Credit Card Debt Continues to Fall

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.

Study Analyzes Changes in Credit Card Industry Since CARD Act

The CARD Act has forced credit card issuers to make a number of good changes that are already benefiting consumers, but there is still room for improvement, so says a study by the Pew Health Group.

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

Here are some of the major findings from the Pew Study:

• Rated continued to increase. Overall, purchase interest rates have increased 30% between December 2008 and March 2010. In December 2008, the median purchase APR was between 9.99% and 15.99%. In March 2010, the range was 12.99% to 20.99%.

• Penalty interest rates received the most attention and criticism in the report. The Federal Reserve rules “permit a creditor to apply an increased rate to an existing balance when an account becomes more than 60 days delinquent.” But the report said that the implementation of the changes has led the emergence of a “troubling new trend.” Some issuers such as Bank of America no longer list the amount and terms of the penalty rate in the terms and conditions. They only include a sentence in the fine print that states they reserve the right to impose a penalty fee. The report argues that this goes against regulations; cardholders are entitled to know the pricing of their account, the penalty rates that could apply, and how high those rates could be. 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.

• 78% of banks offered an introductory rate for purchases and/or balance transfers. The median introductory period is seven months.

• No surveyed banks offered a fixed rate on any credit card.

• Rewards are not used to penalize cardholders for late or overlimit payments. 23% of surveyed bankcards put limitations on cardholders, preventing them from collecting rewards if there is a late payment or penalty on their account. Some issuers require a reinstated fee for lost points, but this is not described in the terms and conditions.

  For example, American Express will cancel points in Delta, Jet Blue, Hilton Hotels and Starwood Hotels accounts earned for that cycle if you have a late payment fee. They can be reinstated for $29 for each month.

• As of yet, legislation did not generate an increase in new annual fees. The number of cards that charge an annual fee actually dropped 1% from July 2009 to March 2010. However, during that time, the median annual fee increased from $50 to $59 for bank cards.

• Cash advance and balance transfer fees increased on average by one-third between July 2009 and March 2010–from 3% of each transaction to 4%. At the same time, cardholders are reducing their cash advances. In 2009, cash advances dropped by more than 40%.

• Only 5% of issuers disclosed the minimum payment formula as part of the application process. Those that did require 1% of principal balance.

There were also several recommendations from the Pew Study:

• Full disclosure of penalty fees. The issuer should clearly list actions that can trigger the fee, what the fee will be, and how/when the rate will return to a non-penalty fee.

• Monitor transaction surcharges to protect against deceptive hidden costs. Rising balance transfer fees equate to higher effective rates.

• Apply total monthly payment to the balance with the highest rate.

• Penalty rate should be no more than seven percentage points above the non-penalty rate.

• Consolidate all maintenance fees, including annual access membership fees, into a single annual fee so that pricing is clear and easy to understand and compare.

• Remove mandatory binding arbitration clause.

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

Consumer Tips on New Overdraft Rules

If you have a checking account, you now have a choice to make about overdraft protection. New Federal Reserve rules require banks to receive permission from each checking account customer before the bank provides overdraft protection for ATM and debit card transactions.

The change started July 1 for new customers and takes effect on August 13 for existing customers. The rules do not cover checks or automatic bill payments–banks can still authorize and pay overdrafts for these transactions at their discretion and charge a fee.

An overdraft occurs when one does not have enough money in a checking account to pay for a transaction, but it is paid by the bank anyway. This service is a loan from the bank and it isn’t free. Banks charge a non-sufficient funds paid item fee (NSF) that is typically $30-$40. A fee is charged for each transaction paid in this manner.

Before the new rules, most banks automatically added courtesy overdraft protection to checking accounts with details and fees in the fine print. Some customers didn’t realize the high price of the fee until they incurred the charge.

Now that the rules are in effect, banks are aggressively encouraging their customers to opt-in and marketing the benefits of overdraft protection. This is revenue banks do not want to lose. In 2009, banks collected almost $38.5 billion in insufficient funds and overdraft fees, Moebs Services estimates.

“Banks have made a lot of money by allowing customers to spend or withdraw money that was not in their account. An overdrawn account can happen quickly with multiple transactions, even if they are small amounts,” says Bill Hardekopf of LowCards.com and author of The Credit Card Guidebook. “Sometimes, overdrafts can be caused by a number of things that are not in the customer’s control: the timing of cash flow or payments, the delayed posting of a deposit, or the banks paying the biggest withdrawals first. A $5 purchase can trigger a $30-$40 fee. Since the cashier doesn’t tell you it’s an overdraft, you don’t know there is a problem until it is too late.”

In response to new regulations, Bank of America and Citi no longer allow debit card overdrafts. Bank of America customers can still sign up for a formal program to cover debit card overdrafts.

How to Opt Out of Overdraft Protection (or Opt In)
Many banks are currently sending out informational letters to customers that explain overdraft protection and how to enroll in the service. A consumer can mail in the enrollment form (the letter may include a postage-paid envelope), or sign up by phone, in person at your local branch or online. If you do not choose an option by August 13, you will automatically be opted out.

Opting out means that you do not want your bank to authorize and pay for debit card and ATM transactions when it appears there is not enough money in your account to cover the transaction. This may create a situation where your purchase is declined.

Opting in means that you do want your bank to cover debit and ATM transactions where they may not be enough money in your account to cover the transaction. As a result, you will be charged a NSF paid item fee.

Read the Fine Print
Carefully read the notice that you receive from your bank. It should reveal the true costs and limits of overdraft protection.

• The cost of overdraft may not end with the NSF paid-item fee. If your account remains overdrawn, you can receive additional fees. For example, if your account is overdrawn and continues with a negative balance for ten consecutive days, BBVA Compass charges a $25 extended overdraft fee. If the ending daily balance remains negative for 20 calendar days, another $25 extended overdraft fee will be charged. The BBVA Compass limits NSF fees to six per calendar day. The total of the negative balances and all fees and charges is due immediately.

• Transactions aren’t processed in the order they occur. Banks can charge the items to your account in any order. They admit in the fine print that this can cause the available balance to be insufficient to pay one of more other items that otherwise could have been paid. This means the order the charges are paid can affect the total amount of overdraft and non-sufficient funds fees.

• Even if you choose to opt-in, the payment of an item is discretionary. Banks will choose which transactions to cover. You can’t count on having overdraft protection when you need it.

If you opt in, you can cancel at any time. If you do not opt in, you can do so later.

Alternatives to a Standard Overdraft
Most banks offer cheaper alternatives to standard overdraft protection. These include a link to your savings account, a credit card, or a line of credit that will cover overdrawn transactions. There is still a fee each time you overdraw your account and your bank performs a transfer but it is typically $5-$10, much less than the standard overdraft fee. You must contact your bank to set up this alternative service, since it is not part of the opt in selection.

“This is a good time to assess how you monitor your checking account. Set up a low balance alert that will notify you when your account is low. Online banking can help avoid overdraft situations and help keep up with your account in real time,” says Hardekopf.

Federal Reserve Announces New Credit Card Protections

The Federal Reserve announced new rules and credit card protections yesterday. It is the grand finale of the CARD Act. Capping late fees and providing possible relief from rate increases. These rules go into effect on August 22nd.

Under these new rules:

• There are limited and conditional protections against interest rate increases. Any increase in your APR must be re-evaluated by your issuer every six months, including any increases that took place after January 1, 2009. If appropriate, the issuer must reduce your rate within 45 days after completing the evaluation. Ideally, lenders will reduce rates if the reasons for the increases no longer exist.

“Terms such as ‘evaluate’ and ‘reduce if appropriate’ leave wiggle room for issuers. Credit card companies need the income from these higher interest rates. That is one reason why many cardholders received significant rate increases before the CARD Act went into effect. It would be surprising if issuers re-evaluate and restore rates to previous levels for a large number of cardholders,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

• Most late payment fees will be capped at $25. However, the fee can be as high as $35 if one of your last six payments was late or if the issuer can prove the costs incurred justify a higher fee.

• The penalty fees cannot exceed the dollar amount of the consumer’s violation. Hence, a credit card company can no longer charge a $39 fee when a consumer is late making a $20 minimum payment. In this example, the fee cannot exceed $20.

• Cardholders can’t be charged more than one fee for a single event or transaction.

Credit card companies can no longer charge an inactivity fee on cardholders who don’t use their card.