more government - please add health care soon!February 22 2010 at 5:19 PM
Mixed blessing: Credit card reform may shock some
The Associated Press
NEW YORK Your next credit card statement is going to contain an ugly truth: how much that card really costs to use.
Mark Lennihan, AP Credit card signs are posted outside a New York parking garage. A law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit.
Now, thanks to a long-awaited law that goes into effect Monday, you'll know that if you pay the minimum on a $3,000 balance with a 14 percent interest rate, it could take you 10 years to pay off.
"Jaws will drop," said David Robertson, publisher of The Nilson Report, a newsletter that tracks the industry. "I don't doubt for a nanosecond that it's going to give a lot of people a sinking feeling in their stomachs."
That's not all that will make them queasy.
During the past nine months, credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.
It wasn't supposed to be this way. The law that President Barack Obama signed last May shields card users from sudden interest rate hikes, excessive fees and other gimmicks that card companies have used to drive up profits. Consumers will save at least $10 billion a year from curbs on interest rate increases alone, according to the Pew Charitable Trust, which tracks credit card issues.
But there was a catch. Card companies had nine months to prepare while certain rules were clarified by the Federal Reserve. They used that time to take actions that ended up hurting the same customers who were supposed to be helped.
Consumer advocates say the law still offers important protections for the users of some 1.4 billion credit cards.
"We expected some rate increases; we expected some annual fees," said Ed Mierzwinski of the U.S. Public Interest Research Group, an advocacy organization that lobbied for the law.
To be sure, the law takes effect while credit card companies are still reeling from the recession.
In 2007, the top 12 card issuers earned a combined $19 billion from credit cards, according to The Nilson Report. A year later, amid the financial meltdown, profits for those companies fell more than 65 percent to $6.32 billion. The plunge was largely because defaults ballooned as unemployment soared.
Profit figures for 2009 aren't yet available. But banks wrote off about $35 billion in credit card debt last year, as the unemployment rate topped 10 percent. Analysts predict the default rate will remain at least twice as high as normal through this year, and longer if unemployment stays high.
At the same time, the law is expected to cut into future profits. FICO Inc., the company best known for its credit scores, projects the average card will generate less than $100 a month in revenue within three years, down from $200 a month before the law.
That helps explain why the industry reacted so aggressively to the legislation. Among the moves it made:
Resurrected annual fees.
Annual fees, common until about 10 years ago, have made a comeback. During the final three months of last year, 43 percent of new offers for credit cards contained annual fees, versus 25 percent in the same period a year earlier, according to Mintel International, which tracks marketing data. Several banks also added these fees to existing accounts. One example: Many Citigroup customers will start paying a $60 annual fee on April 1.
Created new fees and raised old ones.
These include a $1 processing fee for paper statements for cards issued by stores such as Victoria's Secret and Ann Taylor. Another example is a $19 inactivity fee Fifth Third Bank now charges customers who haven't used their card for six months.
Other banks increased existing fees. JPMorgan Chase, for instance raised the cost of balance transfers from one card to another to 5 percent of the transfer from 3 percent.
Raised interest rates.
The average rate offered for a new card climbed to 13.6 percent last week, from 10.7 percent during the same week a year ago meaning cardholders had to pay almost 30 percent more in interest, according to Bankrate.com.
Formillions of other accounts, variable interest rates that can rise with the market replaced fixed rates. The Fed is expected to start raising its benchmark interest rates later this year, which would likely trigger an increase on those cards.
Besides making credit more expensive, banks also made it harder to get and keep credit cards. One big reason: Since the financial meltdown, many credit card issuers have been trying to reduce risk.
The number of Visa, MasterCard and American Express cards in circulation dropped 15 percent in 2009, for example. Rarely used cards were among the first cut off. Some cards linked to rewards programs for purchases like gasoline were likewise shut down.
Card companies also slashed credit limits for millions of accounts that remain open. About 40 percent of banks cut credit lines on existing accounts, according to the consultant TowerGroup, which estimated that such moves eliminated about $1 trillion in available credit. Much of that was unused.
Credit lines were frequently cut in regions most affected by the housing crisis and high unemployment, such as Florida and California, said Curt Beaudouin, a senior analyst at Moody's Investors Service. "They're not doing it willy nilly, they're doing it systematically," he said.
Companies are also making fewer solicitations. Mailed offers for new cards increased in the final three months of 2009 for the first time in two years, but there were only about 575 million. That's about a third of the average number of quarterly offers from 2000 through 2008, according to Mintel.
Because the law makes credit cards less profitable, some subprime borrowers may not be able to get cards at all, at least for the next few years. There's no fixed definition, but subprime borrowers generally have a FICO score below 660. For a good portion of this group, options may be limited to alternatives like PayPal and other electronic payment services, prepaid cards and payday lenders.
"Not everyone either deserves or should have an open-ended credit card," said Roger C. Hochschild, chief operating officer of Discover Financial Services.
Joining those who won't easily get cards: college students and others under age 21. The law strictly limits card marketing on campuses, ending giveaways like T-shirts and pizza Cards can only be granted to applicants who show they have the means to repay, or those who have a co-signer who can pay.
"Some of the more vulnerable parts of the population are a little bit more protected," said Georgetown University finance professor James Angel. But he predicts card companies will find ways around most of the new restrictions. And once the economy recovers, he expects the lending spigot to open again.
In the meantime, there is one group of consumers that banks will chase after those who carry a balance from month to month for at least part of the year, and pay their bills on time. They're the most profitable and least risky group for banks.
Also a target customer: anyone willing to do more business with the bank that issues their card, say opening a checking or savings account or taking out a mortgage.
"What we want is a deeper relationship with our customers," said Andy Rowe, an executive vice president with Bank of America's card business. Customers willing to stick with a single bank may even be able to get annual fees waived or get a better interest rate, he said. "That's where the competition will be."
February 22, 2010 07:30 AM EST
Copyright 2010, The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Let me be the first to state the obvious.........
|February 22 2010, 5:58 PM |
Our old friend, the law of unintended consequences, is alive and well. If we have not yet learned that you cannot force the private sector to treat non-credit worthy people like they are credit worthy (see "mortgage crisis"), we will never learn it. Not everyone should have a house, not everyone should have a credit card (s). That's the harsh reality.
good bye Varsity ...
|February 23 2010, 10:14 AM |
Will this be added in reconciliation?
Redesign hot dogs to be chokeproof?
8:58 am February 22, 2010, by Theresa Walsh Giarrusso
The American Academy of Pediatrics is waging war against the hot dog not because of its terrible nutrition value, but because of its potential to choke small kids.
The Academy would like to see a choking hazard label placed on hot dog packaging. Or even better, it would like to see foods like hot dogs redesigned so their size, shape and texture would be less likely to catch in a childs throat.
According to an article in USA Today:
More than 10,000 children under 14 go to the emergency room each year after choking on food, and up to 77 die, says the new policy statement, published online today in Pediatrics. About 17% of food-related asphyxiations are caused by hot dogs.
If you were to take the best engineers in the world and try to design the perfect plug for a childs airway, it would be a hot dog, says statement author Gary Smith, director of the Center for Injury Research and Policy at Nationwide Childrens Hospital in Columbus, Ohio. Im a pediatric emergency doctor, and to try to get them out once theyre wedged in, its almost impossible.
Smith points out The Consumer Product Safety Commission requires labels on toys that are potential choking hazards but theres no equivalent for food.
Janet Riley, president of the National Hot Dog & Sausage Council, says she supports more education for parents but:
Riley questions whether warning labels are needed. She notes that more than half of hot dogs sold in stores already have choking-prevention tips on their packages, advising parents to cut them into small pieces. As a mother who has fed toddlers cylindrical foods like grapes, bananas, hot dogs and carrots, I redesigned them in my kitchen by cutting them with a paring knife until my children were old enough to manage on their own, Riley says.
Here is a gallery of top choking hazards for kids.
So what do you think: Should there be choking warning labels on hot dogs or other similar foods like grapes or carrots? Should the hot dogs be redesigned? (What would you do with it?)
Should it just be up to the parents to take the time to prepare the food in such a way to make it less dangerous to their kids? (Or up to the parents to just not buy it?)
Have you ever had a child choke on a hot dog? Did you/do you cut them up? Up until what age?
Re: Let me be the first to state the obvious.........
|February 23 2010, 3:34 PM |
No one forced banks to give loans to people who couldn't pay the mortgage. It was greed on the part of the banks. The government placed the incentives and greed on the part of banks, mortgage companies, and homeowners lead to the crisis. There were a lot of people to blame.
Re: Let me be the first to state the obvious.........
|February 23 2010, 4:17 PM |
"No one forced banks to give loans to people who couldn't pay the mortgage"
yes, they did. In an arm-twisting sort of way. If you want to expand, you have to take on more 'distressed' buyers. So the government played off the greed to some extent, but the banks also wanted/needed larger territory to grow their revenue base. The system was gamed from the buyer, agent, mortgage broker all the way to the CEO and federal government (all 3 branches share some blame).
Don't just lay it on the banks because your government was well aware of the practices they were promoting...
|February 23 2010, 4:43 PM |
From Thomas Sowell in today's NRO:
"The problem was that, not only were these mortgages based on housing prices inflated by the Federal Reserve's low-interest-rate policies, many of the home buyers had been granted mortgages under federal government pressures on lenders to lend to people who would not ordinarily qualify, whether because of low income, bad credit history, or other factors likely to make them bigger credit risks.
This was not something that federal regulatory agencies permitted. It was something that federal regulatory agencies -- under pressure from politicians -- pressured and threatened lenders into doing in the name of "affordable housing."
Re: Let me be the first to state the obvious.........
|February 23 2010, 5:45 PM |
Sorry, but you are 100% wrong. The government created the mortgage mess by insisting that Fannie Mae and Freddie Mac buy poor quality mortgages from low or poor credit borrowers, which then allowed the banks to make those mortgages. Then the government, through CRA and other programs, forced the banks to make those loans, or risk being cited for discriminatory practices and redlining. I am in the mortgage business, trust me, I know this stuff better than I want to know it.
|February 23 2010, 7:20 PM |
Your saying that the banks are that weak? That those that offer the products can't be responsible in how they offer them out? Please, you are just part of the problem. Thye don't want to take responsibility for their actions. When the financial markets create the opportunity to gamble with someone else's money for big rewards and ignore the huge downside, that is irresponsible.
|February 23 2010, 7:45 PM |
Banking is a heavily regulated industry. It has nothing to do with weakness. If the government wants you to do something, ypu either go along or face the consequences. For the best example of that, just look at all the banks who didn't want TARP money, but took it anyway because the government strongly suggested they do so.
Your post indicates you are confusing banks and their lending practices with investment banks and their investment practices. They are not the same thing.
All banks are investment banks.
|February 25 2010, 4:13 PM |
What do you think they do with the money you deposit. Water it and hope it grows?
Re: All banks are investment banks.
|February 25 2010, 5:17 PM |
No actually, they lend it to small businesses, to credit worthy people, etc. Something a typical investment bank does not do. There are areas of crossover, but they are not the same.
Yes, they make an "investment" in the small business and
|February 27 2010, 8:44 PM |
the credit worthy individuals. They make interest (money) on each.
|February 28 2010, 1:25 PM |
|February 23 2010, 7:14 PM |
Banks did have a choice
|February 23 2010, 8:17 PM |
Follow the govt mandate to offer loans to poor people who couldnt otherwise afford the loan, or be subject to intense govt scrutiny (lead by liberals franks and dodd) for not offering such loans to minorities.
What would you do?
You are right, the banks didnt have to do this... in hindsight it was a huge mistake. But at the time, those banks/mortgage companies would have risked their future by going against the libs and govt by failing to comply.
The govt did definitely push these banks, through their legislative power, to follow the govt directives!
Just keep yur stinkin' government hands off my Medicare
|February 23 2010, 7:24 PM |
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