What’s Up – And Down – With Credit Cards
Did anybody notice that the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the CARD Act) took effect last month? Passed early in the Obama presidency, it gave credit card companies nine months to “adjust” before the legislation became law. And, boy did they adjust.
Earlier this year the American Institute for Economic Research reviewed Federal Reserve statistics and determined that 73% of American households have one or more general use credit cards and that 58% of households carry a monthly balance. Here is a brief summary of the Institute’s study.
So, what’s up, and down, with credit cards in the nine months between passage and implementation of the CARD Act?
UP: Interest rates. Credit card companies have taken advantage of the lag time to raise initial interest rates, ongoing interest rates and penalty interest rates on delinquent accounts. The CARD Act places no limit on maximum interest rates.
DOWN: Credit limits both on existing cards and new issues have been decreased. Not limited to the adjustment time in the Act, 58 million cardholders have had their credit card limits cut in the past 18 months.
DOWN: Future credit availability. Oppenheimer & Co. predicts that over the next 18 months credit card companies will remove an additional $2.1 trillion, 45%, of consumer credit card availability.
UP: Fees. Cards without annual fees will have fees added, and those cards with annual fees can be expected to increase. And new fees are on the way. Monthly processing fees for paper statements are in the works. Balance transfer fees are being increased. Reinstatement fees, where the company won’t allow use of bonus points until the account is “reinstated” for a fee after a late payment, are taking shape. Then there’s the “inactivity fee” where card companies charge a fee for not using their card. Citibank has already sent notice to some cardholders that minimum card activity of $200 a month is necessary to avoid an inactivity fee.
DOWN: Rewards. Credit card companies will reduce expenses by devaluing rewards programs associated with their cards. American Express has already reduced the cash back rewards on some cards from 1.5% to 1.25% (a 16.7% reduction in cash back rewards). But, the good news that really isn’t good news is that some credit card companies are considering a new rewards program…for carrying a month over month balance, thereby discouraging card users from paying off balances.
If you’d like a quick refresher on what the CARD Act does look at the bottom of this article in the Palm Beach Post for a quick summation.
21 Responses to “What’s Up – And Down – With Credit Cards”
Credit cards might be like entitlement spending. If the costs were more apparent to everyone, there might be less demand.
I personally opted out of a credit card because I didn't want to pay the annual fee.
I'm in favor of shrinking credit availability if it means that realistic underwriting is responsible. For example, what possible basis could there have been for issuing $5000 limit Visa cads to students with less than $1000 annual income? The only realistic basis was a hope that these students would get so hopelessly in debt that they would pay whatever interest was demanded. If the hope was that parents would pay the bills, then the parents should have the opportunity to explicitly agree up front. We've seen many national newscasters, whose incomes today are much higher than the median, comment that they ruined their credit while in college.
As far as rewards and no-fee cards go, I believe that these will still be readily available for those who pay their bills in a timely manner every single month of every single year. The merchant fees card companies impose are just too attractive for the card issuers to chance losing their best customers. There has been a lot of scare rhetoric suggesting otherwise, but even the 25% of users who pay their bills in full monthly, thus avoiding any interest payments, generate a lot of income for issuers.
Odd, AE just increaed my credit limit.
From what I have read, rewards are supposed to jump up. Now that the pot of customers that they feel comfortable lending to has shrunk, they will have to do more to bring in those “good” credit customers.
The solution? Ditch your credit cards, ditch your big bank and get a debit card and overdraft protection from your local credit union. Keeps your money local to lend in your community and starves the credit card companies, which they so richly deserve..
Shannonlee,
Good to know you're not among the 58 million. AmEx has always been a bit contrarian in the credit card biz, but they were among the first to cut cash-back rewards. The average consumer probalby won't notice that 1/4%, but I bet it adds up for the company. If Oppenheimer & Co. is right about taking $2.1 trillion away from the spending ability of consumers it could have a profound effect on the economy as a whole.
Btw, thank you for the very kind comment a few days back.
I like the organization of this article, easy to see as a map. Thanks!
“Ditch your credit cards, ditch your big bank and get a debit card and overdraft protection from your local credit union. “
Not a bad way to go. Currently I bank with Big Bank, Incorporated simply because up to last month I was traveling everywhere and liked having Big Bank ATMs everywhere to avoid fees when drawing cash from an ATM. (You know, what Julienne Malvaeux incorrectly calls a “public utility.” [grin]) I used to have a credit union at my first employer, though, and it was great — even had an ATM of theirs in the building at work. (I mention ATMs and cash because I operate on a cash basis rather than on a credit card for normal expenses.)
Debit cards remain unappreciated, sadly. (I have a combination debit card and ATM card. All that's missing is having it at a credit union that operates nation-wide.)
“a debit card and overdraft protection from your local credit union”
Never mind Bank of North Dakota, Green Dreams. Some lefties want a People's Bank of America for this.
(Zero-interest or low-interest loans and credit cards from such a bank, boosting small business, et cetera)
Another solution… Don't use your credit card for CREDIT… Use them as free bookkeepers.
I'm terrible remembering when and where I spend money (cash) but by using my cards I know where every bit of it went. And, it's easy: Pay on time / online (you save 44¢ postage) and while online download the months transactions into a inexpensive bookkeeping program.
caveat: Before you think I'm sounding like conservative, I do it this way because it saves the trees… I'm leftie “Green” liberal you know.
I guess nobody noticed that this article is really about that mythical “law of unintended consequences”. These changes and the law were entirely coincidence — they really came about because of the economic downturn, or due to Chinese credit cards, or because the card companies suddenly became greedier, or the consumers are just stupid.
I'm just practicing for when a study 5 years from now comes to the shocking conclusion that the expansion of health insurance really hurt both the middle class and poor the most.
Pay more and get less!
I say get less and pay more!
Credit Card Lite.
“Another solution… Don't use your credit card for CREDIT… Use them as free bookkeepers. “
Another good idea. This arguably is more important for day-to-day expenses than travel, etc.
It's easier than saving receipts from paying cash for everything, though that's a “pesteriferous” but good trick, too. (Or just force yourself to write down every penny you spend.)
* * *
“I guess nobody noticed that this article is really about that mythical 'law of unintended consequences'.”
Prof, I'm willing to bet lefty and righty alike on this thread expected this, and is so resigned to the obvious we're preoccupied instead by ways of better living (which often preclude having problems related to these credit cards).
If if makes you feel better: This is another example of the “medication” metaphor, of government interventionism as medicine given by a doctor for a problem (illness) of some kind. The unintended, unexpected consequences, sometimes the opposite results of what is desired (to quote Milton Friedman informally) are like the side effects of medication, the harmful or unwanted other effects. (Never mind if the disease or the symptoms are reduced in any way — it's not necessarily so!) Sadly, what many who see these side effects conclude is that more “medicine,” or additional “medicines,” are the answer all too often.
Why does it seem most every time we have reform to help the American people, whether it be Up/Down Left/Right it so quickly turns into a Lose/Lose?
Are you implying that our elected officials have anything other than the best interests of the American people at heart?
Guys like this, maybe. Maybe. The rest — as a rule, definitely not.
http://www.charlierose.com/view/interview/10916
(And he's not even elected)
Why does it seem most every time we have reform to help the American people, whether it be Up/Down Left/Right it so quickly turns into a Lose/Lose?
Because we're asking government to solve problems it can't solve well, no matter how virtuous the legislators are.
Here's how to enjoy the benefits of a credit card without being victimized: spend less than you earn, and stay out of hock to credit card companies.
You may find that easy or hard, but the government can't do it for you. Nor can credit card companies. The only way either of them can keep you out of trouble is by taking your cards away. And that's exactly what they're doing, by degrees, in raising interest rates, dropping credit limits, and ending rebates.
Debit cards are very dangerous….overdraft protection or not. It isn't too bad if you have a lot of money ion your account and a low daily limit, but that isn't the average family's current position.
Call me crazy, but we need to start being a little more conservative with our credit. I know right now isn't the right time, but credit card debt is out of control and something needs to be done.
Oddly enough, I think my future lack of use will eventually get my card canceled
and I've always liked what you write….I think it is important that people that contribute to TMV should also be part of the commenting community.
Elijah, nice article, and I appreciate what you had to say re. Roe v. Wade in your first piece.
P.S. — Same old redbus, even though it says redbus2