How Credit Card act negatively impacted credit scores

Is Your Credit Card Keeping You From Refinancing?

Excerpt:

In anticipation of the Credit Card Accountability, Responsibility and Disclosure Act passed last year, banks went on a credit pruning spree, cutting available credit lines on millions of borrowers, says Beverly Harzog of Cardratings.com, a consumer-education website. Last year, for example, American Express and J.P. Morgan Chase & Co. reduced credit lines for borrowers in areas hit hardest by the subprime mortgage collapse.

Reductions in available credit have a powerful impact on credit scores, says Ms. Harzog, causing them to plummet precipitously. Low credit scores can knock borrowers out of the refinancing race, as banks impose high closing costs on customers with less than pristine credit. Credit scores are partially determined by how much of available credit a borrower uses, otherwise called the "utilization rate."

...

If homeowners are thinking about refinancing, they should pay close attention to their utilization rate. Pay down as much credit-card debt as you can, says Ms. Harzog—but don't permanently close out existing credit-card accounts, since that can also ding your credit score.

Comment: It's all about the credit "utilization rate". In a simple example, a couple have 1 credit card that had a credit limit of $ 15,000. They carried $ 3000 a month on their card. They utilized 20% of their credit. The CC company reduces their credit limit to $10,000. Well now they are utilizing 30% of their credit. Their FICO goes down and a refinance will cost more. The unintended consequence of the Credit Card Accountability, Responsibility and Disclosure Act.

We have a Discover card that we only use in a limited way. The credit limit is $ 13,500! I wanted to cancel the card. We've had this card for 20 years. I was going to cancel it, but if I did, my available credit would go down and so would my FICO score. Doesn't make sense to me!

Economic tidbits

Recession Ended in June 2009

Excerpt:

The business-cycle dating committee met by phone on Sunday and came to the determination. “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month,” the committee said in a statement. The 2007-2009 recession is the longest in the post-WWII period.

The decision by the NBER means that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in 2007.

Comments: Probably accurate (the official ending of the recession), but it sure does not feel like a recovery! Eg: The very high unemployment, the underemployment, the chronically unemployed, etc.

Defaults Account for Most of Pared Down Debt

Excerpt:

The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.

Comment: Defaulting debt may look good for the borrower, but for the lender it is just a write-off.

One in four consumers now a poor risk for lenders

Americans’ credit scores at new lows

Excerpts:

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

...

FICO's latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO's 300-to-850 scale weren't as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on Myfico.com.

More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual's score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.

Comment: Article continues with the % of consumers with FICO scores above 800.

Coming: Rising interest rates

Consumers in U.S. Face the End of an Era of Cheap Credit

Excerpt:

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

Comment: Click through to article for NY Times graphic

MORE

Impact on Federal Government

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

Thirty year trend

... steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.

Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.

Investing

The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

I can now carry a handgun into a national park ..... because of the Credit Card Act?!

The Credit Card Act: Who Benefits and Who Doesn’t

Excerpt:

Consumers will also likely see a decrease in credit card rewards or cash rebates, as well as increased Annual Percentage Rates. According to the LowCards.com Complete Credit Card Index, the advertised rate for credit cards averaged 13.46% last week. Six months ago, the average was 12.11%. A year ago, the average was 11.51%.

However, it’s not all bad news. The CARD Act will benefit those who want to visit national parks while carrying loaded firearms. Current laws only allow people to carry guns in national parks if they’re unloaded and out of reach. (Republican Senator Tom Coburn of Oklahoma realized how important the CARD Act was to President Obama and traded his vote in exchange for slipping in this wholly unrelated amendment.)

From an investment perspective, analysts believe credit card companies’ revenues should be stable in the short-term, but looking forward, the CARD Act could sting slightly.

Comment: Love how Congress works!

On card fees

Will Congress Take Another Swipe at Credit Cards?

Excerpt:

The "interchange fee" (sometimes called the "swipe fee") is an element of the price a merchant pays when a consumer uses a credit card for a purchase. Interchange partially compensates the cardholder's bank for the cost and risk of offering payment cards to consumers. This includes clearing costs, billing and collection, fraud recovery, customer service, credit losses, and the resolution of any disputes that might arise from the transaction.

Credit cards generate three basic revenue streams: finance charges, merchant fees, and behavior-based fees such as penalties for late payment. Because annual fees have largely disappeared on standard credit cards, interchange is generally the only compensation issuers receive for the billions of dollars of credit they make available to consumers who pay their balance off every month. Credit unions and community banks, which cater to lower-risk customers who are less prone to revolve balances and pay penalty fees, rely especially heavily on interchange revenues.

Merchants pay, on average, less than 2% of the transaction amount in interchange fees. In exchange, merchants are relieved of the cost and risk associated with running their own in-house credit operations. And they benefit because consumers can make purchases even when they don't have enough cash in their wallets. This deal is voluntarily assumed by merchants who agree to accept payment cards because the benefits exceed these costs.

...

The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase.

Annual fees are essentially a tax on card-holding. Policies that produced a return of annual fees would strangle this process of competition by making it more expensive for consumers to hold multiple cards and to switch cards easily. Small businesses, three-quarters of which rely on credit cards, would also have to pay more to maintain access to multiple credit lines, stifling the most potent engine of economic recovery.

Discouraging credit card use would also slow the evolution from a paper-based payment system to a more efficient electronic system. In 2009 the Federal Reserve budgeted $600 million just to print currency (excluding coins). This doesn't even consider the deadweight costs to the economy of cash, such as the time consumers spend making ATM transactions, the cost of paying armed guards to drive around pieces of paper in armored cars, increased crime and tax evasion, or the time spent waiting in the checkout line behind check-writers. Checks are so inefficient that British banks have announced a plan to phase out their use by 2018.

Comments: Would that US Banks phase out checks! I'm one who benefits by not paying an annual fee, the use and convenience of ready credit, and a rewards program!

Debt: A cautionary tale

$60,000 in debt, and nothing to show for it

Excerpts:

Mary Uhazi has more than $60,000 in credit card debt and, by her own account, “nothing to show for it.”

“You have some clothes, you have some dinner, you have a handbag, you have whatever, but it’s not $11,000 worth or it’s not $60,000 worth,” Uhazi said.

Uhazi is drowning in a sea of debt. And, like millions of other Americans, it is a debt load that she built up slowly over more than two decades of easy credit that made it all too simple to spend.

...

“The more money I earned, it seemed like the more money I spent, and the higher my credit was extended,” she said.

Soon, her wallet was stuffed with 13 credit cards, from stores such as Costco, Target, Nordstrom, Macy’s and Sam’s Club plus financial institutions. Still, Uhazi said she didn’t often worry about her credit card debt, reasoning that she paid at least the minimum balance on all her cards. She said she only made a single late payment, and that was an oversight.

“I was able to make the payments, and as long as I was able to make the payments I was OK,” she said.

Uhazi rarely talked about her credit card debt with her friends or family until recently. Her own mother, who has since passed away, went through a bankruptcy when Uhazi was in high school. But, Uhazi said, “I didn’t learn from her.”

...

One morning this spring, she sat down and tallied her debt. The total: $62,597.

“It’s awful, just looking at it,” she said.

If the debt was startling, so was the amount she was paying to service it. That month, Uhazi realized, she would have to pay $1,932 just in minimum credit card payments, about two-thirds of her reduced take-home pay of $3,018. After rent and other fixed expenses, she figured she’d have just $127 left for gas, food and other incidentals.

Perhaps the worst part was trying to figure out how her debt had reached that point.

“It was like, what do I have to show for this, really?” she said. “If I have anything, it’s just material stuff, or it’s a waistline from, you know, going out to lunch or something.”

Comment: Sad story .... 20 years of irresponsibility!

Good news / bad news on Credit Cards

Fed OKs credit card crackdown - Regulators approve a number of key protections for credit card customers

Excerpt:

The Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration approved the regulation, which prohibits banks from certain practices like applying interest payments in ways that maximize penalties, and forces lenders to be more transparent about their billing practices.

"These protections will allow consumers to access credit on terms that are fair and more easily understood," Federal Reserve Chairman Ben Bernanke said in a statement.

The regulations mark an end to double-cycle billing, which averages out the balance from two previous bills. That means that consumers who carry a balance will no longer get hit with retroactive interest on their previous month's bill. And credit card companies will no longer be able to raise the interest rates on pre-existing credit card balances unless a payment is over 30 days late.

Consumers will also be given a reasonable amount of time to make payments, and payments will be applied to higher-rate balances first, to reduce interest penalties and fees.

Credit card statements will clearly list the time of day that a payment is due, and any changes to accounts will be in bold or listed separately.

And, finally, no more universal defaults - a policy that allowed credit card issuers to increase the interest rate on one card if a customer missed a payment on another card.

The Fed's Price Controls - Raising the cost of credit cards.

Excerpts:

That might sound good if you're those borrowers, but for everyone else it will mean higher rates even if you treat credit responsibly. If the banks can't raise prices on the riskiest borrowers, they will either limit to whom they lend or raise rates on everyone -- or both.

...
The new rules will also appeal to those who think Americans spend too much, and save too little, and blame credit cards for encouraging the trend.

But now seems like a particularly inopportune moment to tell banks that they should do less to manage their exposure to credit risk. Banks are already pulling back on consumer credit as the economy worsens and the credit crisis drags on, with lower credit limits and higher rates. If the Fed votes in favor of its new rules Thursday, expect that trend to accelerate.

Comment: The law of unintended consequences! How bad is it? (first article)

In the midst of a credit crunch, Americans have about $976.3 billion in revolving credit and 4.9% of all credit cards were delinquent in the third quarter, according to the latest data from the Federal Reserve.

The Death of Credit Cards?

The Death of Credit Cards

Excerpt:

Meredith Whitney -- bank analyst extraordinaire -- predicts that the credit card industry may slash more than $2 trillion of existing credit lines -- 45% of the total -- over the next year and a half. Yikes! The obvious outcome here would be a huge risk reduction for companies that issue consumer credit, such as JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Citigroup (NYSE: C), while kicking an already-bloodied consumer -- and to a lesser extent, card processors Visa (NYSE: V) and MasterCard (NYSE: MA) -- while they're down.

The big question is whether those consumers deserve to be kicked, with all due respect. Among the more disturbing tidbits Whitney mentions in her report is that credit cards serve as consumers' second most important source of "consumer liquidity," behind actual jobs. Why is it disturbing? In any healthy economy, you'd expect savings to be the closest backstop to job income, not credit cards.

One of the key reasons we're in such a bind right now is that consumers scoffed at saving for a rainy day, and instead spent like there'd be eternal sunshine. Sure, a 45% contraction in credit-card lines will be miserable for some, but the harsh reality going forward is that people will be restricted to purchasing things they can actually afford. I know -- it's a tough concept to grasp.

All of this highlights what I think is one of the biggest fallacies we're facing today: the notion that the key to an economic recovery is getting consumers back to previous spending levels, without realizing that those same levels of spending are partially what ushered in this mess. There's no way around it -- the key to a stabilized economy is to get people to spend less and save more. Unfortunately, that'll mean a reduction in the standard of living for those reliant on plastic to begin with, not to mention the economy as a whole, which is composed of roughly 70% consumer spending.

That said, R.I.P., credit cards. You won't be missed.

Comment: I don't see CC's going away. The point highlighted above is key!

Encouraging consumers to be deeper into debt

The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle

Excerpts:

Over my career, I have seen thousands of consumers that have credit card lines in excess of their annual salaries. Some are sinking under their burden. Some have been fiscally responsible and have minimal amounts outstanding. My 21-year-old daughter, who’s in college, gets pre-approved offers all the time. She has no ability to repay debt, yet the offers flow in just the same. We all know how these lines are accumulated. The banks, in their infinite stupidity, keep upping credit lines because the customer pays the minimum payments on time. My daughter’s credit line started at $1,000 and has been increased over the last two years to $4,400. She has no increased earnings to support this. But the banks do it without asking. And without being asked. The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back. Shame on them.

...

As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages.

...

I’ve been reviewing many of the banks annual reports over the last month and there is no question that the default rates are on the rise. If Congress doesn’t act today, the bankers will have their hats in their hand before we know it, and doing another a tap dance before the Senate Banking Committee, and asking to be bailed out once again with our tax dollars. Sad, but true.

Comment: That "C" is important ... "Capacity to repay". People are being enslaved by debt. Our government (tax policies) punishes (disincents) savers and investors.

NYTimes graphic: The Debt Trap

NYTimes graphic: The Debt Trap


Comment: Instructive - worth checking out

One Nation, Under Debt

In Civil Court, One Nation, Under Debt

Excerpt:

How did he run up $1,400 in debt?

“I heard about this 800 number you could call to get a card,” he said. “I was working as a security guard in Herald Square. It was several years ago.”

What did you buy?

“I bought some shoes,” he said. “My son was young, we got Pampers, things like that.”

At the time, he was making about $11 an hour. How much had he spent?

The shoes, he guessed, were $40. The other stuff was $400 or less.

“They gave me a $500 spending limit,” he said. “So it was less than that. The rest to get it to $1,400 was interest, fees.”

Comment: I'm amazed how ignorant most are about debt, savings, and investments.

‘Stretch your leg only as far as your blanket.’

Outside U.S., Credit Cards Tighten Grip

Excerpt:

In Turkey, where borrowing money was until very recently a family affair, being in debt carried a fearful stigma. Some here even likened it to the disgrace that drives people to commit the honor killings that still occur in parts of this society.

“People who would kill their sisters or daughters for bringing shame on the family would do anything to avoid being labeled a debtor,” said Nazim Kaya, the president of Consumers Union, an advocacy group that helps those who fall into debt.

But in a cultural shift that has swept aside centuries of tradition, credit cards have become commonplace here. Only three decades ago, Turkey had fewer than 10,000 cards; today it has more than 38 million.

As the American blessing of credit cards became widespread, so did the American curse of debt. Outstanding card debt here ballooned to nearly $18 billion last year, six times the level five years earlier. Default rates spiked and consumer groups protested sky-high interest charges. Newspapers were filled with stories of desperate card holders killing themselves or others.

In 2006, a fierce outcry prompted Turkey to pass a law clamping down on credit card marketers.

“We did not listen to our ancestors’ proverb,” Mr. Kaya said. “ ‘Stretch your leg only as far as your blanket.’ ”

Comment: Exporting our "credit culture". Not unlike when the Japanese eat American fast food! (Bad for them!)

That ballooning balance

Watching That Balance Grow . . . and Grow

Excerpt:

According to a new report from the Federal Reserve, revolving credit, which includes credit cards, increased at an annual rate of about 7 percent in May. In April, by contrast, it had shown a slight percentage decline.

The increase is notable because May was the first month when rebate checks from the federal government really started to kick in. So even with some extra financial padding, many consumers still turned to their credit cards.

Prudent credit-card carriers may well be vowing to pay off their balances in full. But with food and gas prices soaring, more people must lean on plastic for the necessities of life, and it becomes harder and harder to keep that balance from ballooning.

Comment: See article for NYTimes chart.

Deadbeat!

Credit Card Quiz


Comment: Take the quiz. I only got 5 / 11 correct.

Financial non-commitment: "You Walk Away"

Facing Default, Some Walk Out on New Homes

Excerpt:

Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.

“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.

For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.

“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.


Comment: The housing market would stabilize if we returned to the standard of 20% down! The You Walk Away website!

Confronting mounting debt

My big, fat, unpaid credit card bill

Excerpt:

So that week, I made an appointment with a financial counselor. As it happens, he's dating a friend. But as a lawyer for a New York nonprofit called the Financial Clinic, which helps people in serious credit card debt, David Friedman works with people like me all the time.

"We demonize credit card companies, and we should," David told me, as we sat in his office. "But a lot of what I see is a failure of people to advocate for themselves."

I liked a lot of things about talking to David. He was honest about my problems but also encouraging. He seemed nonjudgmental about the damage I had done. Mostly I liked that I walked into that session a little bit helpless. But I left with a plan.

"We have to stop the bleeding," said David. That meant two immediate things: getting my credit cards under the limit and trying to raise my credit score, which had been officially branded "poor."

I had an idea: "What about transferring my balance to a no-interest card?" I asked. "Or getting them to raise my credit limit?"

"You could try that," he said, with the tact of a hairdresser telling the old woman she might not look like Jennifer Aniston. "But I'm pretty sure you won't qualify."


Comment: From Salon.com. May require a one day site pass (view an ad to get in). This is a really good read!

The perpetual cycle of automobile debt

New cars that are fully loaded — with debt

Intro:

When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn't have to put a penny down.

The dealership, near the Posts' home in Victorville, made it easy; it just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.


Comment: The article discusses the perils of consumer debt and the dangers of being "upside down" on an auto loan! More below:

Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.

At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.

The longer loans are directly related to the higher balances. By extending the length of loans, lenders keep monthly payments down. But because these loans take longer to pay off, a much larger piece of the principal remains unpaid at the time the car is traded in.

Comment: The danger the auto industry and the economy as a whole ...

Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30% of the loans that are originated by banks, and 100% of those issued by automaker financiers, are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Assn.

Analysts warn that just as investors didn't comprehend the risk inherent in some of the more exotic home mortgages in recent years, they aren't considering how risky these car loans are. If longer loan terms allow debt on the loans to grow too large, many drivers may simply default, leading to expensive repossessions.

And even those who keep paying their bills may reach a point, like Gerhardt, where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has already taken a hit this year from slower consumer spending and higher gas prices.