Why banks are boosting credit card interest rates

Tommy Newsom was shocked when his bank nearly doubled his credit card interest rate this year, to 27%, for no apparent reason. A customer rep told him the law allowed the bank to do so, and that was all the justification it needed.

"I never missed a payment," says Newsom, 63, of Mesquite, Texas, who owes about $5,000 on the card. "The bank is just looking for a reason to maximize profits."

In recent years, banks have sharply raised interest rates and penalty fees on credit cards. As the economy tanks and banks' mortgage-related losses balloon, some banks are stepping up such increases to boost revenue. Bearing the brunt are consumers for whom a jump in rates and fees can make it tougher to pay their bills at a time when household budgets already are being stretched.

A key driver behind this trend: securitization. From 2003 to 2007, seven of the largest issuers of credit cards packaged an increasing amount of card debt into securities and sold them off to investors, just as banks did with mortgages, a USA TODAY review of banking records found.

Selling off credit card debt has given banks a powerful incentive to raise card fees and penalties, according to interviews with dozens of industry analysts, academics and investment specialists.

Here's why: When banks package and sell card debt, they pass along to investors some of the risk the debt will go bad. Yet, banks often get to pocket much of the profit from rate and fee increases on those accounts. Imposing higher fees on more accounts — without a comparable rise in risk — lets banks raise revenue and keep profits up, at customers' expense.

Securitization has been a "major impetus" for banks to expand penalty fees and rates in recent years, says Adam Levitin, a Georgetown University law professor and card expert. Banks "have little to lose if they squeeze too hard (if consumers default), but a lot to gain if they can extract additional payments" from card users, he says.

Banks deny any link between securitization and rising penalties. They say fees are rising because of superior data-tracking tools that allow banks to draw precise profiles of card users. Banks can price debt fairly, officials argue, with riskier borrowers paying more, as they should.

"Securitization is a method of funding credit card loans," says James Chessen, chief economist at the American Bankers Association. "Penalty fees and rates are entirely separate and completely avoidable."

As the debate unfolds about whether — and how much — securitization drove up penalties, analysts are bracing for an acceleration in credit card losses. Already, delinquencies are at their highest point in six years. Defaults, triggered when banks give up on collecting bad loans, are rising rapidly, too.

By the end of 2009, banks are likely to write off a record amount — up to $96 billion, or about 10% — of all credit card debt, says Innovest Strategic Value Advisors, a research firm that was among the first to predict the mortgage meltdown. The credit card market is a fraction of the size of the mortgage world, but its collapse could threaten some issuers' solvency and make it harder for others to absorb financial shocks, says Gregory Larkin, a senior analyst at Innovest.

"Mortgages were simply the first storm to make landfall," Larkin says. "Credit cards are next."

Experts worry that the $700 billion authorized by Congress to help stabilize financial markets will do little to solve the underlying problems.

"Securitization is an important economic tool," says Rep. Carolyn Maloney, D-N.Y. "But when we saw the subprime (mortgage) meltdown occur, we started really looking at credit cards as the next crisis. We have to crack down on the abuses."

Several bills in Congress, including Maloney's Credit Cardholders' Bill of Rights, seek to clamp down on hair-trigger fee and rate increases. The Federal Reserve has proposed limiting rate increases on existing debt and curtailing excessive fees for borrowers with marred credit.

Meanwhile, amid the slowdown of the securitization markets, Sheila Bair, chairman of the Federal Deposit Insurance Corp., wants more restrictions on mortgage- and credit-card-backed securities. "We're finding in retrospect that being able to securitize debt … weakens underwriting discipline," Bair says. "Whether it's credit cards or mortgages, this dynamic needs to be dealt with."

A proposal by the Financial Accounting Standards Board could lead banks to keep more card debt on their balance sheets, and hold more capital in case those loans sour. Banks' inadequate capital levels have prolonged the economic crisis, analysts say.

source : http://www.usatoday.com

Best Credit Cards For The Buck

For years, credit card offers arrived in consumers' mailboxes with greater frequency and consistency than those AOL CD-ROMs.

The offers, many claiming pre-approval, promised low-interest rates, balance transfers and reward programs for everything from gifts to airline miles. American consumers signed up in droves. According to a June 2008 Consumer Reports story, 85% of U.S. households are signed up for at least one rewards program.

Today, however, with the credit crunch and slumping economy, low interest rates, perks and big rewards could soon be a thing of the past. Although the credit card system has, until now, been relatively insulated from the financial meltdown, cardholders are finally feeling the belt tighten.

source : http://www.forbes.com

Layaway: The New Credit Card?

Remember layaways?

Neither do we. Mostly because their biggest boom was during the Great Depression. But thanks to the credit crunch, the layaway has been resurrected, reports today’s WSJ.

A layaway lets a customer put a purchase aside without having to pay for it in full upfront. Dying for that Robopanda but not ready to shell out $199.99 to Kmart right now? No problem. Kmart will hold onto one for you! But there is a catch:

Layaway plans aren’t free — most stores charge a fee for setting aside the merchandise, and ask for a down payment. Kmart requires customers to pay a $5 service fee and a $10 cancellation fee upfront, or put down 10% of the item’s cost, whichever is greater. Customers must make biweekly payments over eight weeks to pay the balance. In case of default, the item goes back into stock and the customer receives a refund, minus the $15.

Some other companies, like TJ Maxx, Marshalls and Burlington Coat Factory, are offering similar layaway plans this season as well. (Wal-Mart axed their layaway plan in 2006.) Sites like eLayaway.com have sprung up, luring consumers with iPod Touches for “as low as $42.23 a month.”

In a perfect world, people would only spend money they actually have on holiday goods. But we’re realists and understand the appeal of the layaway. Compared to the typically sky-high interest rates on credit cards, this might actually be a better alternative if you’re in a pinch.

Keep in mind that the store — not a bank or credit card issuer — sets the rules here. If you miss a payment, you still don’t have the item (since they’re laying it away until you pay in full), and you won’t get all of your money back. They’re not going to negotiate a payment plan with you like a credit card company might. (Not that those guys have been super-flexible lately, either.)

Some stores that offer layaways allow you to charge the payments to your credit card, which doesn’t make much sense: Not only are you racking up layaway fees, but you’re also incurring potentially high interest rates from your credit card. Not a good move.

Before you sign up to lay away, ask yourself a few questions: Do you really need that robotic bear (or whatever)? Can you hold off and pay in full later? What will those payments will look like once the holiday hullabaloo has died down?

source : http://blogs.wsj.com

Credit card? Look at your salary first!

With rising salaries, banks and credit card companies are most likely to increase you credit limit. The easy availability of credit, especially on credit cards, has led to a situation, where most have got used to swiping cards.

However, we always tend to forget that the idea of having a credit line does not mean that you need to use it. Also, it is the wrong way to look at credit just because there is some money available for use. You have to pay it back sometime, and with lots of interest. Delaying repayment only increases the burden to a great extent.

Most banks charge over 30 per cent interest on the outstanding amount, while some charge over 45 per cent a year. In other words, for an outstanding of Rs 1 lakh (Rs 100,000), you could be coughing up anywhere between Rs 30,000 and Rs 45,000.

No wonder, financial planners would say that even before taking a card, it is better that you act as your own policeman. Be cautious about the credit limit being offered. For instance, you might be eligible for Rs 1-lakh limit. Ask yourself the important question: Do I really need it?

While the availability of a higher sum is a good sign, it is not necessary that it should be taken up just because it is there. Similarly, there has to be a constant monitoring of the credit that is being used too so that the potential liability does not extend beyond a certain figure.

In this sense, it is necessary for each individual to fix the amount that one can afford to use on one's credit card. Your total credit, including other loans, should not go beyond 30-35 per cent of your income. This will ensure that there is not too much pressure on your finances and there is also some control over the payments.

The overall credit that you need depends, besides the income, solely on your spending habits. If you are a "cash-first" person, who incurs most of expenses in cash, the requirement is of a smaller credit limit.

On the other hand, if you want to provide some additional amount for a buffer for, say, an emergency hospital expense, then a slightly higher limit will be essential for you.

If you like the feel of card swiping the machine so much that all expenses are incurred with it, then you do need a limit that is considerably higher. But whatever be the situation, it is essential that each individual takes a careful look at one's own position and then decides the minimum amount of credit limit that is required on one's credit cards.

But once you have the limit, make efforts right from the time of selection of credit cards to the usage to make sure that you do not get into a debt trap.

Also, if you have a number of cards, you need to look at the situation in its entirety and not piecemeal because the general tendency is to look at the limit spent on one card and say, "Oh, I am not spending on the other, which is already stretched, or I am using one card properly."

Like the entire credit limit across various cards in your total credit available, the total expenditure also has to be across all the cards. And it is a common situation, where one insulates one card from the other for convenience, when it comes to credit usage.

Of course, the final dictum, making payments as much as possible and regularly before the due date ensures lower interest cost and, more importantly, lesser pressure on funds and no headache in the long run.

Disciplined spending is the best way to ensure that there is no overspending on the cards. And that makes life simpler.

source : http://inhome.rediff.com/money/2008/oct/20card.htm

A Christmas without credit cards? What lower limits mean this holiday shopping season.

Wall Street's problems have captured the attention of Congress, the White House and the media. But on the country's Main Streets, worried workers, struggling small business owners and cash-strapped families are wondering if anyone is paying attention to them. A look at how Americans are coping with the economic crisis.

Here's a scenario that will be more common this holiday season: You fill your arms with purchases and head to the register, where you've been told you'll receive a 20 percent discount by applying for and using the store's credit card. That will help, because you're already nearing your MasterCard limit. But a moment later, the teenage salesgirl says, "Sorry, you've been denied." You slink out, gifts left at the counter, angry and a little bit ashamed, too. Didn't the store encourage you to ask for the card?

That's just one of many ways that this is going to be a different kind of Christmas, as retailers' biggest season collides with newly tightened standards from credit-card companies. Banks and other card issuers have been ratcheting down consumer credit limits, raising interest rates, closing down accounts completely and getting tougher about whom they'll give their cards to in the first place. "Every issuer is looking at this," says John Ulzheimer, president of consumer education for credit.com. "It's one of the top two issues we are hearing about from consumers, and that is a significant change." Since few card issuers are willing to disclose their decisions, it's unclear exactly how many Americans will be affected this holiday season.

At the same time, retailers are trying to fight back by pushing their own cards and starting Christmas sales and displays early. Customers can be expected to use less credit and more cash, propelling them to local stores and away from online merchants. Analyst Dana Telsey, of the equity research and consulting firm the Telsey Advisory Group, expects an even slower holiday season than the anemic one that's been projected. The National Retail Federation had been predicting a 2.2 percent increase in sales this holiday season, the slowest growth in six years, and that was before October's credit meltdown. Sales of big-ticket items like flat-screen TVs could be particularly weak, because the usual "one year, no payments, no interest" offers that often accompany those sales won't be as plentiful.

source : http://www.newsweek.com/id/164052

Bailout has yet to ease fears on Wall Street

WASHINGTON – Why isn't it working?

The Federal Reserve is pumping more than more than $800 billion in loans and investments into banks and corporations. In a move coordinated with other central banks around the world Wednesday, the Fed cut interest rates.

The Treasury has $700 billion to buy mortgage-backed securities, with the hope of rebuilding a market for these complex debt instruments. Treasury officials are still saddling up, but the fact that Congress approved the bailout and President Bush signed it has not restored confidence to stop the panic.

Stocks are still going down. More dangerously, banks are still refusing to lend to each other.

So why?

In part, economists say, because we still don't have a clear grasp of the extent of the problem. There are mortgage foreclosures still to come, credit card debts to charge off and many questions still unanswered about the value of the complex derivatives that came to underlie the financial system in the last decade.

Patience, counsels Liz Ann Sonders, chief investment strategist with Charles Schwab Corp. Things haven't calmed down in part because the financial crisis is still spreading.

"It's almost like, we're coming up with solutions, but while the global domino effect is still in its crescendo phase," Ms. Sonders said.

Some economists say a fundamental problem is that the financial community can't tell the difference between a company with a liquidity problem that's short a few bucks and one that's insolvent, or wiped out. Loans can handle the first problem. Capital obtained from selling all or part of the company is required to fix a solvency problem.

"When a bank gets in trouble, it seems like it's always a liquidity issue, but what drives the liquidity issue is the solvency concern: 'Am I going to get my money back?' " said finance professor Frank Anderson of the University of Texas at Dallas.

In this uncertainty, many older investors have panicked and are selling their stocks to try to save what they can of their retirement nest eggs.

"Millions of people relying on 401(k)s for their retirement, they are just freaking out now," said Bernard Weinstein, director of the Center for Economic Development and Research at the University of North Texas. "The brokers call it GMO – 'get me out!' "

Finance professor Dr. Anderson noted that the Dow Jones Industrials Average hit its all-time high of 14,164 points one year ago, and has since fallen more than 5,000 points.

News Source : http://www.dallasnews.com/

Credit can't cover our cost of living anymore

WASHINGTON – You know what's coming.
Auto loans, student loans, mortgages and home equity loans – all are tough to get now and will be harder to come by for years. Lenders are expected to ration credit rather than raise interest rates. Risk is out. Cash is king.

Household debt has soared from about 45 percent of GDP in 1985 to more than 100 percent today, or $14.5 trillion – more than the total value of all the goods and services produced in the economy in the last year.

Clichés about inebriated consumers are rife: The party's over. Hangover. A return to sobriety.

There is another perspective.

"The core driver of the mortgage collapse is a 10-year trend in which consumers have seen their real wages decline, their debts increase and their savings depleted," said Greg Larkin, a consumer spending analyst with Innovest Strategic Value Advisors in New York.

"This, combined with unprecedented leverage, liquidity and fraud, is what has got us to where we are," he said.

Keeping up via credit

In other words, while income stagnated, consumers used credit to keep up with the rising cost of living. Between 2000 and 2005, the U.S. Census Bureau found that household income declined in the Dallas-Fort Worth area. It's nosed up a bit since, but not by much.

Lenders were delighted. They had plenty of money to lend and lots of investors willing to share the risk. Some of the business models for credit card companies actually relied on loan delinquencies with their late-payment penalties to boost profit, Mr. Larkin said.

As with subprime mortgages, consumers with poor credit histories were lured to credit cards with cheap interest rates and loads of fine print that ballooned rates and spanked anyone going over spending limits.

When Washington Mutual Inc., the nation's largest savings and loan, was seized by the government last month and sold to J.P. Morgan Chase, 48 percent of its credit card holders were considered subprime borrowers, Mr. Larkin said.

News Source : http://www.dallasnews.com/