Americans reduced credit card debt for the 21st straight month in June.
The latest Federal Reserve Consumer Credit Report showed that revolving credit, which is primarily credit card debt, decreased in June at an annual rate of 6.5%. It dropped $4.5 billion for the month, and has declined nearly $150 billion since October 2008, from $976.1 billion to $826.5 billion.
This drop in credit card debt is good for consumers and issuers. Delinquency rates are dropping, indicating that consumers are paying down debts to manageable levels and reducing their risk of default. But not all of the credit can go to consumers, since issuers have minimized their risk by maintaining stringent credit card approval rates, slashing credit limits, writing off bad loans and canceling accounts.
“Paying off debt and spending less is good for personal finances. Fewer delinquencies and smarter lending practices are good for banks. However, cutting back on spending and lending is not good for the economy if they go too far and continue for too long. Lending and spending are the oxygen and water for the economy, and our economy will grow weak without a healthy supply of oxygen and water,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
The Federal Reserve is searching for new ways to stimulate lending and revive the economy. Interest rates have remained at historic lows since December 2008, but these low rates have provided little incentive for lenders or borrowers.
On Tuesday, the Fed left its key bank lending rate at zero to 0.25%, the lowest level in decades, and appears to be in no hurry to raise it. The Fed’s announcement said rates will remain “exceptionally low” for “an extended period.” This means rates on some credit cards, home equity loans, some adjustable rate mortgages and other consumer loans will stay low.
Ideally, the low rate encourages businesses and individuals to finance major purchases, generating momentum in the economy. However, interest rates have been at the historic low for a couple years and have not created the spark.
A low prime rate does not guarantee a low interest rate for credit cards. In August 2008, before the recession, the prime rate was 5.0% and the average credit card APR was 12.03%. Today, the prime rate is 3.25% and the average credit card APR is 13.67% according to the LowCards.com Weekly Credit Card Rate Report.
Barack Obama was recently a guest on The View. No, you’re not going crazy–it’s still 2010 and there is no presidential election going on.
It was announced earlier this week that President Obama would appear on The View and in no time at all, pundits were throwing their notes together, writing their speeches and coming up with silly metaphors to accurately portray how crazy they think it is for Barack Obama to be the first sitting U.S. president to ever appear on a morning talk show. A segment on Nightline concluded with a voice-over booming on over a picture of Obama with his wife and two daughters saying “After all, being constantly surrounded by women is well within Mr. Obama’s comfort zone.” Dylan Rattigan of MSNBC showed a picture of the five co-hosts of The View, Whoopi Goldberg, Joy Behar, Sherri Shepherd, Elisabeth Hasselbeck and Barbara Walters, and asked “Which of these lovely ladies–each of them lovelier than the next–will actually ask the president a difficult or challenging question?” Of course Dylan Rattigan is forgetting that during the 2008 presidential election, the ladies of The View were the only form of media to outright accuse John McCain of lying during his campaign and asked him very difficult questions. In fact, New York Times columnist Frank Rich called that interview “the hardest-hitting interrogation McCain has yet faced on television.”
So what did Barack Obama speak with the five co-hosts of The View about? Well, Barbara Walters asked what the high points and low points as of late, where President Obama spoke a bit about his recent vacation to Maine and also about the economy, as it was when he was voted into office and how it is now, the progressions we have seen as far as the economy and job creation and sustainability. The president was also asked about why his presidency thus far is seen as a failure, despite his list of accomplishments–and there have been quite a few. Joy Behar asked bluntly where the “attack dog” of the left is when “The right wing, through Fox News … seem to be hijacking the narrative.”
For an even more detailed recap of the president’s interview on The View, check out Broadsheet and you can also watch two short clips of the show. The first clip is a fun one, talking about pop culture, what the president has on his iPod, if he has an iPhone (he doesn’t) and if he knew Lindsay Lohan was in jail (he did.) He however did not know who Snooki was and I have to admit, I kind of respect the man a little more for that.
According to a recent FICO study, over one-fourth (25.5%) of Americans have poor credit. Nearly 43.4 million people now have a credit score of 599 or below. When you go to the grocery store or a ballgame, look around–one in four people around you have serious financial problems.
Expect that number to grow as households continue to struggle through unemployment, credit card debt and foreclosures.
How Did We Get Here?
People don’t get into financial problems overnight. It took years of overspending, overlending, and poor regulating to create these problems. Lenders, and even the government, share some of the blame.
The government helped open the door for higher rates and fees in 1978. At that time, a majority of states had usury laws that capped interest rates on credit cards, usually at about 18%. That year, a ruling in Marquette National Bank vs. First of Omaha Service Corp held that national banks could charge credit card customers the highest interest rate allowed in the bank’s home state, instead of the customer’s home state. Taking advantage of this new ruling, many major banks moved to states such as South Dakota and Delaware since those states had no usury limits on interest rates and they could even export these rates to the other states.
In the early 1990′s, credit card issuers advanced beyond one-rate-fits-all offers and used credit scores and financial data to develop pricing and credit strategies. They set rates and limits based on computer assessments of an individual’s risk of default–the higher the risk, the higher the interest rate. This new data led to innovations such as increased credit limits and decreased minimum payments.
“These new, advanced risk assessments created new opportunities to lend to people who were a higher risk including people who should not have had credit. The new loans and higher credit limits were profitable for banks, but made the problem worse for the borrowers,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
In 1996, a Supreme Court ruling (Smiley vs. Citibank) ruled that fees should be included with the balance, and could determined by what the bank’s home state would allow. This ruling allowed issuers to charge more for fees as well as create new fees, such as over-the-limit fees. This ruling also opened the door for punitive practices like the Universal Default clause.
The days of loose lending for mortgages and credit cards, high rates and fees, second mortgages and borrowing beyond more than you could repay couldn’t last forever. The crash occurred in 2008 and caused tremendous losses for borrowers and lenders.
Banks and credit card issuers responded by slamming the brakes on lending. They cut credit lines and increased interest rates. Reduced credit limits hurt borrowers’ credit scores, and higher interest rates made it harder for them to pay down their balance.
Credit card issuers reacted strongly and quickly to protect themselves, but 25% of Americans are practically banned from inexpensive credit at the time they need it. The tightened lending policies shuts off these consumers from many financial options.
Actions Causing Lower Credit Scores
Debt-to-payment ratio increases. This happens when you add to your outstanding balance, moving you closer to the credit limit; or when the issuer reduces your credit limit. A higher debt-to-credit ratio is considered a higher risk and can result in a drop of about 20 points
Late payment. Some credit experts believe a few late payments on a credit card or other loans can lower your score by as much as 100 points if you have a great score, or 80 points for someone with an average score. Making payments on time is a big step toward improving your credit score.
Defaulting on a loan or a foreclosure may lower a score by as much as 200 points.
Here’s the basic breakdown of how long different types of negative information will remain on your credit report:
Late payments: seven years.
Bankruptcies: seven years (Chapter 13) or ten years (Chapter 7).
Foreclosures: seven years.
Collections: Approximately seven years, depending on the age of the debt being collected.
Public Record: Generally seven years, although unpaid tax liens can remain indefinitely.
The good news is that the older the negative item, the less impact it will have on your FICO score. A collection that is five years old will hurt much less than a collection that is five months old.
The Pain
A subprime credit score is just a number. It doesn’t tell the individual story or reasons that a person gets into financial trouble. It doesn’t tell of the stress caused by higher loan rates or increased insurance premiums because your credit score says you are a high risk. But lenders, insurers and even employers will make judgments and decisions about you based on that number.
Car loans, mortgages, credit card loans–all of these cost more when you have a subprime credit score. This puts additional strain on a budget that is already breaking.
“When consumers have made poor financial choices and have damaged their credit score, they are on their own to fix it. There is no federal bailout or TARP fund that will rescue them,” says Hardekopf.
Ways to Raise Your Credit Score
It’s important to note that raising your FICO credit score is a bit like losing weight: it takes time and there is no quick fix. Here are a few tips for raising your credit score:
Get a copy of your credit report from all three credit agencies. U.S. residents are entitled to one free copy of their credit report from each credit reporting agency once every 12 months. This information is found by calling 1-877-322-8228 or at AnnualCreditReport.com. If any of the information on a report is incorrect, contact the agency to correct it. Incorrect information should be corrected or removed within ten to thirty days, and doing so may give your score a quick boost. Your credit score is usually not shown on the free annual credit report. There are paid options that will allow you to see your credit score.
Pay your bills on time. This is the single most important factor in your credit score. Even if you only pay the minimum, pay your bills on time. Late and missed payments can quickly lower your credit score.
Pay off your debt. High balances and high debt ratios drag down credit scores. Your debt balance should be less than 35% of your available credit. If you have a good payment history, contact your creditors and ask for lower interest rates. Then use what you saved in interest to pay down your balances.
Build a long-term relationship with the accounts you have. A long history of good payments on a car loan, a mortgage, or a credit card increases your credit score. Keep older credit card accounts open, even if you are not using them, because you are rewarded for a long, positive credit history. If you review your credit report and discover that you have many accounts that you no longer use, close the newest ones first.
Limit your credit applications. Too many new accounts can lower your credit score. Each time you apply for a loan, the application shows up on your credit report. A significant increase in inquiries signals that you are desperate for money and are a credit risk. The exception is shopping for a mortgage or a car loan, as multiple inquiries for the same purpose in a reasonable period are considered a single inquiry.
Get a checking and a savings account.
Do not co-sign for a loan for someone else. This shows up on your credit report, and a missed payment or a maxed out credit card by the other person will affect your credit score.
If you can’t pay your bills, contact your creditor or see a legitimate credit counselor. The National Foundation for Credit Counselors, a not-for-profit organization, can give counseling and help you put together a debt management plan.
New Legal Protections
Under the financial reform bill passed last week, there is now a law dictating that a lender is legally responsible for assessing a borrower’s ability to pay. Lenders will have to verify borrower income to make a loan.
Additional consumer protections and regulations include: free credit scores for those denied credit or offered only higher rates because of negatives on their credit report; brokers can not receive incentives to steer homebuyers into pricier loans; institutions that lend irresponsibly will be penalized
Over 25% of American consumers (approximately 43.4 million) have credit scores of 599 and below. It is no secret that consumed have relied heavily on debt throughout the past few years, but because of the slow economic recovery and the new regulations being put on credit card issuers after the CARD Act went into effect, these 43.4 million people will now have more trouble than ever getting credit cards, auto loans or mortgages under the tighter lending standards.
The figures proving these new statistics came from FICO, Inc. whose recent analysis is based on consumer credit reports from April up to recently. What is deeply troubling about FICO’s findings is that historically, 25.5 million people fell below the 599 credit score and more are likely to join those in their lowest credit score categories.
On a mildly positive note, the number of people who have a top credit score of 800 or above has increased recently. This can only be attributed to people who have cut spending and paid down debt after consolidating and adjusting to the waves of the recession. There are currently 17.9& of Americans with a credit score of 800 or above.
Now is the best time to begin paying off debt, saving money and doing whatever you can to raise your credit score. Because of the new lending standards being applied by banks, you may not be getting much wiggle room in the world of credit for quite a while.
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.”
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
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Americans reduced credit card debt for the 21st straight month in June.
Barack Obama was recently a guest on The View. No, you’re not going crazy–it’s still 2010 and there is no presidential election going on.
According to a recent FICO study, over one-fourth (25.5%) of Americans 
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?
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.
