Credit Card Crunch

The NY Times article, As Economy Slows, Lenders Begin to Curb Credit Cards brings the credit crisis from Wall Street to, you know, your street. If you want a pretty decent primer on how to protect yourself, check out the San Diego Union-Tribune piece here.

Either I have sucker written in halogen across my forehead, or my credit must be pretty good because the past few weeks I've seen an uptick in credit card offers stuffing my mailbox. That isn't exactly the norm right now, and the Times article lays out some basic ways that we'll start to feel the squeeze.

First, the why:

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

After years of profiting off of us losing our shirts, lenders are now taking enormous losses. And make no mistake about it, even creditworthy consumers are going to feel the pinch, just like creditworthy mortgage seekers are having a hard time right now. If the financial and banking industry is broke enough to get bailout after bailout, then rest assured they're broke enough to extend any kind of credit to the likes of you and me. And that includes the plastic kind.

The how:

Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

Some other notes from the article:

* Even Amex is pushing some creditor's interest rates up 2 to 3 percentage points.

* Rewards shmwards. That "free" flat screen went from a Sony to an Insignia.

* Anticipating the regulation that's headed their way, credit card companies are pulling back on zero percent credit card offers to everyone under the sun, eliminating teaser rates, and chopping up the length of time a zero percent rate is good for.

* Our mailbox will get 13 fewer pieces of junk mail a year. See above.

All of which may inspire a how-dare-they-! kind of response. Aside from the fact they scrod the pooch when they were making bank off of crazy credit limits, high fees, and trap doors for the average Joe and Jane, they now have some pretty legitimate reasons why they're doing this. The credit crisis is trickling down.

To summarize from the article:

* The credit card market is shrinking. It's not like people are exactly banging on the door to get even more credit cards and the debt that goes along with it.

* Credit card companies' profit margins are shrinking. Credit card companies have their own financing-- credit card bonds. Companies live and die on borrowing money, and the credit card companies are no exception. I touched upon this in an earlier post Why We Need the Bailout. So when investors stop investing in the tools that companies use to make money flow, like credit card bonds, companies lose flexibility to take risk (on the likes of you and me, for example, and our comfy interest rate).

* I don't know about you, but I curbed my spending like there's a bread line in my near future. That means less money for the credit card companies.

* Before, credit card companies could make up for a loss in profits by jacking up the fees. This isn't exactly the political climate to be attempting such shenanigans.

And that, folks, is why shite trickling down just never feels good when you're at the bottom.

photo by paalia via flickr

Credit Card Myths

I've been dealing with some family stuff for a bit and I'm out of town, so this post will be short 'n sweet.

In the meantime, in my brief foray back into financial news I stumbled upon this, 9 Big Credit Card Myths-- among them, minimum credit card purchase. Good luck raising holy hell trying to get that bodega to comply.

Sticker Shock

I just put some gas in the tank-- $3.90/gallon! Egads. I don't drive in the city, so I don't fill the tank frequently; I just happened to kill some time while moving alternate side parking this morning. So I'm pumping gas and staring in panic at the numbers by the dollar sign flipping in rapid succession, and my eyes drift down to a receptacle for BP/Amoco gas card applications. 10% rebate first 60 days, 5% thereafter. Is it time to apply for another card?

This summer M and I will be driving to the northern reaches of Maine for a couple weeks, then down to Cape Cod for a week, and back to NYC. Plus there's a round trip NYC-Boston trip, maybe a jaunt down the Jersey Shore- it's a busy summer for our little car. With absolutely killer prices prices at the pump, I think I'll look into credit reward cards that are good for road trips. I'll post my findings, and any suggestions in the meantime would be great.

Bankruptcy Laws and the Economy

An article in the latest New Yorker, Going for Broke, tells the tale of bankruptcy law in the US and how it may or may not have contributed to the current economic meltdown.

The credit crisis has turned into an economic alluvion, with no dry land to be had. The link between the sub-prime mortgage fiasco and the 2005 Bankruptcy Law is interesting, and something I wouldn't have made on my own. But that's why I read Surowieki.

Bankruptcy law is one of those hot button topics, like sub-prime mortgages, that sends people into orbit with a they-did-it-to-themselves ire. It's not as if this anger is without a point. I know that to live below your means is sometimes about as much fun as having 2 cents in a 99 cent store, basically broker than broke, and I have little time for someone complaining about money problems when they have a flat screen TV with TiVo and Wii. And I'm perfectly content with these feelings, but I also know they are reactionary. I am reacting to the a$$hole who just cut me off in his leased SUV that sucks up 50% of his disposable income. And when viewing politics and the economy, reactionary just doesn't always work.

Because as Surowieki points out in the article, there is plenty of bailing out going around, just not for those at the bottom of the economic food chain.

In recent months, a lot of people have been handed financial get-out-of-jail-free cards. C.E.O.s who presided over billions in losses have walked away with tens of millions in compensation. The Federal Reserve has showered cheap money on banks and brokerages. Even Bear Stearns caught a break when, last week, J. P. Morgan agreed to quintuple the price it will pay to take over the firm. But there’s one group for whom forgiveness has not been forthcoming: ordinary consumers struggling with piles of credit-card debt. For them, escaping the burden of their bad decisions and their bad luck has become much harder.

It's important to remember that, I think, because it is too easy to blame things that are easier for us to see, like when the news is full of these after-the-fact interest rate breakdowns on sub-prime mortgage loans. I think that there's probably a lot more transparency after you're f*cked than before you are. Which just might be one of the ways they f*cked you over in the first place. But what do I know, I actually read the fine print and every word on a shampoo bottle because, well, I am a compulsive reader. For example, did you know that the wording on a toothpaste box is concise and grammatically correct, which is more than I can say about Citibank's fine print. Anyways, I digress.

So the 2005 Bankruptcy law. Basically, you couldn't declare bankruptcy over credit cards anymore.

One might say: so what? Even if bankruptcy is sometimes precipitated by bad luck or by an economic downturn, it’s always the result of people living beyond their means, and why should they get away scot-free while the rest of us pay our bills? It’s a fair question. But there’s a reason we did away with debtors’ prisons: having millions of people enslaved to their debts is a bad thing for an economy. Putting people into Chapter 13 essentially means they pay a heavy extra tax that goes straight to the credit-card companies. That creates a disincentive for debtors to work, since the more they earn the more they pay. It also takes away spending power—not the best thing during a recession. Making it harder for people to discharge their credit-card debts has other drawbacks as well. Homeowners would once do almost anything to keep up payments on their homes, even if it meant falling behind on other debts. In the past year, though, economists have reported an increase in the number of people who are just walking away from their homes, because it’s now often easier to abandon a mortgage than a credit-card bill. (The practice has even been given a name—“jingle mail,” because people simply send their keys back in an envelope.) So the new law may very well have exacerbated the housing crisis.

He goes on to connect bankruptcy laws to entrepreneurship (more than 15% of personal bankruptcies are from a failed business), self-employment, and learning a new trade.

In the meantime, bankruptcies have plummeted 62% between 2004 and 2006, and credit card companies' profits rose over 30% between 2005 and 2007. That's all fine and good, but don't tell us you did it for good people like us who pay higher interest rates and fees. Because I know my rates and fees didn't go down, did yours?

Keeping Credit Cards Active (by giving away money)

A few months ago HSBC sent me a letter and informed me that they were closing my account due to inactivity. I was shocked. In the end, it wasn't a big deal because I had too many cards and was in the middle of closing a few. HSBC was on my hit list. However, it did make me worry about my other cards closing my accounts.

Since I only use one card and pay it off in full each month, I forget that my Citibank has been unused for months. After a little googling around I learned that HSBC, Chase, and Bank of America have been known to close accounts due to inactivity. Sometimes an inactive card might be your oldest, and therefore a jackpot number in your credit score. Credit card companies closing accounts willy nilly can have some serious consequences.

So last month I did some research at Charity Navigator, along with a few charities I already support, and put my previously inactive credit cards on automatic monthly contributions. I'm not sure if charging ten bucks a month will prevent them from closing the accounts, but it's not exactly like they're handing out credit cards like they used to, and I've grown fond of my credit score.

Credit Cards Tighten Tactics

In a recent Smart Money article, Credit Card Companies Put Tighter Squeeze on Cardholders, Trent Charlton is racing to pay down his Amex. One would think that is a good thing, but Amex is reducing his credit limit every time he knocks off a chunk of debt; when he was down to $14k they lowered his credit limit from $20k to $14k, then he lowered it to $10k and they lowered his limit to $10,300. This, as PiggyBankBlues readers know, lowers your credit to debt ratio, and therefore lowers your credit score and can raise your interest rate. And it's not just Amex, his GE Money card followed suit.

So what is going on?

... Faced with a growing wave of delinquencies, they're tightening lending standards considerably, focusing on card members they perceive at highest risk of default. (Chasing balances — the industry term for lowering a customer's credit limit as they pay down their balance — is one way to control that risk.) Unfortunately, these days lenders are expanding the definition of high risk to include many consumers who would have been considered good customers just months ago. Now, cardholders can be subject to greater scrutiny based on where they live or what type of business they run.

And get this, the big banks like Chase, Bank of America, and Citibank have clauses that allow lenders to change a users terms simply based on "general market conditions"-- they must be having a field day right about now!

How Many Credit Cards?

In an ideal world of tidy wallets, I would only have three credit cards, an Amex, a Visa, and a Mastercard. Well, my checkered past hasn't led me to the ideal, and so as I've chased zero percent rates to pay for CFP classes and mandatory family vacations, I've accumulated a fair share of plastic. So the past few months I've been slimming down the plastic accounts as part of my New Year's resolution. I dropped 2 Chase cards because their terms and interest rates were absurd. I dropped an HSBC card because it was relatively new. And yesterday, I dropped two cards. One is a Citibank, and one is an Amex rewards gold card.

C(itibank)- May I ask you why you are dropping our card?
P(iggyBankBlues)- I have too many cards, I don't need this many.
C- Everybody has a need for a low interest rate. Would you be interested in a lower interest rate?
P- It's not the interest rate, I pay my card off in full each month.
C- So you're telling me that you do not have a need for a lower interest rate anywhere? I can beat any loan you're paying.
P- I prefer loans from banks, not on a credit card. Like I said, I pay it off in full-
C- (adamant) Do you or do you not have loans?
P- (baffled) Excuse me?
C- A car loan, we can transfer your car loan-
P- Used car, paid cash. Listen, I just want to cancel my card, can I please-
C- You have no loans whatsoever? (he's getting a little agitated at this point...)
P- (joking) Unless you're going to buy our mortgage, then no, I have no loans for you.
C- (serious) I've done it before. I'm sure it's not over $X50,000-
P- (hands up) I live in New York City, of course it's over $X50,000-
C- (irate) Ma'am, you asked questions and I'm just answering them, okay?
P- (magnanimous) Yes, thank you, I appreciate it. May I please close my card?
C- one moment please (click)

Amex went smoother, though they did offer me $40 off the annual fee. Then I was feeling just plain giddy with account closing madness, and I called the Wall Street Journal. Four people later they let me close the account. I told them all the same thing, I am no fan of Rupert Murdoch and refuse to give the man a dime. I did not, of course, tell them that the WSJ was now free online so I could now read it without paying him to begin with. I was naturally told that the ownership of the Journal did not reflect the content of its pages. I was like, have you seen Fox News?

So now I am down to 2 Amex cards (a Delta that I use for everything and a platinum Optima that I use for my credit score), one Bank of America (high limit, low APR, never use, in case of emergency), REI rewards card (no fee, use it only if Amex not accepted), and one last Citibank that I am contemplating closing. Is five cards too much?

While there are good reasons to have multiple credit cards, and the average number of cards Americans have is four, I'm still considering closing that last Citibank card. So while I contemplate closing that card and bring my total down to the good 'ol American average, I'll see how I stack against the Credit card industry facts and personal debt statistics (2006-2007).

Fee Riddled Credit Card Scam

A scam implies illegality. Unfortunately, when it comes to credit, it's the wild wild west out there, and what should be illegal is not. Today's NY Times article, Big Fees for Little Credit, shows how some credit card companies are taking people for an expensive ride.

Some issuers of credit cards are “quietly collecting hundreds of millions of dollars in profits selling nearly worthless, predatory credit cards targeting vulnerable consumers, including those with bad credit,” according to a report published this week by the National Consumer Law Center (consumerlaw.com)...

A typical example the law center offered was this: a card issued with a credit limit of $250. After a $95 program fee, a $29 setup fee, a $6 monthly “participation” fee and a $48 annual fee, the consumer winds up with “an instant debt of $178 and buying power of only $72.”

It's called fee harvesting, and it's not just random companies that are doing it. Capital One was listed in the report, though they deny any wrongdoing. CompuCredit is the biggest culprit, collecting $400 million in fees on $4 billion in debt. Again, they deny the charges, and there is a link in the article to NPR in which they defend their practice.

The reality is that predatory lending is a very big business. Until it's properly regulated, the competition between what is morally okay and what stinks to high heaven will be a slam dunk for the latter.