Category: Credit Cards

Like many major financial institutions, Bank of America is now testing accounts available only to new customers in select parts of the country, with an eye toward rolling them out nationwide, according to a report in the Atlanta Journal-Constitution. These will have higher monthly fees than existing accounts, but many can also be waived if the consumer takes on credit card debt using a Bank of America-branded card.

Taking on credit card debt with on a bank account will allow consumers to bypass fees as high as $15 a month in some cases, and also gain access to accounts with more benefits, the report said.

Many lenders have lost out on large profits as a result of new regulations which limit credit card debt and other banking fees, and are now trying to recover them by introducing new charges or increasing existing ones.
 

In retrospect, 60 percent of Americans say they leaned too heavily on their credit cards prior to the recession, and should have made a greater effort to pay down their credit card debt, according to a new survey from TD Ameritrade Holdings. Another 50 percent said they should have used cash more often to make purchases.

In addition, 25 percent believe that the money troubles they faced hindered their ability to pay down their credit card debt, the report said. Another 71 percent said they should have spent less and saved more, while 60 percent responded that they should have taken more responsibility in dealing with their finances.

Many consumers are now wary of taking on any credit card debt at all, and say they will go out of their way to avoid dealing with it, opting instead to spend within their means.

While the Credit CARD Act provided a number of protections for average consumers from predatory lending tactics, it also forced many financial institutions to stop granting lines of credit to those who had subprime credit scores or incomes, according to a report in the Wall Street Journal. As a result, they were forced to seek other types of credit, including payday loans, which can be more troublesome than credit card debt.

The new rules set forth by the laws caused many institutions to increase lending standards to better protect themselves from losses to delinquent and defaulted credit card debt, the report said. In addition, many also opted to slash credit limits for existing customers, resulting in over $1 trillion in potential credit being eliminated since the start of the recession. Further, they dropped some riskier borrowers – particularly those with low incomes who were more likely to default on their credit card debt – altogether, barring them from additional credit.

As a result of being dropped, combined with the more stringent policies lenders began enforcing, many low-income or subprime consumers were locked out of the credit system entirely, the report said. But they still needed lines of credit, even if they couldn't take on additional credit card debt. This in turn led them to seek payday lenders and other potentially dangerous financial products.

In addition, many banks have also seen their profits tumble as a result of the Durbin Amendment to the Dodd-Frank Act, meaning that they've cut other programs to help close gaps caused by the shortfalls, the report said. These programs include those that were popular among low-income consumers, such as free checking accounts. Instead, subprime borrowers have discontinued their normal use of these institutions, leading many to be under- or entirely unbanked, and putting themselves on more dangerous financial ground.

Many subprime consumers have not been able to open accounts that allow them to take on credit card debt for a number of months. This can lead to money problems and debt concerns because they may not have enough to meet their basic needs.

When consumers apply for a loan, the lender will often use their credit report to not only decide if they qualify, but also determine the interest rate they pay on their credit card debt. Now, if a person gets a less than favorable rate, the lender must tell them the aspects of their credit history that were used to derive it.

Beginning on January 1, lenders were required to tell consumers that so-called "risk-based pricing" was used to determine the interest rates they pay on their credit card debt if it was worse than what others received, according to a report in the Dallas Morning News. Previously, this was only required for those lenders who dealt with home loans.

As an alternative, lenders also have the option of providing an applicant with a free copy of their credit score and explaining some of the information on it to them. In addition, if there is an "adverse action" – a consumer getting a worse rate on their credit card debt – the report said.

Risk-based pricing is often used by lenders who deal with credit card debt to determine loan eligibility and rates.

A considerable amount of consumers still carry significant credit card debt, which may make efforts to reduce outstanding balances more difficult, according to a report from the Rochester Democrat and Chronicle. Currently, Americans carry more than 609 million credit cards, which averages out to more than three per consumer.

Further, credit card debt makes up 98 percent of all credit card debt held nationwide, the report said. Currently, that figure is hovering above more than $800 billion, debt that can carry an average interest rate of 14 percent.

Over the holidays, many consumers said they would lean more heavily on cash and other forms of payment to make their gift purchases, but a significant percentage still took on credit card debt to do so, the report said.

In addition, many industry experts believe that the most significant declines in credit card debt and default have been the result of millions of Americans being forced from the lending system entirely.

American Express is dropping the foreign transaction fee it charges whenever a consumer takes on credit card debt to make a purchase outside the U.S., the company recently announced. While that change is effective immediately, the lender will also roll out more in the next few months.

"We've been expanding those benefits to make sure that American Express is top of mind and top of wallet when they shop, travel and entertain – at home and abroad, said Ed Gilligan, vice chairman of American Express.

Other benefits include covering up to $200 a year in expenses related to airline travel when consumers take on credit card debt to book their flights, including baggage and flight change fees, in-flight meals and airport lounge passes.

American Express announced these changes just a week after Citi also eliminated foreign transaction charges for taking on credit card debt abroad.

In the third quarter of the year alone, lenders sent out 1.2 billion new credit card offers, according to a report from Mintel Comperemedia. That marked a significant increase over the 391 million issued in the same period last year. In addition, a large portion of these offers – 80 percent – were for cards that gave consumers points, miles or cash back for taking on credit card debt, up from 60 percent last year.

Lenders have also made a greater effort to appeal to consumers’ feelings about taking on credit card debt by increasing the amount of cash back rewards offers they send out to 41 percent, the study found. This was a jump from the 28 percent seen in the third quarter of 2009.

Many consumers have been wary of taking on additional credit card debt in recent months, and specifically rewards cards because they carry higher rates and fees than do traditional accounts.

The total amount of delinquent credit card debt slipped for the 13th month in a row, to 4.38 percent in November, down from 4.51 percent the month prior, according to the latest statistics from Moody's Investors Service. This wasthe lowest level observed since December 2007. In particular, early-stage delinquencies – those between 30 and 59 days behind, which are viewed as a forecaster for future charge offs – slipped to 1.14 percent, close to an all-time low.

Meanwhile, the rate of credit card debt that had to be stricken from lenders' books entirely dipped as well, to 8.58 percent in November from the previous month's 8.79 percent, the report said. That was the lowest rate observed since August 2009.

Consumers have had a better time paying their credit card bills in recent months. However, some analysts believe the continual drops in delinquent and defaulted credit card debt may be due to the fact that many consumers having already defaulted, they have effectively locked themselves out of the borrowing system altogether.

The U.S. Supreme Court listened to oral arguments earlier this month in the case of Chase Bank USA vs. McCoy, in which the plaintiff, James McCoy, is suing his lender over a retroactive rate hike. McCoy says he was not properly disclosed ahead of time, according to a report from the Maryland Daily Record. The bank says that the increase, which was a penalty for a late payment on his credit card debt, was clearly outlined in documentation it sent him.

At the time, Regulation Z stated that lenders must give at least 15 days notice prior to any rate increase on credit card debt, the report said. While the lender acknowledged that the disclosure was somewhat ambiguous – it only said it "may" increase rates after a late payment – it also says that this was in keeping with the industry standard at the time.

The credit card industry has gone through many regulatory changes mandated by the federal government over the last year, and if the Supreme Court rules in McCoy's favor, more could come.

Many believed that when the Federal Reserve Board introduced restrictions on how much credit networks could charge merchants for processing debit card transactions, those savings would be passed on to the consumer and lead to less credit card debt. But some financial experts say that the opposite is true.

The Fed's latest rules limit the amount credit networks can charge for processing debit card transactions to just 12 cents. But financial experts worry that the restrictions' lack of a mandate for passing those saving on to consumers will not lead to lower prices, according to a report from the Philadelphia Inquirer. In fact, they say that it could lead to more credit card debt as lenders introduce new fees and higher interest rates in an attempt to make up for lost profits.

"We think the unintended consequences of this legislation will be an environment that is actually bad for consumers, not good for them," analysts Thomas McCrohan and Len DeProspo told Janney Capital Markets clients, the newspaper said.

Many lenders have actually added rewards programs for credit card debt, but at the same time have reintroduced long-absent charges such as annual fees, and increased rates.