Love Affair With Credit Cards Is on the Rocks

|
Includes: BAC, DFS
by: Michael Shedlock

The Discover U.S. Spending Monitor is Reporting Consumers Wary, Plan to Reduce Spending.

The Discover U.S. Spending Monitor recorded its third consecutive monthly decline in January, falling more than four points to 86.1 as economic concern continued to grow and post holiday spending intentions moderated.

Both the economic and spending components of the index reached new lows in January as just over 70 percent of consumers now think the economy is in decline and 48 percent feel the same way about their personal finances.

The number of people preparing to spend more next month fell to 30 percent, down a point from December and five points from October.

At the same time, consumers seem to be ratcheting down plans for spending in areas beyond necessities. Nearly half (49 percent) of the January sample said they expect to do less discretionary spending in February. That’s nearly 5 points higher than December and a full 10 points more than what consumers said last September. Discretionary spending was not the only area consumers were expecting to cut back. They also intend to spend less on household improvements, major personal purchases and savings.

For the first time, consumers making $75,000 or more showed a significant change in spending intentions. In December, for example, 14 percent of people making more than $75,000 a year said they intended to spend more on discretionary items like entertainment and travel. In January, that number dropped to just nine percent.

Nearly 60 percent of this income group said they would hold February spending on par with January. Last month that same sentiment was expressed by just under 45 percent.

The most dramatic shift in attitudes in January occurred among consumers with annual incomes of $75,000 or more. Their economic confidence sharply declined in January. Twenty-nine percent rated the economy as poor and only 8 percent rated it excellent. The January figures compare to 20 percent and 12 percent respectively for December.
Attitudes Lead The Way


The Wall Street Journal is reporting Credit-Card Pinch Leads Consumers To Rein In Spending.
America's love affair with credit cards may be headed for the rocks.

Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies, in turn, have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit.

The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy.

Such a pullback may already be taking shape. Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October. And it reflects the volatility in consumers' spending habits as economic growth sputters.

Evidence is mounting that the plastic-fueled spending spree won't last. In December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier, according to research firm RiskMetrics Group. The analysis includes a broad swath of more than $200 billion of credit-card loans that are sold off to investors by major card issuers like Citigroup Inc. (NYSE:C), Capital One Financial Corp. (NYSE:COF), American Express Co. (NYSE:AXP) and J.P. Morgan Chase & Co (NYSE:JPM).

After J.P. Morgan doubled the interest rate on her credit card to around 30% and lowered her credit limit in December, Jennifer Campion, a 39-year-old computer-software instructor in Chandler, Ariz., decided to eat out less often and to forgo her daily coffee at Starbucks so she can pay off her outstanding card balances.

"Our whole lifestyle has changed at this point because of this strict budget we're on," says Ms. Campion, who has a total of about $7,000 in credit-card debt.
Consumers Want Out Of Debt Trap

"Our whole lifestyle has changed at this point because of this strict budget we're on."

That statement says it all. And when they get out of debt, hopefully they will have learned a valuable lesson to not run those card balances back up again.

Zombie Debt

Newsday is reporting collectors come after debt you didn't know you had.
After Kim Mullen filed for bankruptcy in 1993, she cut up all her credit cards in her lawyer's office. Since then, the Levittown resident has managed to obtain a good credit rating.

But in December, a debt collector contacted her, saying she had an unpaid card balance of $5,655 from 1992. With interest, the letter claimed, the debt had grown to $19,400.

Many credit card companies have started selling delinquent accounts to collectors to boost quarterly earnings, according to a report by Kaulkin Ginsberg, a Rockville, Md.-based adviser on debt collection.
Bank of America Sucker Play

Bank of America (NYSE:BAC) abruptly notified cardholders in good standing their rates would skyrocket if they didn't opt out fast. It's A Credit Card You Want to Toss.
Credit-card issuers have drawn fire for jacking up interest rates on cardholders who aren't behind on payments, but whose credit score has fallen for another reason. Now, some consumers complain, Bank of America (BAC) is hiking rates based on no apparent deterioration in their credit scores at all.

The major credit-card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving an explanation for the increase, according to copies of five letters obtained by BusinessWeek.

What's striking is how arbitrary the Bank of America rate increases appear, credit industry experts say. In recent years, many card companies have turned to a practice called "risk-based pricing," where they will raise a regular paying consumer's rate because of a decline in the person's FICO score.

But Bank of America appears to be taking an even more aggressive stance because, beyond credit scores, it is using internal criteria that aren't available to consumers. That makes the reason for the rate increase even more opaque. "Congress has faulted credit-card companies for lack of transparency in raising rates," says William Ryan, a financial industry analyst at Portales Partners, a New York-based research firm. "Bank of America is bringing it to a new level."

Analysts also say they are surprised by the magnitude of the rate raises Bank of America is imposing on affected cardholders. Michael Jordan, 25, a software developer who lives in Higganum, Conn., says he received a letter from Bank of America in late January advising him that his card rate would rise from 9.99% to 24.99%. The software developer, who earns $80,000 per year, says he was "shocked" because his payments had been on time and his credit score hadn't changed in the last year.

Bank of America is trying to get ahead of Amanda Pennington, 29, of Euless, Texas. She says the bank raised her credit limit three months ago from $5,000 to $8,000 because of her strong payment history. Then she got the letter from the bank in mid-January notifying that her rate would rise from 15.74% to 25.99%. When she called, she says, the bank told her it was raising her rate because her balance was now too high, though it was still under the higher new limit the bank had previously granted.

Adam Levin, CEO of Credit.com and former head of New Jersey's Division of Consumer Affairs, says he is surprised Bank of America would risk bad public relations with its rate increases, given the congressional hearings in December. The bank risks alienating new customers and existing ones by being so brazen, he says, adding, "Either Bank of America has more financial troubles than it is willing to admit or it has a level of institutional arrogance that is unacceptable."
What's Driving BAC's Decision?

Is Bank of America that desperate for cash or is it simply greedy? Perhaps it's a bit of both.

Just as mortgages were bundled up in packages and securitized, so is credit card debt. Who wants to hold that paper when defaults are rising? Capital impaired banks don't want that risk sitting on their balance sheets, nor does anyone else at existing prices.

To find buyers for the debt, lenders are jacking up interest rates and fees. But when they do this to perfectly good customers (suckers), especially suckers with good FICO scores and/or suckers for whom they recently upped credit lines, it smacks of arrogance. BAC will come to regret that arrogance.

While on the theme of sucker plays, be sure to Read the Fine Print On Credit Cards, and stay away from two cycle billing processors like Discover Card (NYSE:DFS) if you carry a balance.

Better yet, stop being a sucker and don't carry a balance.

Tactics Guaranteed To backfire
  • The sudden rate hike will throw some consumers so far behind the curve, they simply give up. In other words, defaults may soar on account of their actions.
  • Some customers will find a better rate elsewhere.
  • Some customers with multiple cards will stop using their Bank of America card.
  • Some customers will vow to get out of the debt trap because of these rate hikes, and manage to do just that.
  • Congress won't sit for these actions.
Under the Bush administration, lenders got everything they wanted and then some when the bankruptcy reform act of 2005 was rammed through a Republican Congress. The real purpose was not bankruptcy "reform" but to make people debt slaves forever. When the Republicans lose the White House in November (and there should be little doubt this is going to happen), there is going to be payback. The tactics of BAC and other lenders will be one of the reasons.

From the next Congress, I look for proposed legislation to reduce fees, to restrict ability of lenders to change terms, to kill the Zombie debt industry, and possibly even impose rate caps. The industry will scream but their greed will have brought it upon themselves.


Attitudes on debt are already changing. And actions by Bank of America and other companies are hastening those attitude changes. Thank you Bank of America, for screwing yourself. You deserve it.