Credit Card Update October 29
FOR MANY OVER 55, DEBT DEFERS DREAMS
A growing number of Americans age 55 and older have put their retirement dreams on hold as they face a dismal financial reality: the recession has forced many into unemployment, stripped away years of their savings or dramatically reduced incomes during what they had hoped would be their final high-earning years. The ranks of older bankruptcy filers also have been swelling rapidly. From 1991 to 2007, bankruptcy filings by those 65 and older increased by 150%, while filings in the 75-to-84 age group soared 433%, according to the Consumer Bankruptcy Project. More than two-thirds of older Americans who have filed for bankruptcy say credit cards are the reason, according to a recent University of Michigan study. The median credit card debt of older bankruptcy filers in 2007 was $22,562, compared
with $13,615 for younger filers, the study said. Credit debt has grown as elderly debtors used their cards to help children, pay medical bills, and survive during job loss and the recession.
Story by Christine Dugas for USA Today
MOST CREDIT CARD COMPANIES SHOW SIGNIFICANT PROFITS IN SEPTEMBER
New financial reports show that credit cards are becoming profitable once again. But is this a recovery or an illusion? Most of the major banks and credit cards reported a jump in profitability during the third quarter. New monthly numbers also show that credit card delinquencies and defaults continue to improve in 2010, boosting revenue for the issuers. A significant amount of this profitability posted by credit card
companies in the third quarter came from issuers reducing the funds previously set aside to cover bad loans because charge-offs and delinquencies are falling. This indicates that banks are more confident that customers will be able to make payments on loans in the future. This drop in delinquencies and write-offs will stop some of the bleeding, but it is not enough for long-term recovery and healthy growth. To move forward, banks and credit card issuers must find a responsible way to ease lending standards, increase lending and encourage consumer spending. They must also navigate through tougher regulations that will continue to drain away revenue.
CHARGE-OFFS DOWN SHARPLY IN SEPTEMBER
Moody’s Investors Service said the charge-off rate for U.S. credit cards fell sharply in September to 8.9%, resuming declines following an August
hiccup, as the economy heals. Charge-offs declined sequentially for the four months leading up to August before increasing in that month–a rise Moody’s on Monday said it can now chalk up to seasonality. The firm said it expects charge-offs to move “steadily lower” into the first half of 2011. The 8.9% charge-off rate for September is down from August’s 10%. The peak was at 11.5% in August 2009. The delinquency rate, balances for which a monthly payment is more than 30 days late, fell to 4.65% in September from 4.7% in August.
Story by Nathan Becker for Dow Jones
RETAILERS EXPLORE CARD SETTLEMENT,
BUT CONSUMER RELIEF MAY BE SLOW
Retailers are exploring how they can take advantage of a recent Justice
Department settlement with Visa and MasterCard that allows merchants to discount transactions paid with cheaper types of credit cards, but consumers may not see any benefits for some time. Merchants face technical hurdles to offering discounts. They’re also waiting for upcoming federal regulations on debit cards that will affect how companies provide discounts for using that form of payment. Many major retailers may have limited discounting options because they remain bound by similar agreements with American Express barring them from discouraging use of AmEx cards, which generally carry higher average fees for retailers.Observers say it could take as long as two years for the case to go to trial.
Story by Brent Kendall for Dow Jones
CREDIT CARD ISSUERS PAID $83 MILLION TO MARKET
CARDS TO COLLEGE STUDENTS AND ALUMNI IN 2009
The CARD Act requires credit card companies to disclose the details on how much they pay to colleges for the rights to market their cards to students and alumni. The Federal Reserve’s first Report on College Credit Card Agreements was released Monday, showing that credit card issuers paid over $83 million to colleges and their related alumni organizations in 2009. Issuers paid out $83,462,712 to a total of 1,044 colleges and associations, an average of nearly $80,000 per institution. A total of 53,164 new college credit card accounts were opened under these agreements in 2009. The report details the payments to each school. The University of Illinois Alumni Association received the highest payment of $3,272,657 in 2009. While 17 issuers struck marketing deals with colleges, three credit card companies–Bank of America, Chase, and U.S. Bank–accounted for approximately 96% of all college credit card agreements submitted to the Board. Bank of America alone had marketing deals with 86% of the institutions.
US BANCORP LOOKS TO SNAG BUSINESS FROM RIVALS
In recent months, giant banks such as Bank of America have scrambled to find new sources of revenue to make up for new limits on fees, including charges when people overdraw their accounts. For many banks, the solution has been simple: Introduce new fees on checking accounts that previously had none. But U.S. Bancorp is taking a decidedly different strategy. Flush with cash, the bank’s executives have decided they can afford to sit on the sidelines–for now, at least–and keep fees unchanged. The bank is betting new customers it wins from its rivals will offset costs of the regulatory changes. This wait-and-see approach also poses substantial risks. The bank estimates new federal restrictions on overdraft fees and credit cards could cost the bank $690 million to $730 million a year.
Story by Chris Serres for the Star-Tribune
REGULATORS PUSH BANKS TO LIMIT RELIANCE ON CREDIT RATINGS
Banks and institutional investors should break their dependency on credit rating agencies and take more responsibility for assessing the quality of the debt that they buy. The Financial Stability Board, which was created by members of the G-20 to work on ways to avoid future financial crises, said in a report that overreliance on credit ratings had contributed to the financial crisis, as downgrades of certain debt issuers provoked market stampedes. Large banks should be required to supplement the work of ratings agencies by doing their own research, and they should disclose what methodology they use. Regulators, in turn, should make sure that banks are not underestimating risks. The F.S.B. said that regulators and central bankers had contributed to the system’s dependence on credit ratings by “hard-wiring” their verdicts into laws and regulations.