Big Ben's Credit Card Moves: The Good, the Bad and the Ugly

Bernake's Credit Cards
A loan shark is defined as an individual who lends money at excessively high rates. (1) Unfortunately, a business that was viewed as a tentacle of organized crime has now become common place through various practices of U.S. Banks and their credit card divisions.

Citing another pressure point in the U.S. economy, the Federal bank regulators are developing a swift action plan against abusive credit card companies. Fed Chairman Ben Bernanke trumpeted a reform agenda on credit card policies. The Fed approved a proposal that would generally prohibit credit card companies from increasing the annual percentage rate on a customer's outstanding balances. Bernanke’s proposal would also ban credit card companies from reaching back to prior billing cycles when calculating the amount of interest charges in the current cycle, a practice known as double-cycle billing. (2)

Evidently, the threat of revolving credit card debt poses a significant risk to consumers. While credit card companies do not like additional government scrutiny, bank billing policies have become too aggressive. This does not mean the consumer gets a free ride here. However, if credit cards are going to be the future platform of electronic transactions, then there needs to be a degree of uniformity between banks.

A recent visit to www.creditmall.org (3) validated some of the basic concerns in the revolving debt model utilized by the credit industry. Credit Cards can fit into three categories: The Good, The Bad, and The Ugly.

The Good... (People with Good Credit)
Depending on the credit rating, a number of credit cards are willing to business on very favorable consumer terms. For instance, a trip to credit mall suggests that there are nearly 100 companies that are willing to extend credit at 0% APRfrom three all the way to fifteen months! After all, the best credit risks deserve the best cards. Aside from low interest, credit cards are available in other reward categories such as cash, gas, and travel. (4)

The Bad... (People with No Credit)
Students find themselves in a unique situation. While bad credit is viewed as a bank risk, no credit in some circles is viewed as too risky. Interestingly enough, most cards for students (5) all had an initial six months with 0% APR as well. However, the terms of this deal are much different. For instance one offer shows “Two Cycles Average Daily Balance" method when determining finance charges. Wikipedia explains this as "The sum of the daily balances of the previous two cycles is used, but interest is charged on that amount only over the current cycle. This can result in an actual interest charge that applies the advertised rate to an amount that does not represent the actual amount of money borrowed over time, much different that the expected interest charge." (6) In layman's terms, an unfavorable borrowing situation.

The Ugly... (People with Bad Credit)
Consumers with poor credit need plastic as well. And there are several banks which offer them. However, the terms as one would guess are unfavorable including some with no introductory rates. Most of these cards come with a hefty membership fee, an APR that is in the Ozone Layer, and a number of penalties that would make a consumer's toes curl. (7)

click to enlarge

Implications
Many banks have loosened credit card underwriting standards at a time when consumer debt is spiraling out of control. There are a number of banks who have given credit cards to customers who do not deserve plastic. While this practice is accounted for in most bank business models, it may have a devastating impact on the economy down the road. Now, it appears that government intervention will impact the bottom lines of most, if not all credit card lenders, and major issuers such as Discover Financial (DFS), MasterCard (MA), and Visa (V). Many individual banks who underwrite credit cards may see a revenue source dry up. This may effect earnings for BoA (BAC), JPMorgan (JPM), Citigroup (C), Capital One (COF), and a number smaller banks such as Advanta (ADVNA), KeyCorp (KEY), National City (NCC), Royal Bank of Scotland (RBS), and SunTrust (STI). (8) After all, everyone wanted a piece of this "action". At the end of the day, The Fed calculates that Americans carry $951.7 billion in revolving credit debt. That is a figure which should not be taken lightly! (9)

Conclusions
In conclusion, Bernanke's comments on Friday were a warning shot for the entire credit card industry. Abusive "loan shark" type lending practices must cease, and stricter underwriting standards must be applied for consumers. Banks must adjust their revolving credit business model. This will have a negative impact on earnings short term. Long term, it will be a good public relations move. In the end, there must be a higher degree of self-policing throughout the entire credit card industry. Failure to change means additional regulations in the future. (11) In the end, no decent
business would want the title of “Loan Shark.”

Disclosure: None

Sources Cited
1. dictionary.reference.com
2. news.yahoo.com
3. creditmall.org
4. creditmall.org
5. creditmall.org
6. wikipedia.org
7. creditmall.org
8. finance.yahoo.com
9.baltimoresun.com
10. NY Times
11. rttnews.com

Comments

[AmyBeth22]

Again..another bogus article calling Visa a "credit card issuer". Visa does not "issue cards". Banks , American Express and Discover do. Not one dollar of credit is "issued" by Visa OR Mastercard. Not one person pays a bill written to Visa or Mastercard!! This regulation is for the issuers, not the V/MA LOGO on the card. It is for the LENDERS of credit. Visa and Mastercard get paid BY the LENDERS everytime the card is swiped. They get paid regardless!! They do not wait for a check in the mail from the little old lady who bought new shoes. Think before you write articles or you just sound ignorant. Right now you look like a high school dropout.

[SmartCredit CardChoices]

A lot of credit card issuers have tightened the reigns recently. Getting approved for a credit card is now quite difficult for people who would have had no problems three months ago. My website monitors the credit card market and features over 100 credit card applications from all the major issuing banks. Approval rates on 80% of these offers have declined by 30% or more in the past two months. Also, so has the quality of offers. Fees have been increased dramatically and introductory 0% rates have been shortened by a number of major issuers.

[Tiger Coach]

Dear Readers,

Continued growth of MA and V will be predicated on consumer demand.

MA and V, have excellent business models. Both companies have healthy stock prices as well. MA and V are based on consumer credit transactions (which should see weakness in coming months).

1. Over-spending
2. Inability to service debt
3. Default rates
4. Tighter underwriting standards

The ability for consumers to service debt will be tested. While this becomes more or less an issue for the underwriting banks, it will also effect the bottom line of MA and V. Furthermore, once a MA or V user defaults, then that customer is unable to continue transactions. Last, banks will continue to scrutinize customers with tighter underwriting standards. There will be come customers that banks will not want. These issues will effect the bottom line of MA and V.

Respectfully,
Brian A. Davis

P.S. I do not hold positions on MA and V at the time of this article.

[windycity]

The sheer number of comments defending V or MA concerns me. There are huge number of calls activities also. I have been awaiting for the sentiment to become extreme positive, but not sure when.

[gongulent]

Seeking Alpha=SPAM, How do these worthless opinions become stock news; as if they are credible.

[jamin1122]

Bottom line is that unless people actually stop buying things, the actual number of transactions should not be effected - I've never had a credit card in my entire life, however I use my debit card with a little Visa logo on it about 5-6 times per day...

So, either people stop buying food, gas, clothes, and everything else and the whole economy falls completely apart... OR everyone starts using cash only... OR they use their bank issued DEBIT card with a Visa and Mastercard logo.

I don't think people are going to start using cash and/or stop buying things just because they may not have a credit card... Yes, there may be a little less spending initially due to the fact that less people will be able to spend money they don't have (by using a credit card)... But, if you think about it logically and long term this will free a lot of people from debt that they may have had, hence providing them money to spend buying goods (using their debt card) vs. paying off credit card bills...

So, the only scenario that could hurt Visa or Mastercard would be if people stopped spending money, in which case we would have a much larger problem on our hands and EVERY stock would be effected (more so than Visa or Mastercard).

However, quit the opposite will likely happen - people will have more money and they will do more transactions, due to less debt to pay off!

Yes, I do hold shares of Visa... and Yes, I have bought in on a TON of call options... and I've filthy rich because of it (10X return in less than 2 months). I hold no shares and I could careless if the stock is going up or down because I just play the direction of the stock, however I don't see Visa heading anyway but way up... to think it would go any other direction is just crazy. Visa will be at $120+ by new years and this whole "good, bad, ugly" thing will not even phase it...

[bearfund]

No, Visa is not a credit card issuer. But V trades at 40x earnings and it pays no dividend. That's an automatic fail here at the bearfund. If you want to bet on number 23, go ahead. The casino is over there. V is neither a sound investment nor a reasonable trade; you are doing nothing but betting on the greater fool. I'll give you $15 a share for it; that's a bit above its liquidation value but I'm willing to take a bit of risk that it'll someday pay a dividend.

No position on V. I don't trade the untradeable.

[jamin1122]

We'll see who the "greater fool" is when V is trading at $200+ one year from now... that may put a little dent in your "automatic fail" theory, eh?

Keep collecting your 1-2% dividends on your "tradeable" stocks and I'll continue to 10-fold my investments every 2 months with V option calls... as Visa drastically continues to go up over the next year.

Hey, maybe if some of your expert picks work out you'll make a whopping 10% gain this year! Good Luck! (I'll go ahead and make that before 10am tomorrow...)

To each his own (some just prefer to own more than others).

[investorslive]

MA might retest $300 but these both need to consolidate for a week (MA and V)

AAPL may squeeze - www.investorslive.com/.../

[VWinner]

jamin- i'm with you on hte v option calls- AND holding a core position- And day trading the stock (some prefer to own MUCH more than the others satisfied with simply owning more than others)........

[VWinner]

bearfund- I doubt you have any money if you think V is untradeable. My 750 trades since the IPO earned me enough to buy you a home..............

[Ruppert]

"Many banks have loosened credit card underwriting standards at a time when consumer debt is spiraling out of control. There are a number of banks who have given credit cards to customers who do not deserve plastic."

Is that so? Which banks have loosened CC underwriting standards at a time when CC debt is spinning out of control? Feel free to be specific. The credit "crunch" or "crises" leads me to believe credit is less available today then yesterday.

It's ironic that the same day the author writes such fuzzy rhetoric The Wall Street Journal published a Federal Reserve survey of 56 bank presidents that find that --"About a third of the 56 domestic banks surveyed in April reported raising their standards for credit-card loans over the past three months, up from just 10% in January. Banks are being tougher on credit-score requirements and are reducing credit limits on card loans."

(Fair Disclosure long DFS)

[spc4l]

you go
jamin1122
let keep double our money while that fool sit there on his10% return ANNUALLY hahahah
V winner - my man you go tell that fool buddy

[fencer1]

Hey VWinner...

Newer investor here. You seem to know what you are talking about.
How many shares do you day trade at a time and how much profit do you take on each trade?
I'd like to approach it like you do, but I don't know when enough is enough...if you know what I mean...both going up & going down?

Any suggestions?

[User 168848]

BRIAN A.DAVID
THAT WEAKNESS is replaced by the big growth and the use of credit card in develloping countries, plus india & china who just start using credit card.

[fxtrader07]

the number of people bragging about (a) their success trading V or (b) bragging about calls on V being the ultimate road to riches is stunning.
the voice of reason (bearfund) gets silly rebuttals by people who think that a 10% annual return is something ridiculously low RoI. Feels like dot-com fools are allover the Visa-place. yeah, it might go to 200$/share. so what? you can make this exercise 5 times and be right 4 times. the fifth kills you, especially with this repeated call-buying humbug. face it, you need someone (fool or not) who buys V-stocks from you at ahigher price to make any money. Compare that to solid dividend paying business. that was bearfund#s point - but the momentum morons who don't know a thing about fundamentals and investing of course didn't get it.
at one point your calls will expire worthless and kill all your nice profits. only hope you didn't pay them with your V-card

[fuzzyshrimp]

Banks issue Visa cards, not Visa. My Visa card is "backed" by my credit Union. And as far as Uncle Ben tightening laws about fees. That's great news, it will mean MORE people will NOT be scared to use Credit Cards more freely. Swipe Swipe Swipe - hear that? It's the sound of Visa making more money every time you each lunch or buy gasoline.

[bearfund]

There is nothing I can use to predict the future price of V, so there's no way to formulate an exit strategy. Its price is decoupled from its value and there are no technical indicators; it's a new issue and the chart is parabolic. That's not trading, it's gambling. If you need the returns and are comfortable with that, so be it. Good luck to you.

[VWinner]

Hey Fx trader- and bear fund- you keep doubting-

I have 6 options positions....

I own several thousand shares..

And- I've traded the untradeable....750 TIMES

I have 6 figures in PROFITS under my belt - you guys must be salaried guys because I hear little old men in young bodies talking-

Why don't you guys just go buy an annuity and then in twenty years you can take your little checks and go fly fishing! You may even be able to rent yourself a little RV if the price of gas goes down......

Whats UP SPC- I KNOW for a fact YOU are cashing in right now......

[windycity]

There is a bill introduced and referred to the Judiciary Committee -- HR5546 (Credit Card Fair Fee Act), which directly attacks V and MA. Since it is co-sponsored by both Dems and GOPs, I expect it moving quickly on the floor. Expect it to put V into tailspin.

[iThinkBig]

FxTrader07, you continue to provide sound wisdom. I accept my six figure job as a CEO and founder of a business.

Yeah, the long days are not fun and I imagine that in V Winner's or Jammin's world you click on the mouse a few times, read a chart and jump in the beamer to go out to drinks with the honey. Party it up!

Some former investors in a business I left (Dennis and Mark) at Tyco acted a lot like this too, full of pride from riding a nice wave acting untouchable until it crashes and your broke or in there case, jail. Y

ou see, because once you have gotten rich from being somewhat bright but immature you tend to become overconfident and make BIG mistakes. How many waves can you climb on, ride, go bust and do it all over again? Will you live to be 1,000 years old?

The nice part of my business is that I run it on fundamentals ONLY and put my own money up as do the other managers. Profitable ventures create very large multipliers on M/A deals and when you own all the majority of equity tend to pay 8 figure dividends. This makes it easier to make another 8 figure dividend later by repeating the same research driven, quiet approach where no one sees you coming and then your competition buys you out.

Here's a suggestion: If your happy about making a big pile of loot just say it. Fellow capatalists will gladly smile and be happy for you.

However, demeaning other investors whom choose a less risky and less profitable short-term approach but become multi-millionaires over a lifetime (and enjoy the fulfillment of quiet conquest in the process which is deeply rewarding beyond just money) makes yourselves sound retarded and wastes valuable time. But keep shooting off your mouth with your pride. Just don't ask me to invest in your new fund when you start it.

[Meerkatt]

There is some truth in almost every argument here, but long term we are becoming a cashless society and that will only help V and MA which have what the small merchants call, "a license to steal". You can't beat them so might as well join them.

[investorslive]

The USA is just one big Plastic Credit card, isn't it fantastic!
www.investorslive.com/.../