Thursday, April 30, 2009

Debit-Card Use Overtakes Credit

Debit-card use is on the rise. It's now the preferred card of choice -- at Visa -- when it comes to purchases. On a dollar-volume basis, Visa-branded debit cards inched ahead of credit-card purchases during the last three month of 2008.

From the Wall Street Journal (hat tip Don in SW OH):

The urge to not splurge by thrift-conscious consumers is giving the debit-card revolution a new push. On Wednesday, Visa Inc. reported that the total dollar volume of purchases made using its branded debit cards surpassed credit-card purchases for the first time during the last three months of 2008. The $206 billion in U.S. debit-card transactions processed by Visa were 50.4% of the San Francisco company's total transaction volume in the period, up from about 40% in 2003.

"The reality is that the vast majority of consumers want to pay as they go," said Stacey Pinkerd, who oversees Visa's debit-card business.

Credit-card issuers better be careful. If debit cards ever become the overwhelming choice for payments, card issuers will have to figure out another way to enrich themselves (you'd think that interest fees will fall as debit-card use continues to rise).

Read the rest of the Journal story here.

House Backs Credit-Card Measure With Obama Priorities; Senate Kills Cram-Down Bill

One down and one to go. Today the House voted overwhelmingly in favor of legislation that would put limits on credit-card interest rates and fees. The vote was 357 to 70. The measure now heads to the Senate, which could vote as early as next week.

From Bloomberg:

The legislation would make credit-card companies give 45 days’ notice before increasing rates. That provision would take effect 90 days after the measure is signed into law. Other changes would take effect a year after enactment, or July 1, 2010, whichever comes first.

The legislation would also require statements to be mailed at least 21 days before the payment due date, up from 14 days. It would ban unilateral changes to credit-card agreements and would permit retroactive interest-rate increases only when certain conditions are met.

The administration also backed an amendment, agreed to on a voice vote, requiring clearer disclosure in agreements. A requirement that the Federal Reserve report every two years on the credit-card market and lenders’ compliance with consumer- protection laws was also agreed to.

Note that this bill only applies to consumer credit cards. The bill does not apply to business or corporate cards (which I've mentioned before). Also note that the bill, if it gets past the Senate, won't be implemented until a year after enactment -- or until July, 1, 2010 (whichever is sooner).

Read the rest of the Bloomberg story here.

Separately, the Senate today killed a so-called "cramdown" amendment that would have allowed bankruptcy judges to modify mortgages for homeowners facing foreclosure. You can read about that here. Read More...

Wednesday, April 29, 2009

American Express's Risk-Cutting Poses Its Own Risks

David Lazarus, a columnist over at the Los Angeles Times, must be living in a bubble. Must be. His story today on American Express is untimely and unenlightening (or at least it should be for most readers by now). What's more, I can't figure out what his headline means. Lazarus never says how American Express's risk cutting poses its own risks. For who? For the company? For the customer? If the headline refers to American Express's own risk, Lazarus never makes the point.

From the story:

Davis' theory, and I think he's on to something, is that AmEx has unleashed some sort of computer program that's combing cardholders' credit files for any problem, no matter how small or outdated.

The company is then acting on any such issues to thin the ranks of customers and reduce its exposure to risk at a time when credit card defaults have risen to record levels.

I put this theory to Desiree Fish, an AmEx spokeswoman. All she would say was that the company "is trying to manage its risk prudently."

She said she couldn't comment on Davis' account but insisted that "if we tell people that there's an action because of a delinquency in their credit file, it's because we've found a delinquency."

I asked about the reports I'd heard of AmEx customers being asked by the company to fax in their income tax returns. This couldn't be a legitimate request, right?


See what I mean about living in a bubble? American Express has been requesting tax returns for years. Indeed, I've found instances of it happening as far back as 2002 (and it has probably been going on for longer than that).

In addition to Lazarus being late to the game (this story has been written many times by many news publications), it's surprising to see him take American Express to task for its risk-mitigation strategy: "The company is then acting on any such issues to thin the ranks of customers and reduce its exposure to risk at a time when credit card defaults have risen to record levels," Lazarus writes. Isn't that what a card issuer should do?

Of course, Lazarus, I think, is more irritated with the excuses that American Express uses to justify its risk-reduction moves. This I can understand. I have criticized American Express in the past for some of its excuses, too. That's why I often wonder why American Express even bothers to use any at all.

When customers apply for an American Express card (or any other card for that matter), there is no warranty issued with the card that says you'll be able to keep the card open in perpetuity. American Express reserves the right to withdraw its credit line from a customer at any time -- and for any reason (or for no reason at all).

I'm certainly not an apologist for American Express (far from it!), but Lazarus's story didn't do anything for me. I'm always on the prowl for a good American Express story (as everyone knows). Unfortunately, Lazarus's story failed to add any incremental information -- or some new twist -- to the many stories that have already been written about American Express.

You can read Lazarus's story here.

Related Articles:

•Read More American Express Stories Here

American Consumers Are More Likely Than Ever To Default On Loans, Bills, Study Finds

Mary Pilon, who holds down the fort at The Wallet, takes a look at data that were released by TransUnion today. According to the Credit Risk Index, which TransUnion created about a decade ago, extending credit to American consumers is nearly 25% more risky than it was just ten years ago.

From the Wallet:

Lenders use the Credit Risk Index to determine creditworthiness in different geographic areas. The index baseline is 100, but it rose to 124.79 at the end of 2008 — meaning that consumers are defaulting on accounts, loans and so on with greater frequency and in bigger numbers.

The data is used at a broad level and has no bearing on individual loans and lines of credit. But for consumers, this number helps explain why it’s much harder to secure a loan these days, and might hint at why more people are receiving notices from their credit-card company, informing them that their credit limit’s been cut.

Read the rest of Mary's story here.

You can read TransUnion's press release here.

Tuesday, April 28, 2009

Customer's Phone Call To Bank Of America An Exercise In Futility

Ben, a reader of mine, recently received a notice in the mail about his Bank of America credit card. Like others, his interest rate is climbing. What's more, fees are moving higher as well. Ben, whose FICO scores are around 825, decided that he would call the bank and find out why his account was targeted for these increases.

What follows is not a verbatim transcript of the call. Instead, Ben tried -- as best he could -- to capture the essence of the entire conversation. Ben is an intelligent guy. It's pretty clear that, after a while, he was just having fun with the Bank of America employees. I think we've all done this from time to time. If you haven't, you can live vicariously through Ben. The call, by the way, illustrates why customers are so frustrated with card issuers' customer service these days. Of course, I don't necessarily blame the agents who are hired to handle these calls. They're just doing their jobs as well as they can. Still, these phone calls can be an exercise in futility and frustration.

What follows is the back and forth between Ben and Bank of America.

Customer service representative (CSR): The general cost of lending has gone up and, to remain competitive, we had to raise rates across the board.

Ben: To all your card holders?

CSR: Yes. Let me review your account for a moment. (A minute or so passes.) I'm glad you called. I'm reviewing your account and I see that I can maintain your purchase interest rate at x.xx% and your existing promotional balance transfer rate is still good until May 1st so if you'd like to transfer a balance I can do that at the existing promotional rate. And the transfer fee is 3% still. It goes up to 4% on June 1st.

Ben: I presume the transfer fee is on the entire amount of the balance transfer, with no cap?

CSR: Yes.

Ben: OK. Thanks. I'm not interested to make a balance transfer. But what about my other interest rates - can those be dropped back as well?

CSR: I can't do anything about those.

Ben: All right. Thanks for the information. I do want to clarify something with you. You said that the rate increase was across the board - to all your card holders. I'd just like to be sure I understand you. You've passed on the general cost of lending increase to all your card holders?

CSR: Yes. Everyone has been getting letters...

Ben: Just to be sure I understand you clearly - everyone who has a Bank of America credit card?

CSR: Um, I can't really answer that question. I don't know.

Ben: OK. I'd like to speak to a supervisor - someone who can answer that question.

CSR: OK. Please hold.

Supervisor gets on the phone

Supervisor: How can I help you?

Ben: The customer service rep I was just speaking with told me that the rate increases you've notified me about are "across-the-board" increases due to the general increase in the cost of lending money. I asked her to clarify (since it is a General cost increase) that all of your card holders have seen similar rate increases. She reconfirmed that. Just to be really sure I asked her if ALL Bank of America card holders had their rates increased recently. At that point she said she couldn't really answer that question and turned me over to you. So I was wondering if you can tell me why all the rates and fees associated with my account have been raised.

Supervisor: It was a business decision to raise rates due to General cost of lending.

Ben: The General cost of lending or the cost to lend to Me specifically?

Supervisor: Yes. Costs have gone up across the board.

Ben: So were rates raised for ALL your card holders?

Supervisor: No - I can't say that.

Ben: Your customer service agent did say that until I pressed her on it. Do all your customer service agents say that when card holders ask why their interest rates and fees have gone up?

Supervisor: No.

Ben: So she would be the only one who does.

Supervisor: Probably.

Ben: You yourself just explained to me that it is an "across-the-board" increase.

Supervisor: How can I help you?

Ben: I'd like to know what were the reasons for raising the rates on my account?

Supervisor: Because the cost of lending funds has gone up.

Ben: Lending money in general?

Supervisor: Yes.

Ben: So you would have raised all your card holders' rates to cover that cost increase...?

Supervisor: I can't say that.

Ben: OK. So you've told me that the general cost of lending money has gone up but you can't tell me that you have passed the increased cost on to your general card membership. Is there something about my account specifically that has raised your cost of lending?

Supervisor: Yes. (long silence)

Ben: Does it have anything to do with the way I've handled my account, my credit rating, or anything specific to my account?

Supervisor: No. It's just that the cost of lending money has gone up.

Ben: You mean the cost of lending money to all your card holders?

Supervisor: I can't discuss anyone else's account.

Ben: The cost for lending money to Me specifically has gone up?

Supervisor: Yes.

Ben: What caused the cost of lending to Me to go up?

Supervisor: We reviewed your account and took a business decision to raise your rates.

Ben: But what specifically caused you to make that decision?

Supervisor: The cost of lending has gone up.

Ben: You mean the cost of lending to Me specifically?

Supervisor: Yes.

Ben: But what is it about Me that caused your cost of lending to ME to go up.

Supervisor: I've already told you that.

Ben: You told me that the cost of lending money to Me has gone up but you haven't told me what it is about Me that has caused your cost of lending to Me to rise.

Supervisor: The cost of lending in the general market has gone up.

Ben: So it's an across-the-board increase?

Supervisor: Yes.

Ben: So if it's a general "across-the-board" increase in the cost to lend money you would have raised everyone's rates?

Supervisor: I can't talk about other cardholders' accounts. That's against the law.

Ben: I'm not asking you about any one person's account. I'm asking if the general cost increase for lending has caused you to raise rates to all your cardholders, across the board.

Supervisor: It's a general increase in cost.

Ben: An increase in the cost to lend to everyone?

Supervisor: I can't talk about another card holder's account.

Ben: OK. What caused you to raise my rates specifically?

Supervisor: I've already told you that. It was a business decision.

Ben: But interest rates have fallen sharply.

Supervisor: Yes, that's true but it's costing us more to lend money.

Ben: To Me specifically?

Supervisor: Yes. I've already told you that.

Ben: But what is it about me specifically that has raised your costs? Why would you take the decision to raise my rates and not take that decision for some other card holder - say someone else who, like me, pays on time and has a stellar credit score?

Supervisor: I can't talk about another card holder's account.

Ben: I'm not asking you to speak about anyone specific. If someone had the same payment history and credit rating as me, would you raise his interest rate?

Supervisor: I can't talk about any other card holder's account.

Ben: I'm not asking about any other specific card holder. I'm just asking, if there were someone else out there with equivalent metrics to me, would you raise his interest rate?

Supervisor: You're asking me to give you general answers...

Ben: No, I'm not. I'm asking you to give me SPECIFIC answers regarding why you've taken the decision to raise MY SPECIFIC rates and fees. SPECIFICALLY.

Supervisor: I've told you 4 times now. We took a business decision to raise your rates.

Ben: But why Me specifically?

Supervisor: We felt that your interest rate was too low.

Ben: You mean it was a touchy-feely sort of decision?

Supervisor: Of course not. Look, I can't stay on the phone with you all day answering the same questions over and over again.

Ben: You haven't answered my question. Why have you passed your cost increases on to me specifically? If you can give me a real answer we can close this conversation. If you can't tell me what factors made Bank of America single me out for rate increases, I'd like to speak to someone who can.

Supervisor: There isn't anyone else you can speak to. The conversation is closed now. Good bye. (click.)

First things first. Ben obviously knew that he wasn't getting anywhere with these representatives. But I suspect he was frustrated with the entire process -- including some of the answers he received -- so he decided to tie them up for a while, just to get some kind of satisfaction (even if it wasn't the kind of satisfaction he was ultimately looking for). By the way, I have to hand it to the supervisor. I would have hung up on Ben a lot earlier!

That said, there has got to be a better way for Bank of America and other banks to get a handle on these sorts of calls. Rather than winging it, which is what both agents appeared to be doing, these banks need to keep it simple. These kinds of calls only serve to frustrate the general card membership.

How The Banks Plan To Limit Credit-Card Protections wrote a story yesterday that entertained me. The story lays out the tactics that the card industry plans to use if Congress successfully pushes through tough restrictions aimed at curbing abusive and unfair credit-card practices. For their part, politicians say that they're prepared to do whatever it takes -- in response to industry moves -- to make sure that card issuers can't "screw" customers.

The banks have fired back, arguing that they'll get paid one way or another: they say Dodd's recipe is political posturing that will only produce higher initial rates for everyone and diminished credit for an ailing economy. "The American people can't manage their credit," says one industry heavyweight, "If you change the rules, guess what, we'll just start at a higher rate and you'll see a decrease in availability of credit and an increase in the cost to everyone else."

Read the full story here.

Over-The-Limit Block At Chase Could Save You Money

I've been a credit-card customer at Chase for almost 10 years. And yet, I only recently learned -- in the last three days -- that Chase has something called an "over-the-limit block." A friend of mine, who knows Chase's operations well, says that it's something the bank does not advertise. Still, the ability to block purchases that would take a card over its limit does exist. All it takes is a simple phone call to get the block put on an account.

The over-the-limit block will work for every Chase card -- except Chase's Signature products. Those are no-preset-limit cards that are designed to allow for purchases that go above and beyond stated credit limits (those customers are not assessed a fee if they do go over the limit). Thus, these so-called "access lines," which is what Chase calls these Signature cards, are not eligible for over-the-limit blocks.

Also, over-the-limit blocks work for most purchases -- but not all. The block, for example, would not work with two-step purchases. Think of a gasoline purchase, for instance. The customer's credit card is authorized for an initial $1 at the pump. Chase has no idea how much the customer will actually charge above that $1 authorization, though. While the authorized dollar might not take a customer over the limit, the amount of fuel that the customer ultimately purchases could. Under limited circumstances like this, an over-the-limit block won't prevent a purchase from taking a customer above his or her limit. (Get the full details from a Chase customer-service representative.)

On the whole, though, a block will work for most things. For instance, let's say that you have a credit limit of $5,000 on your Chase card. Assume that your balance is currently at $4,976. What's more, assume that you're out shopping. You find a nice pair of shorts for $35 (including tax). You decide to buy the shorts using your Chase card. Assuming your purchase goes through (and it very likely will), your balance will now be over the limit. Indeed, your balance will now be at $5,011. As a result, your card will be assessed an over-the-limit fee of $39 (since balances of $250 or more are assessed the highest over-the-limit fee that Chase charges). An over-the-limit block, though, would have prevented that purchase from going through. Sure, you wouldn't have been able to buy the shorts, but you also wouldn't have been charged an additional $39 either, which would have brought the full value of those shorts to $74 (if you add the fee to the price of the shorts). That's an expensive pair of shorts!

Why doesn't Chase tell its customers about this block feature? The short answer is that Chase allows purchases to go through, even if these purchases would take the customer over the limit, as a "courtesy" to its customers. That's the company line. It's a courtesy, I am told, because it allows the customer to make a purchase that he or she would not otherwise be able to make. Therefore, the customer in my hypothetical walks away with the shorts -- but also pays $39 for the privilege. Of course, in some cases -- with large, expensive purchases, for example -- an over-the-limit fee may be worth accruing (think of an important purchase that takes you over the limit by $3). That's the courtesy that Chase is touting.

The reality, of course, is that Chase doesn't advertise its over-the-limit block because it doesn't make good business sense -- for Chase. While it would be great for the customer, it would be terrible for Chase. Chase, like every other card issuer in this country, makes a boatload of money each year from the penalty fees that is collects from customers who exceed their credit limits and make late payments. Chase, in other words, has no financial incentive to promote this block.

While customers should avoid maxing out their credit cards, it happens. It's a fact that some customers, who are nearly maxed out, go over their credit limits from time to time. For these customers, rest assured that Chase is unlikely to prevent your purchases from taking you over the limit. As a "courtesy," Chase, even if your purchase takes you over the credit limit, will typically not stop you from getting that item you really want or need. But you'll pay a fee for the privilege.

Still, if you're no longer interested in having the privilege (or courtesy) of going over your credit limit, you should call Chase and request an over-the-limit block today.

And a note my readers: if other card issuers have this feature as well, please let me know. Leave a note in the comments section.

Monday, April 27, 2009

Busting Bank Of America (Update 1 -- Includes NY AG Letter)

The Wall Street Journal has an opinion piece out today that takes the U.S. government to task for the way it has handled the financial crisis -- and the way it has handled Bank of America. It's a damning piece that shows Bank of America getting pushed around by the government. The last sentence says this: "The men who nearly ruined Bank of America have some explaining to do."

From the opinion piece:

In the name of containing "systemic risk," our regulators spread it. In order to keep Mr. Lewis quiet, they all but ordered him to deceive his own shareholders. And in the name of restoring financial confidence, they have so mistreated Bank of America that bank executives everywhere have concluded that neither Treasury nor the Federal Reserve can be trusted.

Read the entire piece here.

And read the letter from the New York AG's office that details the Merrill Lynch Merger Investigation.

Getting Around That Credit Card Maze

If you're falling behind on your credit-card payments, you could be offered a sweet deal by your card issuer. That's the takeaway from Brent Hunsberger's story in the Oregonian over the weekend. Hunsberger spoke to several distressed borrowers who talked about being offered deals that were too good to pass up. Bank of America recently told one customer that it would accept a payment of 32 cents on the dollar. Another customer got his interest rate lowered to 0%. It would appear that card issuers want to get paid -- by any means necessary -- even if it means the card issuer is leaving something on the table. Something is better than a whole lot of nothing.

From the Oregonian:

"We have accelerated our efforts to reach out to customers earlier in the delinquency cycle before their situation becomes distressed," says Betty Riess, a BofA spokeswoman. "We think it's better for the bank and better for our customer."

From Jan. 1, 2008, through March 31, 2009, Bank of America modified 1.3 million credit-card loans, she says.

These companies appear to be open to negotiating with debtors. Poole got his deal after being badgered by a Citibank representative for 35 minutes. The representative initially offered him a repayment plan at 10 percent interest. Poole didn't like his pushiness and refused. "I told him I'd let the debt go."

That's when the offer dropped to 0 percent.

"He went from you have to pay it all now to 10 percent to 0," Poole says. "I wasn't really trying to get it down to zero."

Read the rest of the story here.

When Did Your County's Jobs Disappear?

Slate has an interactive map that illustrates rising unemployment across the country. Specifically, the map shows each of the more than 3,100 counties since January 2007. The best way to view this map -- initially -- is to head straight to the bottom of Slate's story, where you'll find a "play button" that's green. Hit that button and watch the progression of unemployment that the maps depicts. After that, feel free to poke around the map on your own. It's a very nice tool.

From (hat tip Credit Slips):

The economic crisis, which has claimed more than 5 million jobs since the recession began, did not strike the entire country at once. A map of employment gains or losses by county tells the story of how those job losses first struck in the most vulnerable regions and then spread rapidly to the rest of the country. As early as August 2007, for example—several months before the recession officially began—jobs were already on the decline in southwest Florida; Orange County, Calif.; much of New Jersey; and Detroit, while other areas of the country remained on the uptick.

Check out the interactive map here.

Friday, April 24, 2009

Credit-Card Issuers Have A Message For You: You're Not Special

Let's get something straight: no one is special. It doesn't matter what your FICO score is. Credit-card issuers are cutting credit limits and raising interest rates on even the most creditworthy customers. It looks as though John Ulzheimer, who used to work at Equifax and FICO, is finally having his moment. But I had mine in November when Citibank raised my interest rate. I thought I was special. I had an excellent credit score, too. But I quickly realized that it didn't matter. It was simply business -- and not personal.

Ulzheimer, in the video below, asks this: "what did I do to earn this insult -- this slap in the face?" Ulzheimer got his credit limit slashed from $25,000 to $11,500. That's the slap in the face that he's referring to. He received one of the Bank of America letters that I pointed to earlier this week.

This is the kind of letter that Ulzheimer received (click to enlarge):

In the video, Ulzheimer does a mock interview with a customer-service representative (being played by Carmen Wong Ulrich). He tries to find out what he did to warrant this kind of limit cut.

It sounds as though John is now on the prowl for a new card (he said that asking another lender for a limit increase isn't an option). Notice that he said his score would take a hit because of this limit cut. He says it's a fact. I disagree. And it's one of the things that I take umbrage with when it comes to most commentators and writers who say that a reduced credit limit will -- for a fact -- hurt a credit score. If you do not reduce your spending on the card that got hit, then your score may indeed take a hit. But it's not a fait accompli.

If John was previously using 7% of his limit, or $1,750, he'll need to reduce his spending to a level that preserves that 7% usage. That would mean he won't be able to spend more than $805 each month on the card. If he's able to do that, his utilization won't change a bit -- and his FICO score won't suffer at all.

Of course, FICO measures utilization in two ways. By individual card and overall. Assuming that John is not overutilizing his limits on other cards -- and I can assure you that he's not (his lowest FICO score is 809) -- he'll be fine there as well. Using my hypothetical, we're only talking about shuffling $945 in spending. My hypothetical also assumes that he has enough credit (elsewhere) to absorb that extra spending each month. I'd be shocked if he doesn't.

John may be looking for a new card, to replace the available credit that he lost, but I'm not sure why he'd even bother. Given the low utilization that I imagine he maintains each month, I don't see any need to replace it. All he'll end up doing is getting dinged for opening a new account (his average age of history will drop and he'll get a new inquiry). What's more, there is no guarantee that his new credit limit will be $13,500, which is what he lost over at Bank of America.

I would argue that John would be better served by shifting some of his spending to other cards that he already possesses.

That said, if it turns out that Ulzheimer's score will absolutely suffer because of the limit reduction (he'll know after he crunches the numbers), then it might make sense to start looking for a new card.

My point is this: A credit-limit reduction does not, for a fact, mean that your score will be hurt. You've got to do the math first. Figure it out before you start making moves.

Related Articles:

•Read More Bank of America Stories Here

Is Your Credit Card Issued By A Publicly-Traded Company? (American Express Transcript Now Available)

In the past, I have mentioned that I try to catch all of the earnings conference calls for the companies that issue my credit cards. It's not unusual, on the question-and-answer portion of the calls, to hear discussions about charge-off rates, FICO scores, etc. Listening to these calls seems like a no brainer -- especially if I want to stay abreast of the latest information from my card issuers. These days, I often read the transcripts instead of listening to the calls, though. It's a heck of a lot faster, too.

I think my readers would benefit from reading the transcripts, so I've decided to link my site to all of the transcripts that are currently available.

Seeking Alpha is great for transcripts. And they're free. What follows is a list of transcripts from the banks that do a substantial amount of credit-card business (the list is not exhaustive, though).

As companies report their earnings, and complete their conference calls, I will update this post by bumping it to the top of the site.

American Express (call on April 23, 2009): Transcript here.

Wells Fargo (call on April 22, 2009). Transcript here.

Capital One (call on April 21, 2009): Transcript here.

U.S. Bancorp. (call on April 21, 2009): Transcript here.

Bank of America (call on April 20, 2009): Transcript here.

Citigroup (call on April 17, 2009): Transcript here.

JPMorgan Chase (call on April 16, 2009): Transcript here.

Discover Financial Services (call on March 19, 2009): Transcript here.

HSBC (call on March 2, 2009): Transcript here.

If you're not familiar with conference calls, here's how they work. The first part of the call contains prepared remarks made by the company. The company will talk about its most recent quarter -- the good and the bad (though companies emphasize the high points more than the low points).

The most valuable part of the call takes place in the Q&A. That's when analysts and investors (some times) get a chance to ask questions about the quarter (and the future). This is where I often find the best material.

I try to read the transcripts from the companies I've listed. I like to stay informed. I find that going through these transcripts allows me to stay current on the industry. I'm hoping that you'll read through at least one or two -- even if you don't read all of them.

Thursday, April 23, 2009

Obama Pressures Credit Card Issuers on Rates

By now, I am sure that most people have read something about the meeting that took place today between President Obama and credit-card industry officials. In addition to the White House meeting, two Senators, independent of the meeting, wrote a letter suggesting that an "emergency freeze" be implemented on existing credit-card balances. I'm going to point to three stories that I think sum up the day's action best.

From the Washington Post:

One of the principles involves Congress quickly passing a law that requires credit card companies to issue what sounds like a Credit Card for Dummies.

"Every credit card issuer has to issue a plain vanilla easy-to-understand, simplest possible credit card that would be the default credit card that the average user can feel comfortable with," the president said.

Read the Washington Post story here.

From the New York Times:

Despite the hurdles, President Obama said Thursday he was confident that responsible people in the industry “will engage with us in a constructive fashion, and that we’re going to be able to get this done in short order.”

Industry lobbyists have been working closely with Senate Republicans to try to block the passage, although the White House’s recent push for the measure could make that difficult. During the presidential campaign, Mr. Obama made an issue of what he considered excessive credit card fees, but until this week he had been largely silent on the matter since his arrival in Washington.

Read the New York Times story here.

And, which dealt with the letter sent by two Senators:

On a day when President Barack Obama was to give a scheduled scolding to the executives of credit card issuing institutions, a pair of prominent Democratic senators asked federal regulators to impose an "emergency freeze" on credit card rate increases on existing balances.

Sen. Chris Dodd (D-Conn.) and Sen. Charles Schumer (D-N.Y.) wrote their letter to Federal Reserve Chairman Ben Bernanke, Office of Thrift Supervision Acting Director John Bowman and National Credit Union Administration Chairman Michael Fryzel. The senators asked that they use emergency authority under the "good cause" exception to the Administrative Procedures Act to impose the freeze.

Read the entire story here.

Spain's Costumed Debt Collectors: Final Notice?

In the United States, some debt collectors act like clowns. In Spain, they dress like them. In an effort to collect debts, Spanish debt collectors show up at debtors' homes wearing costumes so that everyone -- including the debtors' neighbors -- know what's going on. The days of using these collection tactics, which play on debtors' fears of being publicly humiliated, may be numbered, though.

From (hat tip Far Left Texas):

"In this country, they treat people who owe money worse than criminals," says Vila, 49, an employee of a health-insurance company. Earlier this year, she fell behind on her mortgage payments. On March 31, she received a call from an unidentified collection agency that said it worked with the bank who had issued her mortgage and informed her that the next day it would be sending three bullfighters to "take up a collection" on her behalf from her neighbors. "I'm a serious person. I've paid my bills my whole life," says Vila. "This is a really painful situation to be in."

Read the rest of the story here.

Emergency Fund Math

I had to go back to see why I missed this Wall Street Journal story. It was published March 11. Turns out that I was working on a paper that was due the following day, which explains why it slipped through my net. However, none of my readers sent it to me either. Given how controversial this column must have been, I'm surprised I didn't receive several emails about it. No matter. I doubt that Brett Arends has changed his position since last month. Brett, it turns out, believes that it may make sense to build an emergency fund by borrowing against a credit card. And he's not talking about borrowing at 0% either.

From Brett's story (hat tip Liz Weston):

Usually the sensible financial advice is to pay off your credit cards. It's expensive debt. But people without enough on hand right now may find it makes sense to borrow from their credit cards and put that money in a bank account. Sure they will pay a negative spread, borrowing at 12% and earning 1%. But they may figure that is the price of being prepared.

The added incentive: Card debt is unsecured. So in a worst-case scenario, credit-card debts are often discharged in bankruptcy court even while some assets, like retirement plans and in many cases your home, may be protected from creditors.

I'm certainly not encouraging this strategy for anyone who can avoid it. It's not pretty. But who said anything about the current situation is pretty?

This isn't the kind of story I expect from the Wall Street Journal. Brett talks about a negative spread -- borrowing at 12% while earning 1% -- but I'm still trying to figure out where Brett is going to find credit-card cash that only costs 12%. Most cash advances, if you're not getting some promo rate of 0%-5%, is going to cost you north of 20%.

Desperate times call for desperate measures. But can anyone defend Brett's position? If you can, please weigh in.

Read the rest of the story here.

Wednesday, April 22, 2009

Banks Sway Bills To Aid Consumers

Banks may be down but they're certainly not out. Banks are busy working their political connections, making it more likely that legislative measures aimed at helping strapped homeowners and struggling credit-card customers will either be killed or seriously diluted, the New York Times reports.

From the New York Times (hat tip Sam Fingold):

The banks have made it difficult for Congressional Democrats and the White House to give stretched homeowners a stronger hand in negotiating lower monthly payments on mortgages and to prevent credit card companies from imposing higher fees and interest rates.

Having won some early skirmishes by teaming with Republican allies, the banks now appear to have the upper hand and may wind up killing — or at least substantially diluting — both pro-consumer measures.

Discuss below.

Read the entire story here.

The Worst Credit Card Offers You’ll Ever See

Some of you will have to forgive me for posting this story. Why? Many of my readers will no doubt be acquainted with what is known as "fee harvesting." However, I get a lot of new readers each day -- and I have no way of knowing if they're already acquainted with the term. Many years ago, my sister got one of these cards. I was mortified when I saw the terms of the deal. After all of the fees were applied (before the card was used for the first time), the amount of available credit left over was almost nonexistent.

From the Red Tape Chronicles:

When Mike Templeton looked at the credit card application his college-aged son received in the mail, his blood started to boil. The card promised an attractive 9.9 percent interest rate, but there was a catch. Buried in the fine print was a list of fees that seemed almost comical.

• Account set-up fee: $29.00
• Program fee: $95.00
• Annual fee: $48.00
• Monthly servicing Fee: $84.00 annually
• Additional card Fee: $20.00 annually

And then, at the bottom, was a sentence that it's hard to imagine someone could write with a straight face:

"If you are assigned the minimum credit limit of $250.00 your initial available credit will be $71.00 ($51.00 if you select the additional card option)."

I'd like to think there has to be an alternative for folks who apply for cards like this. No one needs access to credit this badly. Indeed, the initial limits on these cards are typically sub-$300 anyhow. There isn't much you can do with the card to begin with. My guess is that these fee-harvester cards rack up a ton of over-the-limit fees too. These kinds of cards seem great for the companies peddling them and terrible for those who use them.

Read the rest of the story here.

Tuesday, April 21, 2009

At Citibank It's Not What We Write -- It's What We Say

You've got to keep an eye on card issuers these days. That's the takeaway for one of my readers, who decided to ditch his Citibank credit card after the issuer did a switcheroo on him.

Ken, who did not want to use his last name for this story, has had a Citibank American Airlines World MasterCard for more than three years. For most customers the card's annual fee is waived during the first year and then an annual fee is assessed after that. In Ken's case, however, his card, for whatever reason, has never had an annual fee.

Thus, when Ken recently received a renewal card (along with the letter that followed his card), and saw that there was no annual fee (just as it's always been), he figured that all was well.

But it wasn't. In fact, Citibank eventually slapped an $85 annual fee on his account statement. Miffed, Ken decided to give Citibank a call. Ken explained that his card had never had an annual fee. Indeed, the letter he received showed that there was no annual fee. See the letter below (click to enlarge).

In no uncertain terms, Ken was told to pound sand. Even though Ken had not been assessed an annual fee for three years, and even though his most recent letter showed that there was no annual fee, too bad. In essence, Citibank said that Ken should ignore the letter. What counts is what it says -- not what it writes, apparently. "I offered to fax the activation letter to them, to show the information," Ken told me. "Nope. They were not interested."

I'm really not surprised. Customer service has gone downhill over the past few years. That's not an indictment on Citibank specifically, mind you; it's an indictment on the entire industry. It used to be that good customer service was expected. Now it's just the opposite. I hope for good customer service but expect poor service. But I digress.

Ken immediately canceled his Citibank card. Since Ken canceled the card within 30 days of receiving it, the annual fee was reversed. Ken is still irritated by the entire ordeal, though. "What I find most annoying," says Ken, is that "the paperwork says one thing, and the people on the phone say another. It's just not the way to do business." Luckily Ken noticed the charge. Some customers, who aren't as vigilant, might not be as lucky.

After listening to Ken's story, I asked him if he'd be interested in keeping the card if Citibank decided to give him the card without an annual fee. "Nope. Not interested," Ken says. "I feel their practice was/is deceptive and should not be rewarded by me accepting what had already been agreed to. If their letter stated a fee, then, yes, I would feel as though the onus was on me, and I would be the one responsible."

Ken didn't stop there. "This is just a small example of what the credit card business has become," Ken says. "If a paying customer has to resort to posting their card agreement online (in order to receive what is stated in writing from the credit-card company), this is, at best, a poor way of doing business; at worst, it's a kind of fraud."

I didn't want to stop Ken, who was just getting on a roll. "You know, it's sad when a customer pays their bills on time, follows the rules (as best as can be done), can't get a company, which has been basically saved (for now) by the taxpayers (us), to play by the same rules required of everyone else. There is something basically flawed with the model," Ken concluded.

Ken summed up his experience by saying that the entire episode was "another typical screw job by Citibank."

I wish that I could tell Ken that his story was an anomaly. Unfortunately, these kinds of stories are becoming more and more commonplace each day. Indeed, my emailbox is brimming with similar tales. Were I so inclined, I could write a story like this almost every day of the week.

Sad but true.

Is The American Love Affair With Credit Cards Over?

There can be little doubt that Americans are reevaluating their debt situation -- and rightfully so. Many Americans loaded up on debt during the most recent economic expansion. However, with the economy now in full retreat, Americans are wondering how they got from there to here. In evaluating the situation, many Americans are blaming credit cards for their plight. Not surprisingly, these Americans are looking to shed debt (smart) and get rid of credit cards forever.


Such an extreme reaction is no surprise to Michael Mihalik, author of "Debt is Slavery: And Nine Other Things I Wish My Dad Had Taught Me About Money." "I think one of the things people are getting out of the experience of this economic downturn is they are feeling like slaves to their debt," says Mihalik, who details in his book how he climbed out of $10,000 in credit card debt. "Slavery is a very harsh term, but I'm sure people are feeling burdened and oppressed by the debt that they've accumulated."

Mihalik isn't wrong. The problem is that too many people reached for their cards to make purchases -- purchases that most could not have afforded without the card. With unemployment rising, stock portfolios cut in half, and house prices under water, these people have found religion. Whether they'll keep going to church each week, especially when the crisis has passed, remains to be seen, however.

Read the story here.

Monday, April 20, 2009

Bank of America Credit-Card Customers Beware: A Credit-Limit Reduction Could Be Lurking (Update1 -- Includes Bank of America Letter)

During the past several weeks, Bank of America has been busy cutting credit limits. In many cases, the cuts have amounted to 50% of the limit. Ouch. This morning I got an email from a reader of mine -- a reader who has largely been immune to this kind of stuff. At least he was until this morning, when he noticed that Bank of America cut his credit-card limit by almost half.

Jack (last name withheld for privacy purposes) has been a customer at Bank of America for more than 20 years. His credit card has been open for about five years. He pays his Bank of America card in full each month.

(UPDATE: A friend of mine, who recently suffered a 50% limit cut, shared his credit-limit-reduction letter with me. Thanks, Shawnee. It's very obvious that Bank of America is targeting customers who are under utilizing their cards (read carry little to no balance). This could be just the start. Ultimately, Bank of America could make its way to customers who carry significant balances.)

Here is a copy of the letter (click to enlarge):

While other card issuers were busy raising rates and slashing limits last year, Bank of America largely left its customers alone. It would appear that Bank of America is making up for lost time now. Earlier this month, Bank of America said that it would lift interest rates on millions of customers. It's now busy reining in available credit. Welcome to the party, Bank of America.

"I was angry. I have used the card semi-actively for the past two years after using it regularly for the prior four," Jack told me this morning. "The account has not carried balance in at least two years. They could have at least given me warning -- especially considering they just sent me a stack of credit card checks touting my old limit. I am happy I chose to shred them; I believe using them would have caused even more problems, including the possibility that a returned check to a different creditor would have had a negative impact on my FICO."

Jack raises a good point -- and it's the reason I am writing: if you're planning on using one of those balance-transfer checks, be sure to check your credit limit before you do. Even then, of course, there is no guarantee that your limit will remain intact between the time you put the check in the mail and the recipient receives it. But, given this environment, that's about the best you can do.

To be sure, credit-card users should be checking their credit limits before they make large purchases, too. During the past six months, I've received plenty of email and seen plenty of comments on my blog saying that purchases didn't go through because card limits had been slashed without the customer's knowledge.

Jack says that he's leaning toward closing the Bank of America account. "Probably going to close the account even though I have no outstanding balance. It will continue to age for 10 years so it shouldn't affect my FICO, as it will not change my utilization much (the only balance I carry is a 36 months same-as-cash deal on Best Buy). I just can't see letting Bank of America earn exchange fees on me. I have never been late with these people. Why should I voluntarily give them anymore of my money?"

I told Jack that he should keep the account open. Out of principle, I think he'll close it. Given his low utilization elsewhere, his scores, which range from roughly 760-790, should be just fine even if he does close it, though.

Jack's story is not an isolated one. Bank of America, though inactive early on, is coming on strong. First it hiked rates. Now it is slashing limits.

It's a jungle out there. Be careful.

Related Articles:

•Read More Bank of America Stories Here

In Search Of The Perfect FICO Score

When it comes to FICO, 850 is considered a perfect score. I've never met a single person with that score, though. According to Craig Watts, public relations director at FICO, getting a score of 850 is "rare." He said as much recently to the good folks over at Marketplace.

From Marketplace:

Craig Watts: In rare circumstances it is possible to get a FICO score of 850.

That's the good news. Here's the bad:

Watts: For a broad section of the population, it probably isn't possible, even if they do everything right.

That's because there's not one formula for calculating your FICO score. There are ten. Each is a "scorecard," that gives different items in your credit history slightly different weight. Your scorecard depends on where you are in your economic life.

Watts: For example, if you are college student, you're brand new to credit. The FICO formula is only comparing you to other people who also have very short credit histories.

There's a scorecard for people who've been through, say, bankruptcy -- they may be printing extras of those these days. But here's the point: every scorecard has its own score range. If your scorecard's top range isn't 850? You can't get an 850, period. Now, what scorecard applies to you, or when you'll move out of one and into another? That's a secret. All Watts would tell me is how to get the best score possible.

While reaching 850 would be a monumental achievement (assuming it's possible), it's a waste of time. Generally, a score of 760 or more will do anything that an 850 will do. Pay your bills on time. Keep your utilization low. Open accounts sparingly. Over time, those habits will get you to where you want to be. (Full disclosure: I have a financial relationship with; I get a commission if you purchase a score or product using one of the FICO ads on my site.)

That said, I still found Marketplace's story interesting. Give it a read here.

President Obama to Target Credit Card Abuses

Over the weekend, President Obama's chief economic adviser, Larry Summers, told NBC's "Meet The Press" that Obama plans to tackle issues that deal with credit-card abuses. Summers specifically said that Obama would be looking into issues having to do with the way consumers have been "deceived into paying extraordinarily high rates that they wouldn’t have paid if they knew they were getting themselves into."

Were consumers deceived into paying high rates? I correspond with a lot of readers. I've really never got the impression that they've been deceived. Instead, most of them knew that card issuers could slash limits, implement fees, and hike rates at a moment's notice. If anything, it just seems as though most consumers never thought that card issuers would actually do it. Consumers were wrong. Now the Obama administration feels compelled to step in and do something about it.

I think it's too little, too late. Card issuers have been busy lately. They've been cutting limits, raising fees, and hiking rates for months. Unless Obama plans to roll everything back, which he isn't, consumers are going to get little satisfaction from government intervention at this point. Of course, I'm not saying that legislation is useless. I'm merely saying that implementing it now won't do a whole lot of good for consumers who have already been "deceived into paying extraordinarily high rates that they wouldn’t have paid if they knew they were getting themselves into."

Barn door. Open. Horses gone.

I've provided the relevant portion of "Meet The Press" below. It's less than four minutes long.

Visit for Breaking News, World News, and News about the Economy


Saturday, April 18, 2009

The 100 Most Useful Web Sites -- All Money Related

Liz Pulliam Weston, one of the best personal-finance writers extant, has compiled a list of what she calls "the 100 most useful Web sites." I'm constantly on the prowl for information -- as are most of my readers -- so I figure this will make a great Saturday blog entry. By the way, Liz included on the list. Thanks, Liz!

I was included in the "Best sites for managing your credit" category.

From the column: This is the government-run clearinghouse to get your legally mandated free credit reports -- you get one per year each from Experian, TransUnion and Equifax. Accept no imitations. This site does more than highlight some of the best available credit card offers. It also advises users on how to best manage their credit, pay off debt and deal with credit crises. LowCard$.com and Index credit cards are good to check, too. Two of my favorite credit experts, John Ulzheimer and Gerri Detweiler, contribute to this site, which educates users about all things credit-related. Former editor Dan Ray has added smart, timely content to what was once just a collection of credit card offers. You can search for those here too, of course, but also check out the breaking news stories, the advice and the expert Q&As. Run by a former Wall Street reporter and soon-to-be lawyer, this blog tracks changes in the credit markets and has broken more than a few stories, including the one about American Express paying some customers $300 to close their accounts.

myFICO. If you're going to pay for a credit score (as opposed to a credit report, which you should never pay for), you might as well get a FICO, which is the scoring formula most lenders use. This is where you can buy FICOs for Equifax and TransUnion. (The third credit bureau, Experian, no longer sells FICO scores to consumers.) The site also has a lot of great information about how your scores are figured, what interest rates your scores qualify you for and how to improve your scores.

I visit quite a few of the sites on Liz's list. Still, that's just the credit section of her list. Looking forward to exploring some new ones (outside of the credit area). Do yourself a favor and check out the other 94 sites that made Weston's list.

Read Liz's story here.

Friday, April 17, 2009

Cartoon Of The Day II -- American Express: Please Leave Home Without It

This is a first. Two cartoons on the same day. But because I've done so much writing about American Express during the past 10 months (see my American Express index of stories here), I've got little choice but to make an exception against my unwritten rule today (it's not cartoons of the day).

Click to enlarge (hat tip B_in_SC).


Cartoon Of The Day -- What Kind Of Recession Will We Have?

We were just talking about this the other day. Martin Focazio, a reader, thinks we're headed for an L-shaped recovery (Carnap, another reader, agreed with Focazio). SuzQ, yet another reader, thinks we're heading for a V-shaped recovery. No one picked the U-shaped recovery.

Tom Toles, the political cartoonist over at the Washington Post, isn't banking on any of those shapes. Instead, he's thinking something else (hat tip Sean).


Credit Card Issuers Face New Scrutiny

Executives from 14 of the largest credit-card issuers are heading to the White House. The executives are being summoned by senior administration officials who want to discuss industry practices. Executives are expected to talk about ways to increase transparency and help the economy, the Washington Post reports.

From the Post:

In recent months, several credit card issuers , including Capital One, Bank of America and Citi, have all raised interest rates or cut credit lines for some of their customers.

Most of Bank of America's customers whose rates increased had changes in their risk profile, said Betty Riess, a spokeswoman for the company.

But a small group of customers whose rates were less than 10 percent were told their rates would increase in June because of "current economic conditions," Riess said. "Essentially, our cost of providing credit has significantly increased," she said.

Consumer advocates and congressional leaders said they were pleased that the Obama administration would meet with the card issuers.

Consumer advocates are hoping that the White House can convince card issuers to hasten reforms that aren't slated to take effect until July 2010. Good luck. I don't see that happening.

Still, even if the White House does manage to speed up the timetable, what's the net result? Most of the card issuers have already hiked rates and slashed limits -- ahead of the rule changes. Discover, for example, recently said that its rate hike was done, in part, because it would be more difficult to raise rates next year when the rule changes take place. No dummy Discover.

Read the rest of the Washington Post story here. Read More...

Thursday, April 16, 2009

Cartoon of The Day -- Not In Our Lifetime

The more things change, the more they stay the same. I'm just too cynical. Really. And today's cartoon captures my outlook precisely. Those in charge talk a good game. But at the end of the day, everything will be just fine -- with the powers that be -- if nothing ever does get sorted out.

Click the cartoon to enlarge (hat tip Far Left Texas).

See the entire Mister Boffo archive here.

Glut of Stolen Banking Data Trims Profits for Thieves

Profit margins for stolen credit-card data are razor thin these days. Indeed, profit margins on stolen credit card data have dropped to 50 cents a record, down substantially from $10 to $16 per record as recently as mid-2007, according to Verizon Business. A Washington Post story provides a nice glimpse into how much of our data are sloshing around.

From the Post:

Crooks who deal in stolen credit and debit cards and hacked online banking credentials have long used shadowy online forums and chat rooms to broker sales with other thieves who try to convert those goods into cash.

But recently, several commercial Web sites have sprung up and created a brisk business helping thieves check the balances and limits on stolen cards, with discounts for customers who check hundreds or even thousands of card numbers at a time.

The services are advertised on Internet forums that facilitate identity theft, and cater to criminals who wish to buy large numbers of stolen credit and debit cards. Using such services, the would-be buyers can quickly verify whether a random sampling of the cards is still active, and -- for an additional fee -- the available balance on each card. In most cases, the only barrier to new customers signing up at these services is the ability to speak and read Russian, and the ability to pay with one of several virtual currencies, such as Webmoney.

Maybe it's just me but I am fascinated by this stuff. I'm amazed by how much information these crooks have. Remember last year when I posted a story showing how criminals create credit cards -- using stolen credit-card data? No? Watch the video here (it's a 3-minute video). Again, I find this stuff fascinating. Given all of this stolen data, I'm surprised that only one of my credit cards has been breached since I got my first credit card many years ago.

Anyhow, read the rest of the Post story here. Read More...

Wednesday, April 15, 2009

Former Washington Mutual Cardholders Getting Snagged By Shifting Due Dates At Chase

If you're a former Washington Mutual cardholder -- now holding a Chase card -- you may want to check your due date. During the transition from Washington Mutual to Chase, which took place in early March, due dates on some credit-card accounts were moved up by as much as a week. The due-date change has resulted in a host of late payments for customers. Depending on balances, those late payments have resulted in late fees ranging from $29 to $39.

Chase is aware of the shift in due dates (and it knows that it occurred during the transition). Chase is not unsympathetic. Customers who are affected -- and who don't have a history of late payments -- are encouraged to call Chase and ask for a "courtesy adjustment." (Use that exact terminology: courtesy adjustment.) I'm told that in most cases, it should not be difficult to get a fee reversal. If you get a customer-service representative who seems reticent to help you out (read: you get a robot who won't deviate from the script), hang up and call back. You'll eventually find a representative who is willing to help you remedy the situation.

(UPDATE: it's quite possible that a change in the grace period may be the reason for the shifting due dates. WaMu cardholders had a 25-day grace period. The new Chase cards that replaced those old WaMu cards have a grace period of "at least" 20 days, according to a letter that was sent to WaMu cardholders back in February.)

I've heard from several readers who were affected by the date change. Most were caught off guard because they had become accustomed to WaMu's consistent due dates. Indeed, over the years, the due date on my Washington Mutual credit card never changed by more than a day or two. It's easy to get complacent when the due date is that consistent. Therefore, I can see exactly how customers got snared by Chase's date change.

Anyhow, that's my public-service announcement for the day. If the recent due-date change caught you by surprise -- and you ended up being late because of it (and you're not a serial offender when it comes to being late) -- give Chase a call. Meanwhile, if you do find that Chase is unwilling to work with you, after several attempts, please let me know. I want to monitor this situation closely.


Discover Raises Interest Rates On Some Credit Cards

I think I first heard about these rate hikes about a month ago. I didn't have any intention of blogging about it -- mostly because I didn't think enough of my readers would care (in other words, not enough of my readers would be impacted by a rate hike that, as far as I can tell, isn't that widespread). However, I am blogging about it today. I'm blogging about it because Discover provided a quote to the Chicago Tribune -- a quote that you know other card issuers don't have the guts to give but one that you know every card issuer could give.

From the story:

"Discover is re-balancing its portfolio due to the increased costs of doing business in this economy and in response to Fed rules limiting the ability to adjust rates in the future based upon elevated risk," a spokeswoman told the Tribune in a statement late Tuesday afternoon.

Finally. A card issuer that is willing to go on the record and say what we've all known -- but couldn't prove. Discover is lifting rates, in part, "in response to Fed rules limiting the ability to adjust rates in the future based upon elevated risk."

A preemptive strike.

Get used to it. As we get closer to implementation of the new rules (July 2010), we'll see more belt tightening by the card issuers.

Read the rest of the story here.

Tuesday, April 14, 2009

Congress Takes Aim at Payday Loans

If Congress passes the Payday Loan Reform Act, life will get a lot more difficult for cash-strapped Americans who rely on payday loans to make ends meet, says Robert DeYoung, a finance professor at the University of Kansas. In a Wall Street Journal op-ed piece, DeYoung argues that payday-loan borrowers are well aware of the costs associated with payday loans. Indeed, says DeYoung, these borrowers don't need to be saved -- and they don't need regulators instituting sweeping changes.

From the piece:

The reform is based on the false premise that consumers take out these loans without realizing how much they are paying. True enough, these loans are expensive. A two-week payday advance of $300 typically comes with a $45 finance charge -- an implied annual percentage rate (APR) of 391%. Critics say borrows could not possibly intend to pay that much for an advance on their paychecks, and that the cost alone is evidence of exploitation of the working poor.

But new research suggests that most payday borrowers are more rational and informed than critics believe. A January 2009 study by Gregory Elliehausen at George Washington University found that payday borrowers make informed choices. About half of the 1,173 payday borrowers he surveyed considered other credit alternatives -- such as bank, credit card, or personal loans -- before taking out a payday loan. Over 80% lacked sufficient funds in their bank accounts to meet their expenses, so by taking out a payday loan they avoided expensive checking account overdraft fees. Nearly 90% said they were either very or somewhat satisfied with the transaction.

You tell me, reader, do payday-loan fees need to be capped? DeYoung is arguing that payday loans represent the lesser of two evils -- with payday-loan fees on the one hand and expensive overdraft fees on the other hand. Of course, there's no reason why both -- the overdraft fees that banks levy and the high fees that payday loan companies assess -- can't be reined in.

Read the rest of DeYoung's piece here.

Bank Of America Suspends Overdraft Fee Increase But Other Changes Will Go Ahead As Planned

Bank of America is suspending an overdraft fee increase that was supposed to go into effect in June. Other fee changes, however, will go ahead as planned.

Bank of America says its decision to scuttle the overdraft fee increase is due to economic conditions. "Decisions on our rates and fees have been made over the past several months, and we are making the fee adjustment and launching our customer assistance program in light of the recent dramatic rise in the unemployment rate," Jim Pierpoint, a Bank of America spokesman, told me. The current overdraft fee of $35 per instance was scheduled to move to $39 per instance on June 5. The suspension was reported earlier by the Wall Street Journal.

Bank of America has also established a program to help the recently unemployed. As part of the program, the bank will waive monthly maintenance fees for three months, and refund fees associated with non-sufficient funds and overdrafts, says Pierpoint. Refunds will be doled out on a case-by-case basis. As part of the program, "We will ask customers to enroll in online banking and request paperless statements so that they can keep better track of their finances in the long run," Pierpoint adds.

In the meantime, the bank's decision to raise the number of times a customer can be hit with an overdraft fee during a single day will remain in place. Earlier this month, Bank of America capped overdrafts at a limit of 10 overdraft items per day -- up from five a day. A customer could conceivably get hit with $350 in fees during a single day under the new fee structure. "We also are instituting a $35 one-time fee on overdrawn accounts with a negative balance that extends beyond five days, effective in June," Pierpoint says.

Bank of America's fee hike for checking accounts, meanwhile, will also go forward as planned. Customers with a MyAccess checking account will see their maintenance fee increase to $8.95 a month, up from $5.95 a month, effective June 5. The fee is waived, though, for customers with direct deposits or those who maintain an "average" daily balance of $1,500. The fee is also waived for those who open the account online. Customers with standard checking accounts will see their monthly fees rise to $9.95 a month -- up from $8.50. Previously, the fee was waived if a customer had direct deposit set up. That will no longer earn a waiver. Customers looking for a fee waiver will need to keep a "minimum" daily balance of $1,500 or maintain a combined balance of $5,000 from linked savings or investment accounts, according to Bank of America's Web site (see all of the fee changes here).

Bank of America says the fee increases are due -- in part -- to rising costs. "The changing landscape has meant rising costs for our industry. These increasing costs include provision and credit expenses; fraud and charge-offs; FDIC insurance costs; and the rising expense of building and maintaining industry-leading capabilities," Jim Pierpoint says. "To continue to offer competitive products and services and responsibly lend in this current environment, we must adjust our pricing."

The fee increases come at a time of heightened scrutiny. The Congressional Oversight Panel, the body that is in charge of overseeing bank bailout programs, is looking into the lending practices (story here) of bailed out banks, many of which have hiked fees and interest rates on customers during the past six months.

One piece of good news for customers is that Bank of America will be more forgiving when customers overdraw their accounts by a small amount. Beginning on June 5, customers who overdraw their accounts by less than $5 will "only" pay an overdraft fee of $10 per item. The key, however, is that the account cannot be overdrawn by $5 or more at the end of the day. If a customer's account is overdrawn by more than $5 at the end of the day, that customer will pay $35 per item instead of $10 -- even if some of the overdrafts occurred at a time when the account was overdrawn by less than $5. "This directly addresses one of our largest customer complaints and allows us to help them when they make small mistakes," Pierpoint told me.

While some customers will most certainly be helped by Bank of America's new overdraft policy, I have to wonder just how often accounts are overdrawn by less than $5 at the end of the day. That's not a lot of wiggle room. What's more, the little secret -- inside Bank of America's call centers -- is that the new policy merely formalizes something that Bank of America has always done for its customers. Indeed, I am told by a person who has knowledge of the situation that customers could often get their overdraft fees reversed if they were overdrawn by small-dollar amounts. A simple phone call made by the customer often ended in a fee reversal. That said, some customers, I am told, abused the informal policy. That abuse, I suspect, prompted Bank of America to formalize its policy -- and cap the dollar amount at $5.

Related Articles:

•Read More Bank of America Stories Here

Monday, April 13, 2009

Charge! American Express Is In Better Shape Than Investors Think

So says the current issue of Barron's magazine. While the story is mostly an equity story (about American Express's stock), there is plenty to chew on for those who are interested in credit matters. After all, it's difficult -- if not impossible -- to discuss the stock's prospects without discussing the fundamentals of the credit markets and American Express's customers.

From Barron's (hat tip Josh):

Yet, says Ryan, the losses AmEx is now suffering from bad underwriting decisions tend to be short-lived and violent, compared with losses that creditors suffer from economic weakness, with its attendant rise in unemployment and drop in consumer spending. "I'm not saying that credit losses at AmEx won't continue to rise some in the months ahead, but the deterioration in charge-offs compared to that of its peers will be tempered somewhat as the underwriting mistakes are quickly washed through AmEx's system," says Ryan.

Liquidity has been yet another concern of investors, about AmEx specifically and the financial industry in general. Beaten-up stock prices in the sector make stock offerings punishingly dilutive to current stockholders. Even more damaging has been the freezing-up of the all-important asset-backed securitization market, which allowed lenders like AmEx to bundle vast hunks of their credit-card receivables and sell them off to investors in the form of bonds. At the end of last year, such securitizations accounted for some $29 billion of the $72 billion in credit that AmEx had extended to cardholders in both the U.S. and abroad.

The author, Jonathan Laing, does a good job laying out the American Express stock story. In the process, he also does a good job of laying out the credit issues that American Express is grappling with.

Read the entire story here.

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•Read More American Express Stories Here

Consumer Frugality Could Become A Habit

Call me a cynic. When this recession eventually falls to the wayside, I'm not convinced that we'll be a country of thoughtful consumers -- never to return to our pre-recession ways. Many people have been scared straight by the swiftness and severity of this downturn. But when things get better, will consumers return to their free-spending ways again? I'm betting they will. I'd love to be wrong.

From the San Francisco Chronicle:

"Consumers are generally saying this is going to be a long-term impact," said Dianne Kremer, an analyst with BIGresearch, a polling firm in Ohio.

BIGresearch recently asked more than 8,000 people to predict their economic behavior over the next five years. More than 90 percent of those surveyed said they plan to change their lifestyle in one or more ways during that time.

Among the specifics, almost half the respondents said they will dine out less frequently. More than 40 percent said they plan to cut credit card debt, and more than a third intend to save more.

"The downturn and how quickly it happened really affected people's psyche," Kremer said.

Read the rest of the story here.

The Pros and Cons Of Using Credit-Based Insurance Scoring

I've always been interested in credit-based insurance scoring. How does the information contained in my credit report correlate to my driving habits -- and potential insurance claims? Are credit scores abused in the underwriting process? If credit scores could not be used in the underwriting process, would insurance premiums go up across the board? Who has the better argument -- the insurance industry, which says that credit scores are an important and predictive factor in the underwriting process, or consumer advocates who would like to eliminate credit scores from the underwriting process altogether?

Last year, Maxine Waters, a democrat in California, introduced H.R. 6062 in Congress: "Personal Lines of Insurance Fairness Act of 2008." The bill never became law. Still, the arguments, and rationale, for each party's position were well represented in debate over the bill.

Here's what the representative for the insurance industry had to say:

Likewise, historical data reflects a strong correlation between the timeliness with which an individual pays his bills and the average number of homeowner insurance losses that individual will incur. Individuals who are delinquent in paying their bills two or more times within the last two years are approximately 80 percent more likely to file an insurance claim than those who pay their bills on time.

It is precisely this type of information that forms the basis for credit-based insurance scores, alternatively referred to as insurance scores. Westfield Group began using insurance scores in 2000 as a part of an effort to improve the pricing of our automobile and homeowners’ insurance products. In analyzing the relationship between credit information and our loss data, we found a strong correlation. Used in conjunction with more traditional rating factors such as vehicle performance, age, gender and territory, credit-based insurance scoring allowed Westfield to more accurately price our products and improve our competitive position. Today, approximately 75 percent of our policyholders pay less because of the use of insurance scores, while only eight percent pay more. In other words, without the use of credit-based insurance scores, three-quarters of our policyholders would be paying more for their insurance than they are now.

Here's what the representative who would kill credit scoring in the underwriting process had to say:

The insurance industry maintains that there are a variety of benefits from their use of credit scoring. Upon examination, these assertions are illusory and contradicted by the available evidence. Ultimately, however, all of the insurer arguments for insurance scoring come down to a single point: insurance scoring is predictive of the likelihood that a consumer will have a claim and consumers will benefit if insurers are able to price more accurately.

The problem with this contention is that insurers cannot tell us what it is about a credit score that is linked with risk. If you ask proponents of the use of credit scoring to explain to a person who suffered a decline in credit as a result of being in Hurricane Katrina, or lost her job because of outsourcing, or lost his job in the current economic downturn, why these events that they had no control over made them a worse auto or home insurance risk, they have no response.

These quotes are nearly a year old now -- but the arguments remain the same. When the next bill is introduced -- and there will be another one -- the arguments will mirror the ones made in 2008.

At this point, I am undecided in the debate. I am still doing my homework.

If you're interested in the positions, I invite you to read the arguments in their entirety. The insurance industry's argument is five pages. Critics make their argument in six pages.

The insurance industry's argument.

The consumer advocate position.

Bailed-Out Banks Face Investigation Over Fee And Rate Hikes

Banks that benefited from bailout funds through the Troubled Asset Relief Program are being investigated by the Congressional Oversight Panel, the body that is in charge of overseeing bank bailout programs, according to the Wall Street Journal. The panel is looking into the lending practices of bailed out banks, many of which have hiked fees and interest rates on customers during the past six months.

From the Journal:

Last week, for example, Bank of America Corp. told some customers that interest rates on their credit cards will nearly double to about 14%. The Charlotte, N.C., bank, which got $45 billion in capital from the U.S. government, also is imposing fees of least $10 on a wide range of credit-card transactions.

Citigroup Inc., another recipient of government cash, is trying to entice customers to borrow at high rates. "You could get $5,000 today," Citigroup's consumer-finance unit wrote in fliers mailed to customers. The ads don't disclose that the loans often carry annual interest rates of 30%.

The interest rates "compare competitively to similar offers in the market" and vary depending on the creditworthiness of borrowers, a Citigroup spokesman said. Citigroup has received $50 billion in capital from taxpayers, and the U.S. government will soon own as much as 36% of the company's common stock.

"To continue to offer competitive products and services and responsibly lend in this current environment, we must adjust our pricing," said a Bank of America spokeswoman about the company's new fees and interest rates.

We've been talking about these rate and fee hikes for at least six months. Wonder what took the regulators so long to get around to this. If my email is any indication, and it often is, many people will be pleased with this latest development.

That said, anyone want to wager a bet as to whether this ever turns into anything more than a probe? I'm not holding my breath. I'll be very surprised if this barking ever turns into a bite.

Read the rest of the story here.