Another Sign of Recovery: Credit Card Mail Solicitations Increase 83%

Look no further than your own mailbox to see that the rebound in the credit card industry is underway.

According to a recent study by Synovate Mail Monitor, households in the United States received 640.3 million credit card offers during the second quarter of 2010. This was an 83% increase over the 349.1 million offers mailed during the same quarter in 2009. Several issuers showed very significant increases in volume during the April-June period: Chase quadrupled their mailings and Citi nearly tripled their solicitations.

This increase in mailings follows a 29% jump during the first quarter of the year (481.3 million offers versus 372.4 million).

For the first six months of 2010, there have been 1.12 billion credit card offers sent through the mail. During the entire year of 2009, there were 1.39 billion offers.

“This is an indication that the financial outlook for credit card issuers has improved dramatically. Defaults and delinquencies continue to decline, and they have put new policies in place, as well as some increased rates and fees. They are one again aggressively pursuing new customers, but this time around, they seem to really be focusing on those with good or excellent credit scores,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

In addition to increased mailings, issuers are using incentives to get potential cardholders to sign up for their credit card. 71% of these mail solicitations contain an introductory offer, the highest percentage in the 22 years of Synovate tracking this data. A number of these introductory offers have 0% APR for a certain number of months.

While these credit card mail solicitation figures are hefty increases over the previous year levels, they are substantially below the record 1.58 billion mailings sent during the third quarter of 2005.

Personal Credit Cards: Better for Your Business?

This is a guest post by Odysseas Papadimitriou, founder and CEO of CardHub.com, an online marketplace for credit card offers.

Running your own business takes energy, organization – and a whole lot of money. Using a credit card for funding a small business can provide you with the resources you need when you don’t have the cash. However, due to small business credit cards’ exclusion from protection under the Credit CARD Act, you should think twice before carrying a balance on your small business credit card.

Even though it’s called a business credit card, the business owner is still personally responsible for the debt incurred at the end of the day. Since the owner is assuming this risk already, it makes sense to use a personal credit card for purposes such as funding or any other expense that you can’t pay back right away. This way the Credit CARD Act will provide the protection you need when carrying a balance.

A personal credit card offers much more predictability and stability for someone managing a business. For instance, the credit card company cannot increase the interest rate on existing balances and cannot apply the penalty APR until you are 60 days delinquent. The Credit CARD Act also enforces a payment allocation system for personal cards that is more advantageous for the cardholder. Credit card companies such as Capital One, Chase, Bank of America, and Citibank do not have to adhere to such restrictions when it comes to business credit cards.

Don’t get me wrong, a business credit card offers its own advantages and can play an important role in financing your expenses. For example, a business owner can set individual credit limits for each employee, which makes managing and tracking expenses much more efficient. Business credit cards also often offer higher credit lines, making it a more effective spending tool when multiple people are using the same account.

These factors make business credit cards an excellent choice – even better than personal credit cards – when used as a charge card. In other words, it is my recommendation that you use a business credit card for making company purchases, but only those purchases that you plan to pay back in full at the end of each month.

When making decisions around financing your business, you should take advantage of what both business and personal credit cards have to offer. The combination of the two will give you the most purchasing power while allowing you to fund your business without being subjected to the whim of credit card companies.

Many Credit Card Issuers Not Providing Full Disclosure on Penalty Rates

Despite legislation to make credit card terms fair and easy-to-understand for consumers, the new regulations have opened the door to changes that can make cardholders “vulnerable and uninformed.”

The Pew Health Group Study (entitled “Two Steps Forward: After the Card Act, Credit Cards are Safer and More Transparent–But Challenges Remain”) released last week analyzed and compared the credit card marketplace before and after the CARD Act. The study reviewed credit cards offered online by the twelve largest banks and twelve largest credit unions–nearly 450 credit card offers.

The study shows that issuers have taken two steps forward in most areas, but also taken a step back with penalty rates. Some issuers no longer provide full disclosure of the terms of the penalty rate, or fail to correctly follow disclosure requirements required by the new Federal Reserve rules.

Before the CARD Act, credit card issuers clearly disclosed the penalty rate and the terms in the application process because this gave t hem the legal right to raise rates immediately and without notice as soon as the accounts became past due or cardholders went over their credit limit. This full disclosure was in their best interest because increasing rates generated more revenue.

After the CARD Act, the Federal Reserve added new rules for the penalty rate. While these rules benefit cardholders, they have also allowed issuers to withhold important pricing information which can leave cardholders uninformed about the complete conditions of their credit card.

Here are the new rules for applying penalty rates:

• Issuers are permitted to apply an increased rate to an existing balance when an account becomes more than 60 days delinquent. Issuers can also increase rates to the penalty rate on new transactions any time after the account has been open for one year.

• The cardholder must be given at least a 45-day notice before the rate is increased.

• According to the Federal Reserve Board rules, “the credit card issuers must disclose if the rate increase is due to the consumer’s failure to make a minimum periodic payment within 60 days from the due date for that payment. In those circumstances, the notice must state the reason for the increase and disclose that the increase will cease to apply if the creditor receives six consecutive required minimum periodic payments on or before the payment due date, beginning with the first payment due following the effective date of the increase.”

• The rules also say that “the notice also must state the circumstances under which the increased rate will cease to apply to the consumer’s account or, if applicable, that the increased rate will remain in effect for a potentially indefinite time period. In addition, the notice must include a statement indicating to which balances the delinquency or default rate or penalty rate will be applied, and, if applicable, a description of any balances to which the current rate will continue to apply as of the effective date of the rate increase, unless a consumer fails to make a minimum periodic payment within 60 days from the due date for that payment.”

“The cardholder must make six on-time monthly payments that start at the time of the penalty, or the issuer can charge the penalty rate indefinitely,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Starting on August 22, 2010, issuers must perform a review of accounts that receive a rate increase. The review should determine if changes in key factors (such as cardholder credit risk and market conditions) give reasons to reduce the rate.

The application of these rules varies widely by credit card company. Here is the terminology used by the six major issuers when describing this penalty rate:

• Chase: If an APR is increased for any of these reasons (late payment, exceed credit limit, payment returned) the Penalty APR will apply indefinitely to future transactions. If we do not receive any Minimum Payment within 60 days of the date and time due, the Penalty APR will apply to all outstanding balances and future transactions on your Account; but if we receive six consecutive Minimum Payments when due, beginning immediately after the increase, the Penalty APR will stop being applied to transactions that occurred prior to or within 14 days after we provided you notice about the APR increase. (Penalty APR is 29.99%)

• American Express: If the Penalty APR is applied for any of these reasons (late payments, returned payments), it will apply for at least 12 billing periods in a row. It will continue to apply until after you have made timely payments, with no returned payments, for 12 billing periods in a row. (Penalty APR is 27.24%)

• Citi: If your APR is increased for either of these reasions (late payment, returned payment), the Penalty APR will no longer apply to existing balances on your account if you make the next six consecutive minimum payments when due. However, the Penalty APR may apply to new transactions indefinitely. (Penalty APR is up to 29.99%)

• Discover: If your APRs for new transactions are increased for a late payment, the Penalty APRs may apply indefinitely.

  (Editor’s Note: Discover seems to have the most reasonable penalty rate; it is five percentage points above the non-penalty rate. The Penalty APR is between 16.99% and 25.99% based on your creditworthiness and other factors.)

• Capital One: If APRs are increased for a payment that is more than 60 days late, the Penalty APR will apply indefinitely unless you make the next six consecutive minimum payments on time following the rate increase. (Penalty APR is 29.4%)

• Bank of America: If this account becomes 60 days or more past due, we may amend the terms of the Agreement to increase all interest rates, including interest rates on existing promotional rate balances.

According to the Pew report, altogether one in five penalty disclosures mentioned the right way to “cure” (return to the original, non-penalty interest rate). Only three of ten banks that use penalty rates mentioned the legally mandated cure periods.

The Pew report points out that some issuers (Bank of America) no longer provide the rate or terms for the penalty fee, only including a sentence in the fine print that states they reserve the right to impose a penalty fee. The report argues that this undermines regulations. Cardholders are entitled to know the pricing of their account, the penalty rates that could apply, and how high those rates could be.

The Pew Health Group recommends that the Federal Reserve bank regulators should ensure full and reliable disclosure of credit card penalty rates because “full disclosure is critical to the success of this policy.” Regulators should also enforce the existing rules in Regulation Z to make sure the penalty rate and the terms are disclosed in advance.

It also suggests that he penalty rate should be no higher than 7% of the regular rate.

Credit Card Changes in the First Half of 2010

2009 was a difficult year for many credit card customers. Interest rates increased significantly, credit limits were slashed for millions of cardholders, issuers closed risky accounts and rewards were decreased. Many consumers wondered what would happen after the CARD Act and other regulations went into effect in 2010. Would these regulations really help consumers?

“Despite regulations, credit card issuers are still increasing rates and fees in 2010, but less dramatically than last year,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Here are some of the changes that banks and credit card issuers have made during the first half of 2010.

Rate Increases
Compared to 2009, this has been a slow year for rate increases. Issuers increased rates dramatically in 2009 while it was still easy to raise rates, and most issuers have not made wide-ranging rate increases since then. But rates have continued to increase during 2010. Here are some recent changes:

• Capital One increased the rate on its Classic Platinum credit card from 16.9% to 19.8% and on the No Hassle Cash Rewards card from 17.9% to 19.8%.

• Citi increased its Cash Advance APR from 21.99% to 25.24%. (February 2010)

Overall, rates are still rising. Based on the 1000+ cards in the LowCards.com Complete Credit Card Index, the average advertised APR for credit cards this week is 13.64%. Six months ago, the average was 13.25%. One year ago, the average was 12.10%.

Higher Fees

• Discover increased the cash advance fee from 3% with a $5 minimum to 5% with a $10 minimum. (January 2010)

• Bank of America added an annual fee for a limited group of cardholders that started in February. The fee ranges from $29 to $99 and is applied to the selected accounts based on risk and profitability.

• Citi increased its balance transfer fee from 3% to 4%. (June 2010) It also increased the cash advance fee increased from 3% to 5% with a minimum fee of $10.

• Citi added a $60 annual fee to some credit card accounts, effective April 1, 2010. Make $2,400 in purchases each year and the annual fee will be credited back to your account.

Banks are already preparing new fees on basic banking services as they try to replace revenue lost to recent regulatory rules. HSBC and Wells Fargo ended their free checking accounts. Bank of America is testing account fees and options that will be added later this year. Other banks could join in.

Some Niche Cards and Popular Offers are Discontinued

• Credit card issuers have discontinued some of the specialized cards that were targeted to consumers during a time of free-flowing credit. Chase closed the Starbucks Duetto Visa and credit card deals with Avon Products, Inc., The Detroit Pistons, The Orlando Magic and the New Jersey Devils.

• Bank of America also reduced the number of niche cards. The Wall Street Journal reported that Bank of America currently has about 4,400 affinity cards, down from 5,000. These are typically offered through college alumni associations and charities.

• The Wall Street Journal also reported that Chase now has about 110 co-branded credit cards, down from more than 200. Issuers seem to be eliminating these cards to cut costs and reduce their risk of delinquencies by card holders.

• Charles Schwab no longer accepts new applications for its acclaimed cash rebate credit card that was recommended by many consumer advocates and financial writers. The rebate was 2%, one of the most generous cash rebates available, and it was deposited into a brokerage account.

• The National Football League is moving its branded credit card business from Bank of America to British banker Barclays. This is forcing customers to scramble to spend reward points before they expire next month. They will have to apply for the new card to continue earning NFL rewards.

Expanding Introductory Offers
Some credit card issuers are increasing intro offers back to 12 and even 18 months. This is a sign that issuers are competing again for new customers. Until recently, issuers had slashed some intro rates periods to only three or six months, depending on the credit score.

• For some applicants, Discover increased the intro period for balance transfer increases from 12 months to 15 months for Discover More. (July 2010)

• Citi expanded the intro period to 18 months for all balance transfers to Citi Platinum Select. It was previously a tier of 18, 12, or 7 months.

• Iberia Bank Visa Select Card expanded the intro rate on purchases to 0% for 12 months (formerly 7.5% for 12 months). It lowered the intro rate to 1.99% for balance transfers during the first 12 billing cycles (formerly 7.5% for 12 months).

New Offers and Targeted Incentives to Encourage Spending

• Chase and Continental Airlines launched the new Continental Airlines OnePass Plus Card and added new features and benefits to the existing Continental Airlines Presidential Plus Card.

• Chase revised Freedom Rewards. It now offers a 5% cash-back rotating rewards promotion on its Chase Freedom card. However, it requires cardholders to register every three months in order to continue earning that level of cash back on spending categories that change every three months.

• Delta and Continental now waive checked bag fees for at least one bag if the ticket is purchased with their affiliated credit card.

• American Express offers selected cardholders a $30 statement credit for shopping at six of the designated retailers by August 30, 2010.

More Credit Card Offers in the Mail

During the first quarter of 2010, US households received 481.3 million credit card offers, a 29% increase from the 372.4 million offers mailed during the same period a year ago, according to the latest study by Synovate Mail Monitor. Some credit card issuers, such as Capital One and HSBC, more than doubled their mail offers during this quarter versus the prior quarter.

The study also showed direct mail offers are also becoming more widespread for soliciting new debt as more issuers offer attractive introductory interest rates. 65% of the total offers mailed in the first quarter had an introductory purchase APR compared to just 58% in the final quarter of 2009.

Consumers with good or excellent credit scores seem to be receiving the majority of these direct mail pieces.

“The consumers with above average credit scores are the ones that most every issuer wants,” says Hardekopf. “They pose less risk.”

Credit Card Debt and Delinquencies Fall Again

Late payments for credit cards fell in the first quarter of 2010 to the lowest level in eight years, the American Bankers Association reported last Tuesday. Card payments that are at least 30 days overdue fell to 3.88% of all accounts in the first quarter compared with 4.39% in the fourth quarter of 2009. This was the lowest level since the first quarter of 2002. Nearly every major credit card issuer has posted five straight months of improvement in their late payment figures.

In addition, the latest Consumer Credit report released today from the Federal Reserve showed that revolving credit, which is primarily credit card debt, fell in May for the 20th consecutive month. It declined at an annual rate of 10.5%, and has decreased an impressive $145 billion since October of 2008, from $976.1 billion to $830.8 billion.

A drop in credit card delinquencies should be a good sign of a healthy recovery, indicating that more people are employed and have money to pay down their debt. Employment numbers have historically been a gauge for credit card delinquencies. But that doesn’t seem to be the case now. The economy lost jobs in June for the first time this year. Unemployment remains high at 9.5%.

What could be causing this drop in delinquencies and overall credit card debt? It appears that both issuers and consumers have taken steps to help decrease both these figures.

Issuer Changes
Credit card issuers have taken a number of steps to decrease their financial risk:

• Lowered the credit limits on millions of credit card accounts, cutting the amount of consumers can charge on their accounts.
• Closed credit card accounts due to inactivity.
• Written off a number of their uncollectible accounts.
• Approved fewer risky credit card applications. If consumers have fair or poor credit scores, it is now very tough for them to get approved on a new credit card account.

“Banks reacted strongly to the credit crisis and slammed the door on subprime loans. Wells Fargo just announced that it is shutting its subprime lending unit including mortgages, credit cards and auto loans,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “This is bad news for households that are struggling to pay the bills. Subprime loan options are shrinking and an average or low credit score now receives interest rates and fees that no one can afford.”

Consumer Changes
Consumers are also reducing their credit card debt. Higher APRs and fees may have pushed some cardholders to switch to debit card and cash transactions.

Nearly 42% of consumers are using more cash than they were a year ago, according to a survey by the consulting firm Market Strategies International. A study by BIG Research in January showed that 20.5% of the respondents said they would pay with cash more often, up from 23.0% a year earlier.

Debit card usage is increasing. According to their annual reports, MasterCard’s debit card usage in this country increased 10.5% in the fourth quarter of 2009 versus year ago levels, while Visa reported a 17% increase.

Delinquencies Lower for All Issuers in 2010
The lower delinquencies in May represent the fifth straight month of improvement for nearly every major credit card issuer. Here is a look at the monthly delinquencies for the top credit card issuers:

Capital One delinquencies by month:
Jan   5.80%
Feb   5.51
Mar   5.30
Apr   5.07
May   4.80

Discover delinquencies by month:
Jan   5.55%
Feb   5.50
Mar   5.39
Apr   5.20
May   4.95

Chase delinquencies by month:
Jan   4.75%
Feb   4.67
Mar   4.51
Apr   4.40
May   4.22

Bank of America delinquencies by month:
Jan   7.35%
Feb   7.23
Mar   7.07
Apr   6.73
May   6.39

American Express delinquencies by month:
Jan   3.60%
Feb   3.60
Mar   3.30
Apr   3.10
May   2.90

Citi delinquencies by month:
Jan   5.75%
Feb   5.94
Mar   6.06
Apr   5.85
May   5.59