Credit-card issuers curb solicitations
Posted on Sunday, November 2, 2008
The worldwide financial crisis and increased regulatory pressure in Washington are starting to reshape the lending system in ways that are making credit cards harder to get and more costly to use.
American consumers carry nearly a trillion dollars of credit-card debt, according to Federal Reserve estimates.
For the majority of cardholders, who pay off their balances each month, this buynow, pay-later system will remain a convenience that often comes with discounts and other benefits.
But nearly 50 million Americans carry balances from month to month — they’re called rollovers in credit-card parlance. And many of these are hard-pressed families who use credit to cover the rising prices of gasoline, food, health care and housing, said Elizabeth Warren, a law professor and debt expert at Harvard University.
“It would be wonderful to report that all we have to do is cut back on extra spending, but most of the people who carry creditcard balances just can’t pay their expenses on their declining real incomes,” Warren said.
Many consumers can’t even meet monthly payments. U. S. banks charged off 5. 47 percent of all credit-card loans in the second quarter, according to the Federal Reserve, representing some $ 50 billion that they’ll likely never collect. That’s up from 3. 85 percent the year before.
Signs of tightening in the credit-card market began to appear last fall, said Curtis Arnold of CardRatings. com, a Web site he founded 10 years ago to track things such as balance transfer offers promising low or no-cost introductory rates.
“A year ago, many of these offers had very aggressive teaser rates with 12 months of zero percent interest and no fees,” Arnold said.
Now such offers are “very, very rare” and many come-ons charge fees of up to 3 percent of the balance transfer, while introductory rates could hit 3. 99 percent and last only six months. Card issuers also are demanding higher credit scores, he said.
“Historically, consumers have used these transfers as life preservers to manage their debt,” Arnold said. “The rules have changed.”
When credit cards first appeared in the 1960 s, they were “very hard to get, almost status symbols,” said Carol Kaplan, a spokesman for the American Bankers Association. But the plastic currency grew common during the relatively booming 1980 s and 1990 s.
“Credit-card companies had money, rates were reasonable, it became so every family had one,” Kaplan said. “Now the industry is sort of tightening credit standards. It’s harder to get a higher limit. It’s harder even to get a card at all.”
The stricter standards are partly a reaction to economic conditions that make it tougher for cardholders to make payments.
“More and more credit-card users are having difficulty paying more than the minimum on their credit-card balances,” noted Standard & Poor’s.
Scott Crawford, of Debt Goal. com, a Web site in San Francisco designed to help people manage credit, said consumers will have to adjust to an environment in which credit is tougher to obtain.
“What we essentially have is a crisis driven by too much borrowing and too little saving,” he said.
Warren, the Harvard debt expert, said this shift will make life harder for working families who have used credit cards to stretch paychecks that can’t cover the basics. In testimony before Congress in July, she used federal data to show that the typical family has seen its income fall more than $ 1, 000 between 2000 and 2007 after inflation, while food, gasoline, housing and healthcare costs have risen more than $ 4, 000.
“There are no easy ways out,” Warren said, adding that people are getting second jobs or holding yard sales in an effort to stay afloat.
Issuing credit cards has long been one of the most profitable forms of lending. “Credit-card earnings have been consistently higher than returns on all commercial bank activities,” said the Federal Reserve in a June report.
The report said big creditcard banks send out billions of direct-mail pitches to land about one new customer for every 200 letters. The Fed said the volume of these direct-mail solicitations peaked at 6. 05 billion in 2005, falling to 5. 8 billion in 2006 and 5. 2 billion in 2007. That works out to 26. 7 letters per adult at the peak, sliding to 25. 6 and 23 letters per adult more recently, based on a Census Bureau estimate of 226 million Americans 18 or older.
“Much of the falloff in solicitations during 2007 took place during the latter portion of the year as solicitations of higher credit-risk prospects were curtailed in the face of rising creditcard delinquencies and difficulties in the mortgage market,” the report said.
Gail Hillebrand, a lawyer who tracks the finance industry for Consumers Union in San Francisco, likened credit-card sales tactics to the practices of subprime mortgage lenders who offered low introductory loans that later rose to levels beyond the borrower’s ability to pay. She singled out a practice under which some card issuers routinely raise low introductory rates to punitive levels if the payer is late even once.
Such practices are sometimes called hair-trigger delinquency rates and they have come under intense regulatory scrutiny in Washington.
In May, the Fed, which oversees banks, joined the Office of Thrift Supervision and the National Credit Union Administration in proposing new regulations that would, among other things, prevent credit-card issuers from raising rates this way unless a cardholder was more than 30 days late with a payment.
The banking industry is fighting the proposed regulations.
Edward Yingling, president of the American Bankers Association, has called them unprecedented and likened them to price controls that would discourage lending because it would not allow card issuers to set interest rates at levels adequate to offset their lending risks.
“This is particularly perplexing, as the result will be a reduction in credit availability at the very time the Fed is working to increase access to credit,” Yingling said.
But the Fed remains on track to put the new rules in place before year-end — although it could be months before they take effect, in order to give banks time to make the adjustment. Information for this article was provided by Christina Rexrode of McClatchy Newspapers.
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