Credit Card Usage Continues to Decline

Consumer borrowing increased in January for the first time in a year, the Federal Reserve reported Friday. The increase alone was significant, but the news was even more surprising since it occurred despite another drop in credit card loans.

According to the Federal Reserve, total consumer borrowing rose to $2.456 trillion in January, an annual rate of 2.5%. The increase came from nonrevolving credit like auto, personal and student loans that rose at a 5% annual rate. Revolving credit, which is primarily credit card usage, fell for the 16th consecutive month, decreasing at an annual rate of 2.3%.

Recent studies underscore some clear trends either taking place or projected for credit card usage.

* Credit card usage has dropped substantially over the past three years, from 87% of consumers surveyed in 2007 to 56% in 2009 (Javelin Strategy and Research).
http://www.americanbanker.com/bulletins/consumers-turn-on-cards-1015107-1.html

* Debit card usage is increasing significantly. According to their annual reports, MasterCard's debit card usage increased 10.5% in the United States while Visa reported a 17% increase. MasterCard also reported its credit card usage dropped 13%.

* The number of new credit cards issued declined 45% last year, according to Equifax Consumer Credit Trends.

*The average balance on Visa, MasterCard, and American Express accounts dropped 5% to $5,434 in the fourth quarter of 2009 from $5,729 in the fourth quarter of 2008.

* According to a BIG Research survey in January 2010, 30.5% of respondents said they would pay with cash more often, up from 23.0% a year earlier. http://www.bigresearch.com/news/EBJan10.htm

* The same study showed consumers are concentrating on eliminating debt. 37.9% are prioritizing paying down debt over the next three months, rising from 34.4% in December.

* Issuers will reduce credit card lines by $2.1 trillion in the next 18 months, wiping out nearly 45% of the spending power U.S. consumers now have on credit cards, predicts investment bank Oppenheimer & Co.
https://www.javelinstrategy.com/news/629/91/Banks-are-cutting-back-consumers-credit-card-limits-a-trend-likely-to-accelerate-in-the-coming-months-How-will-online-retailers-close-sales-if-customers-can-t-pay-with-plastic

"We know that over the past 18 months, banks cut credit limits for 58 million cardholders." says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "If issuers keep this up and cut 45% of the spending power on credit cards, they will be forcing consumers to continue to reduce their usage of credit cards and find alternative forms of payment like debit cards and cash. That might not be a bad thing for the financial well being of the American consumer."

Significant Credit Card Changes Proposed By The Federal Reserve

Today, the Federal Reserve proposed a rule amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable late payment and other penalty fees, as well as requiring credit card issuers to reconsider increases in interest rates. This rule will go into effect on August 22, 2010.

"This proposal addresses two key costs of using a credit card--fees and interest rates," said Federal Reserve Governor Elizabeth A. Duke. "The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year."

The proposed rule would:

* Ban inactivity fees. Some issuers have recently instituted an inactivity fee if there are no transactions on your credit card for a certain period of time.

* Force issuers to evaluate rate increases. At least every six months, credit card issuers must reevaluate annual percentage rates increased on or after January 1, 200. and, if appropriate based on their review, reduce the annual percentage rate applicable to the account. This includes changes in the consumer's creditworthiness, and to increases in the rate due to changes in market conditions or the issuer's cost of funds. However, the statute also expressly provides that no specific amount of reduction in the rate is required.

* Stop credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation of the account terms. Card issuers would no longer be able to charge a $39 late fee for a $20 minimum payment. The fee could not exceed $20.

* Require credit card issuers to provide reasons for increases in rates.

* Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of account terms.

"These are significant changes in the credit card industry that will help every cardholder. But if history is any indicator, credit card issuers will find new ways to make up for the revenue they will lose when these rules take effect in August, and those changes could be in the form of new or increased fees," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Here is a link to the Federal Reserve's amendment to Regulation Z:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100303a1.pdf

This proposed rule represents the third stage of the Board's implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009. In July 2009, the Board issued a rule implementing the provisions of the Credit Card Act that went into effect on August 20, 2009. In January 2010, the Board issued a rule to implement the provisions of the Credit Card Act that went into effect on February 22, 2010.

New Credit Card Statements Could Help Consumers Decrease Debt

Consumers will soon receive their first credit card bill since last week's implementation of the CARD Act and their statement will look very different.

"The new debt information on your credit card statement is one of the best provisions of the CARD Act and it will benefit every cardholder," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

The most significant change in your statement will be a chart which will clearly show how long it will take and how much you will actually pay should you make just the minimum payment each month. In addition, the chart will display how much you need to pay each billing cycle in order to completely pay off your balance in three years.

Suppose you owe $3,000 and your interest rate is 14.4%. Your statement would show that if you made no additional charges and paid only the minimum payment, it would take almost 11 years to pay off the balance at an estimated cost of $4,745. In addition, it would show that if you wanted to pay off the balance in three years, you would need to pay $103 per month and it would cost an estimated $3,712.

"Consumers will be shocked at how long it takes to pay down a balance and how much interest is actually paid if you are only making the minimum payment. When people see this personal information clearly presented in black and white, it should have a significant impact on getting consumers to pay off their credit card balance in a much more timely manner. Cardholders can't ignore reality when they see the numbers each month on their credit card bill," says Hardekopf.

An example of the minimum payment table can be found on the Federal Reserve website:
http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm

Consumers will see several additional changes on their credit card bills:

* Your statement should be much easier to understand. Fees and interest charges should be highlighted and explained in simple language in a legible font size, not buried in the fine print.

* Your statement should give a toll-free number for counseling assistance from legitimate nonprofit organizations. Issuers are required to provide contact information for three organizations that have been approved by the United States Trustee or a bankruptcy administrator to provide credit counseling services in, at the card issuer's option, either the state in which the billing address for the account is located or the state specified by the consumer. The National Foundation of Credit Counseling (NFCC) has added help lines to meet the expected increase in consumer assistance under the governments new regulation.

* Some issuers will give a summary of total fees and interest paid to date during the current billing cycle and year to date.

Not only will your bill look different, but the delivery and due dates may also be different. Pay attention to the due date because it is possible that your due date has changed as a result of the provision that requires at least 21 days notice before your due date. Your due date now has to fall on the same day every month. The payment cut-off time cannot be earlier than 5 p.m. on the due date. If your payment due date falls on a weekend or holiday (when the company does not process payments), you will have until the following business day to pay without penalty.

These statement changes may be limited to or be most effective for those with paper statements. If you have online banking without a paper statement, you will miss these numbers about your debt. You may have to go looking for it in a pdf file instead of it being delivered directly to you. According to a recent AP story, the biggest banks are not putting the minimum payment on the online account summary page. Bank of America, Chase, Citi and others say they are educating customers through mail and email about the new statements. Capital One is using banner ads about the new disclosures when cardholders log on.

"Banks should act in the spirit of the CARD Act and also make the minimum payment information easily available to online accounts," says Hardekopf.

Significant APR Increases Took Place Before CARD Act

The major provisions of the CARD Act took effect Monday and these regulations are very beneficial for credit cardholders. But it appears that issuers simply made changes before this date, creating new ways to generate revenue at the expense of their customers.

One of the most significant changes has been in interest rates. Since the CARD Act places some restrictions on future interest rate hikes, issuers simply took them before the February 22 implementation of the law. While the prime rate remains at its historic low of 3.25%, unchanged since December 2008, the average APR on a credit card increased almost two full percentage points from the time the CARD Act was signed into law until it took effect.

According to the LowCards Complete Credit Card Index, which tracks the APR on the 1000+ credit cards in the US (http://www.lowcards.com/CreditCardIndex.aspx ), the average advertised APR last week was 13.54%. On May 21, the day before the CARD Act was signed, that average was 11.64%

The rates on some of the nation's most popular cards increased even more significantly during the past 18 months. In October 2008, the APR for Blue from American Express was as low as 8.99%. Today, the rate is as low as 15.24%. In October 2008, the rate for Citi Platinum Select was as low as 7.99%. Today, it is as low as 11.99%. Some cardholders, who are now perceived as higher risk by their issuer, have received rates as high as 29.99%.

While the CARD Act does provide needed restrictions against "any time, any reason" rate increases, it doesn't provide "every time, every reason" protection for rate increases. Issuers can still raise rates on future purchases if they provide a 45-day notice. Cardholders can also expect rate increases in the near future as the Fed eases its foot off the interest rate brake.

Other changes that issuers implemented include:

1) Minimum Payment Increases
Before the CARD Act, most issuers first applied the monthly payments to the part of the balance with the lowest interest rates, assuring that the cardholder paid the highest rates as long as possible and thus, extending the time for repayment. The CARD Act forces issuers to apply any payment in excess of the minimum monthly payment to the highest interest rate.

"This provision could have been one of the best regulations for consumers who carried a balance, helping them pay down the most costly loans faster and saving money on interest payments. However, many issuers also increased the minimum payment from 2.5% of your balance to 5%, so that a greater percentage of the payment is still applied to your balance with the lowest interest rate," says Bill Hardekopf, CEO of
LowCards.com and author of The Credit Card Guidebook. "While this may help consumers pay down their debt faster, they now have to pay even more to exceed the minimum payment and pay down the higher rate loans."


2) Fees
Even the though the CARD Act has eliminated the dreaded "over the limit" fee, issuers have used the nine months between the bill passing and being instituted to raise numerous existing fees and institute new fees. Here are a few examples:

* Some issuers have increased balance transfer and cash advance fees from 3% to 5% (Discover and Chase).

* Issuers are adding annual fees. Bank of America added an annual fee that ranges from $29 to $99 to a limited group of cardholders. In April, Citi will begin charging a $60 annual fee on accounts that charge less than $2400 per year.

* Several issuers broadened the definition of international transactions to apply the foreign transaction fee to more purchases.

* Some cards now cancel your accumulated rewards after a late payment, but
then offer the chance to buy them back with a reinstatement fee.

* World Financial Network National Bank now charges some cardholders a $1 fee for paper statements. World Financial Network national Bank offers a wide range of store-branded cards for retailers.

* Inactivity fees have had a limited introduction, but more issuers may add this fee as a way to make revenue on dormant and rarely-used accounts.


3) Fixed to Variable Rates
Fixed rates were once a popular feature in marketing credit cards. Consumers wanted a set low rate; issuers liked them especially at a time when the prime rate was dropping and remained low.

But after the passage of the CARD Act, most issuers switched from fixed to variable rates to give themselves the flexibility to raise rates in the future, as the prime rate increases.

"Regulations in the CARD Act make it harder for issuers to raise rates, which is good for consumers, but the side effect is that fixed rate cards have almost become extinct," says Hardekopf. "By changing to variable rates, issuers can maintain their margins by passing along any future increases in the card's index."


4) Changes in rewards
Since issuers are trying to raise revenue and cut costs, rewards is an area where they have made subtle changes to reduce their cost.

* American Express reduced the amount of cash earned on some cards from 1.5% to 1.25% on most purchases.

* Citi tied bonus miles to purchases. Cardholders now receive 25,000 bonus
miles after making $750 in purchases within four months.

* The spend hurdle to earn 6,000 bonus points increased from $50 to $250 for both the Citi Forward Card and Citi Forward Card for College Students.

* Discover reduced rewards for Open Road. 5% cash back on gas and auto maintenance became 2% cash back on gas and restaurants. However, the monthly cashback limit increased from $100 to $250 per month.

Citi Adds $60 Annual Fee to More Credit Card Accounts

One week before the CARD Act goes into effect, Citi has added an annual fee to more accounts on many of its popular credit cards.

Many Citi cardholders are receiving letters about a $60 annual fee that is being added to their account effective April 1, 2010. If consumers make $2,400 in purchases during the year, then the annual fee will be credited back to their account.

It appears that Citi's test of adding an annual fee to a small percentage of their customers in August of 2009 proved successful for the issuer. At that time, Citi began charging some cardholders an annual fee of $30 to $90 unless they spent at least $2,400 per year. Now a far greater number of customers are receiving this notice.

"The reason we are making this change is to maintain the quality of our service amid the rising cost of doing business," said Ken Stork of Citibank in a letter to the cardholders receiving this notice.

"This is a very concerning sign for credit card consumers and it is further evidence of how issuers will react in 2010. Issuers are having to find creative ways to generate revenue. The tough economy, the high default rates they have experienced, and the enactment of the CARD Act have combined to make it a very stressful period for the issuers," says Bill Hardekopf, CEO of LowCards.com and author of The Credit
Card Guidebook. "Adding annual fees is one way to generate new revenue. Consumers need to watch for this on their accounts since only about 20% of the credit cards currently carry an annual fee.

"If you spend at least an average of $200 per month on your Citi card, this may not be a big deal. However, it is a problem for the cardholders who charge less than $2,400 per year, who keep the account open for emergencies or to boost their credit score. Other credit card issuers may follow Citi and add a similar fee.

"If the annual fee will be added to your account, contact the issuer to ask them to waive it. This may not work, but it doesn't hurt to ask. You can opt out of the card and close the account. If you have a good history with this card and it is building your credit score, shift some of your spending to this card to reach the $2,400 limit and pay it off each month."