credit Cards

Many consumers that own their own company can expect to see a greater number of offers for their small business in the coming year, according to a report from the Los Angeles Times. New rules for consumer credit card debt have made it more difficult for financial institutions to turn a profit on these accounts, but those for businesses remain relatively unregulated. As a result, lenders see this as a more viable revenue stream moving forward.

"You are going to find a real effort on the part of card issuers to look at this as an opportunity to grow credit cards outstanding at fairly significant interest rates," David Robertson, publisher of the Nilson Report, told the newspaper.

Lawmakers discussed placing regulations on business credit card debt that were similar to those for consumers, but the idea was eventually rejected as being too limiting to major financial institutions.

The mobile payment industry is expected to gain a strong foothold with consumers in the coming years as major financial institutions and cellular phone service providers combine to make it easier for consumers to take on credit card debt without reaching for their wallets, according to a report from CNN Money. Credit giants like Visa, MasterCard, Bank of America, Citi and U.S. Bank are all testing a version of the technology and expected to start rolling out their mobile payment systems in the coming months. In addition, AT&T, Verizon and T-Mobile have combined with Barclay's and Discover Financial Services to launch Isis, a near-field communication payment system.

"I definitely believe that the mobile wallet will eventually replace the plastic card – but it's going to take some time because consumer habits take a long time to change," Jane Cloninger, director of financial services consulting firm Edgar Dunn and Co. told the news agency. "But where before it's been a lot of discussion, we're at the point now where you're going to start seeing momentum toward it and going to see it move beyond the trials and into reality."

Many models of handsets containing the NFC chips necessary to complete such a transaction – which can be completed simply by waving a smartphone in front of a sensor – will be shipped this year, the report said. Google, the company behind the popular Android operating system, already has infrastructure in its latest operating system that allows for NFC data to be transmitted and received.

Companies that handle credit card debt currently make almost no money on mobile payment systems, but the industry could be worth as much as $22 billion by 2015, the report said.

The largest obstacle to widespread adoption of digital payments may be public trust of the new technology. A number of studies have found that many consumers say they are wary of attempting to take on credit card debt using an unfamiliar system. However, younger Americans have in general been more likely to give it a try.

As a result of a renewed effort from lenders to recoup profits lost to new federal regulations, consumers looking to avoid credit card debt may find that debit is no longer a cost-effective payment option either, according to a report from the New York Daily News. Major lenders are expected to roll out or reintroduce a number of fees to debit accounts.

One of these expected changes is the use of the long-absent minimum account balance, in which consumers can be hit with hefty charges for not maintaining certain amounts in their checking accounts, the report said. Banks are likely introducing this in an effort to encourage consumers to take on more credit card debt instead.

In much the same way it recently limited fees for transactions involving credit card debt, the Federal Reserve Board recently announced it was considering caps for debit purchases as well.

The newly-introduced Interest Rate Reduction Act would limit what lenders can charge for credit card debt, as well as all other consumer loans, to just 15 percent, according to the bill's author, New York Representative Maurice Hinchey. Currently, Hinchey says companies can increase rates with too little warning or justification.

"Many hardworking Americans are using credit cards to make ends meet in this recovering economy, but credit card companies are finding new ways to squeeze the middle class despite significant reforms in the last Congress," Hinchey said.

This is the second bill designed to limit interest rates on credit card debt that Hinchey has introduced, the report said. In the past, he has also authored one that attempted to cap rates at 18 percent.

Many in the credit card industry believe the government has already done too much to limit revenues from consumers' credit card debt, including restricting fees and altering rules for rate changes.

The success or failure of the mobile payment industry may depend on the U.S. version's ability to emulate Japan in 2011, according to a report from Javelin Strategy and Research. Overseas, taking on credit card debt using a mobilephone has become the norm, and companies must reassure consumers that this system is secure effective.

"In Japan, mobile wallets play a broad role in consumers' lives," said Beth Robertson, Javelin director of payments research. "An individual's mobile phone might contain their airline boarding pass, help track their loyalty programs, unlock their home, pay for a taxi or soda out of a vending machine and be used to purchase items at a store."

Javelin found that nearly half of consumers are hesitant to take on credit card debt in this way over concerns for the security of the transaction, the report said. However, one-third iPhone users say they are likely or very likely to try it.

A number of companies have tested systems that allow consumers to take on credit card debt using their smartphones in the last few months.

The nation's six largest credit card lenders – American Express, Bank of America, Capital One, Chase, Citibank and Discover – all saw the rate at which they had to write off consumers' seriously delinquent credit card debt as being uncollectable slip to year-long lows, according to a report from The Associated Press. However, despite the lows, rates are still considerably higher than historical averages and pre-recession levels.

Federal Reserve data showed that the rate of defaulted credit card debt peaked in the second quarter of 2010 at 10.37 percent of all balances, the report said. In the two years prior to the recession, though, it averaged just 3.82 percent.

"There are some good improvements," Mike Dean, a managing director with industry tracking firm Fitch Ratings, told the news agency. "We've seen some better numbers there, but nothing to say, 'Wow!'"

The rate at which consumers' credit card debt is stricken from lender records is expected to continue to improve into the future as well, the report said. However, the national unemployment rate, which is still hovering around 10 percent could still hinder more substantial improvements until it begins to come down more significantly.

Currently, many industry experts believe that the lower charge off rates are due to two factors, the report said. First, consumers are being more careful in dealing with their credit cards in general, spending less and cutting into balances with higher payments. However, the default rates are also likely the result of many consumers who have already experienced financial troubles in the past and are now unable to obtain new lines of credit. As a result of these two considerations, lenders are only allowing the most trustworthy consumers to maintain accounts, ensuring fewer losses. In all, some 8 million consumers discontinued their use of credit card accounts in 2010 for one reason or another.

In the past, rates of default and delinquency moved more or less in concert with fluctuations in the nationwide unemployment rate, but since the recession began, the latter figure has plateaued while the former two have declined.

Citi saw its rate of charge offs – credit card debt that has fallen so behind in payments they're deemed uncollectable – slip significantly in December, to 8.34 percent, according to a report from The Associated Press. That was a 22-month low, and down from 9.4 percent observed in November. The lender's peak default rate came in August 2009, when it was 12.14 percent.

Meanwhile, delinquencies – credit card debt 35 or more days past due – declined as well, to 4.44 percent from 4.71 percent in December, the report said. This was the lowest rate seen in over two years.

Consumers have made a greater effort to reduce their credit card debt in recent months, but the large declines in delinquency and default has also been attributed to fewer troubled borrowers having access to lines of credit.

Capital One Financial had fewer instances of charge offs and delinquency in December as consumers continued to improve their finances and get a better handle on their credit card debt, according to the company's monthly regulatory filing.

The company saw charge offs – credit card debt so late on payments that the company writes it off as uncollectable – decrease considerably, dipping to 7.01 percent in December from 7.56 percent the previous month. Meanwhile, its delinquency rate – accounts 30 or more days behind – fell to 4.09 percent from November's 4.26 percent.

Capital One is typically the first major lender to release information about its borrowers' delinquent and defaulted credit card debt every month. Like most issuers, it has seen these rates decline significantly over the last several months as consumers had a better time dealing with their finances.

Prepaid debit cards have become a popular gift for holiday shoppers, and a frequently-used payment option among consumers who either can't or don't want to deal with the hassles of credit card debt. But the fees that are typically associated with these accounts can also cause headaches, according to a report from USA Today. Prepaid cards can carry fees for monthly maintenance, activation, ATM withdrawals and more, quickly leaving some consumers with a negative balance in just a few months if they don't use them right away.

Still, these cards are among the most popular and fastest-growing payment options available, the report said. A MasterCard study on the future of these accounts found it could top $440 billion by 2017, four times higher than the total in 2009.

But the growing popularity of prepaid debit cards has also drawn attention to the associated fees, the report said. A number of consumer groups and lawmakers have recently spoken out against the charges these cards can incur, and noted that they don't offer the same protections against fraud and loss that accounts from banks do. A number of U.S. senators have also voiced opinions, as one introduced legislation to rein in some of the fees, and another called for these accounts to be regulated by the Consumer Financial Protection Agency.

Currently, law mandates that some fees be displayed on the card's packaging, the report said. However, for the full list, cardholders will have to visit a website. Further, the listed charges are often difficult to find.

Companies that issue the cards, however, contend even with the charges, they are less costly than dealing with credit card debt and bank accounts, the report said. In addition, the popularity of the cards has led to more competition from issuers, and driven the cost of the fees down considerably.

These cards have become particularly popular with underbanked consumers who may have had trouble with credit card debt in the past and are now unable to obtain new accounts. 

Millions of consumers stopped using their credit cards altogether in 2010, though a portion of that was due to some being unable to pay their credit card debt at all, according to a report from the Minneapolis Star-Tribune. In all, the number of Americans with at least one credit card dipped to 62 million last year, down from 70 million in 2009.

Instead of taking on credit card debt to make everyday purchases, most who no longer have these accounts rely largely on debit instead, the report said. This option offers most of the same features as credit, such as the ability to make purchases online, and may also have fewer fees associated with it.

However, there are headaches associated with debit as well, the report said. Some companies, such as rental services or hotels, may charge hundreds of dollars to the cards at the time of purchase, as a means of securing their property in case of damage. But that may change with the new consumer focus on using these cards.

The overall shift to the use of debit is similar to the way credit cards gained popularity in the late 1980s, the report said. At that time, lenders sent out millions of preapproved cards to consumers. But since the current recession set in, they've effectively done the opposite, revoking many checking accounts over delinquent and defaulted credit card debt.

"When an account gets charged off, what normally happens is that the account is closed," Darryl Dahlheimer, program director for Lutheran Social Service Financial Counseling Service in the Twin Cities, told the newspaper. "It's an involuntarily thing on the part of the card-holder. Nobody wants that to happen because it's a big black mark on your credit report, you lose your credit cards and you're still liable for the debt."

Overall, most major lenders have seen their rates of defaulted and delinquent credit card debt decline over the last several months as consumers made a greater effort to improve their credit health and reduce their balances. This in turn has lead to higher profits in the industry.