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Credit Card Industry Aims to Profit From Sterling Payers

 
 
Reply Tue 19 May, 2009 11:50 am
Credit card industry going after payers with good FICA scores like BBB, who has a 810 FICA score and pays her balance every month. Fair or unfair?
---BBB


Credit Card Industry Aims to Profit From Sterling Payers
By ANDREW MARTIN
New York Times
Published: May 18, 2009

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

As they thin their ranks of risky cardholders to deal with an economic downturn, major banks including American Express, Citigroup, Bank of America and a long list of others have already begun to raise interest rates, and some have set their sights on consumers who pay their bills on time. The legislation scheduled for a Senate vote on Tuesday does not cap interest rates, so banks can continue to lift them, albeit at a slower pace and with greater disclosure.

“There will be one-size-fits-all pricing, and as a result, you’ll see the industry will be more egalitarian in terms of its revenue base,” said David Robertson, publisher of the Nilson Report, which tracks the credit card business.

People who routinely pay off their credit card balances have been enjoying the equivalent of a free ride, he said, because many have not had to pay an annual fee even as they collect points for air travel and other perks.

“Despite all the terrible things that have been said, you’re making out like a bandit,” he said. “That’s a third of credit card customers, 50 million people who have gotten a great deal.”

Robert Hammer, an industry consultant, said the legislation might have the broad effect of encouraging card issuers to become ever more reliant on fees from marginal customers as well as creditworthy cardholders " “deadbeats” in industry parlance, because they generate scant fee revenue.

“They aren’t charities. They have shareholders to report to,” he said, referring to banks and credit card companies. “Whatever is left in the model to work from, they will start to maneuver.”

Banks used to give credit cards only to the best consumers and charge them a flat interest rate of about 20 percent and an annual fee. But with the relaxing of usury laws in some states, and the ready availability of credit scores in the late 1980s, banks began offering cards with a variety of different interest rates and fees, tying the pricing to the credit risk of the cardholder.

That helped push interest rates down for many consumers, but they soared for riskier cardholders, who became a significant source of revenue for the industry. The recent economic downturn challenged that formula, and banks started dumping the riskiest customers and lowering their credit limits in earnest as the recession accelerated. Now, consumers who pay their bills off every month are issuing a rising chorus of complaints about shortened grace periods, new hidden fees and higher interest rates.

The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

Citigroup and Capital One referred comments to the A.B.A. Discover and American Express declined to comment. Bank of America intends to “provide credit to the largest number of creditworthy customers possible, while also remaining prudent in our lending practices,” said Betty Riess, a spokeswoman. Together with JPMorgan Chase, which has said the changes will force it to limit credit availability and raise fees, these banks account for 80 percent of the credit card industry.

Banks are not required to publicly reveal how much money they make from penalty interest rates and fees, though government officials and industry consultants estimate they constitute a growing portion of revenue.

For instance, Mr. Hammer said the amount of money generated by penalty fees like late charges and exceeding credit limits had increased by about $1 billion annually in recent years, and should top $20 billion this year.

Regulations passed by the Federal Reserve in December to curb unexpected interest charges would cost issuers about $12 billion a year in lost fees and income, according to industry calculations. The legislation before Congress would build on the Fed rules and would further squeeze banks’ revenue when they are being hit with a high rate of credit card charge-offs. The government’s stress tests showed that the nation’s 19 biggest banks will take on $82 billion in credit card losses in the next two years.

A 2005 report by the Government Accountability Office estimated that 70 percent of card issuers’ revenue came from interest charges, and the portion from penalty rates appeared to be growing. The remainder came from fees on cardholders as well as retailers for processing transactions. Many retailers are angry at the high fees and plan to pass them on to shoppers once the Congressional legislation takes effect.

Consumer advocates say they have little sympathy for credit card issuers, arguing that they have made billions in recent years with unfair and sometimes deceptive practices.

“The business model will change because the business model doesn’t work for the public,” said Gail Hillebrand, a senior lawyer at Consumers Union.

“In order to do business under the new rules, they’ll actually have to tell you how much it’s going to cost,” she said.

With many consumers mired in debt and angry at what they consider gouging by credit card companies, the issue of credit card reform has broad populist appeal. Members of Congress and the Obama administration have seized on the discontent to push reforms that the industry succeeded in tamping down when the economy was flying high.

Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to “a series of carjackings.”

“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.

Ron Lieber contributed reporting.
 
JPB
 
  1  
Reply Tue 19 May, 2009 12:34 pm
Quote:
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.


Then I would stop using credit cards and go back to cash/check for my purchases. I don't have to use credit cards. I do it because it's convenient and easier to write one check rather than 20. Any cc company that implements those fees would lose my business in a heartbeat. If they don't want the fees that my purchases generate through the retailer then that's fine with me.
engineer
 
  3  
Reply Tue 19 May, 2009 01:16 pm
@JPB,
I think the author of this article bought into some industry hype here. After all, credit card companies typically charge 2% + a fixed fee for every purchase. If they give me 1% back, they're doing fine for nothing more than a few CPU cycles.
boomerang
 
  2  
Reply Tue 19 May, 2009 01:29 pm
In a spooky way, it's hilarious that they've tried to turn it around by suggesting that people who have managed their credit well have had a "free ride" at the expense of people who don't manage their credit.
dyslexia
 
  1  
Reply Tue 19 May, 2009 01:41 pm
@boomerang,
boomerang wrote:

In a spooky way, it's hilarious that they've tried to turn it around by suggesting that people who have managed their credit well have had a "free ride" at the expense of people who don't manage their credit.

just asking re the free ride, is that not true? I use my debit card exclusively, almost never use a credit card.
JPB
 
  1  
Reply Tue 19 May, 2009 01:52 pm
@dyslexia,
Probably only in the sense that we ALL pay higher prices to absorb the 2-4% that retailers pay the cc companies. There was a time when retailers added a fee onto cc purchases. Then, once the number of cc buyers exceeded the number of cash payers, they simply raised the prices of their goods. The rewards programs are either offset by annual fees or they are only a fraction of the cost that the retailer pays (as in engineer's example). I'm not aware of any no-annual-fee programs that cost the cc company more than the retailer/consumer pays upfront, but they may well exist.
0 Replies
 
JPB
 
  1  
Reply Tue 19 May, 2009 01:58 pm
@engineer,
Quote:
“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”


This is what I think is so short sighted. Why would I choose a cc company that charges me to hold their card? I wouldn't. If they ALL start charging customers then people who pay off their balances in full each month can do so by check/cash.
0 Replies
 
ebrown p
 
  1  
Reply Tue 19 May, 2009 02:03 pm
@boomerang,
Quote:
In a spooky way, it's hilarious that they've tried to turn it around by suggesting that people who have managed their credit well have had a "free ride" at the expense of people who don't manage their credit.


I don't think this is hilarious at all. In fact this is exactly what has been happening.

People who are well off (the people you say "have managed their credit well") are getting a free ride... they get paid with lower prices and kickbacks which are paid by higher prices-- even by those of us who don't use credit cards.

People who are vulnerable, the working class, college kids get screwed with ridiculous interest rates and traps without even the right to a day in court.

Robbing from the poor to give to the rich. What the heck is "hilarious" about that?
boomerang
 
  1  
Reply Tue 19 May, 2009 02:12 pm
@ebrown p,
I'm not rich but I have managed my credit well. I have one credit card that I use in emergencies. If I don't have the money to pay for something, I don't buy it.

For the banks to say they have given me a free ride on the backs of the nations poor is ridiculous.

I don't force the banks to go to a college campus and sign up thousands of unemployed students.

I'm not responsible for anyone issuing credit to "anyone the law allows".

THEY have taken advantage of the nations poor, not me.
ebrown p
 
  1  
Reply Tue 19 May, 2009 02:18 pm
@boomerang,
But you have gotten a free ride.

You borrow money each month with no interest-- this costs money.

You get advertised to on the TV and with offers in the mail(at least one of which you responded to) -- this costs money.

There is a whole organization with business people and clerical workers and a marketing department and people to answer the phone when you call and lawyers (let's not forget the lawyers). All of these people working so you can have a credit card need to be paid-- which costs money.

And on top of this you get kickbacks-- which cost money.

You are getting something (a whole lot of something) for nothing (and no, paying your bills on time doesn't entitle you to other people's money).

That is the very definition of a free ride.
boomerang
 
  2  
Reply Tue 19 May, 2009 02:24 pm
I do not borrow money interest free each month. I can't remember the last time I used my credit card. I don't get any kickback on my card when I do use it.

Every time someone does use their credit card, or debit card, or writes a check, the place where they shop pays a transaction fee to the credit card company. The credit card company profits from that fee. That fee is passed on to me with higher prices so I pay extra even though I use cash.
0 Replies
 
JPB
 
  1  
Reply Tue 19 May, 2009 02:34 pm
On a related note,

Quote:
Senate passes tough new credit card reform bill
Obama could sign card reforms into law by end of May
By Connie Prater

Riding on a wave of anti-bank and pro-consumer sentiment sweeping the country, the U.S. Senate today voted 90-5 to pass unprecedented credit card industry reforms designed to help millions of families struggling to pay credit card debt.

<snip>

Reaction from the banking community echoed past warnings of reduced credit.

"This bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk," Edward Yingling, president and CEO of the American Bankers Association trade group said in a statement released after the vote. "What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky. It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate.'

He added: "While the recent Federal Reserve rule also contained restrictions on pricing card credit for risk, this bill goes much further in this and other areas. We are concerned that the Senate bill will have a dramatic impact on the ability of consumers, students, and small businesses to obtain and use credit cards." more


I'm not entirely convinced that limiting credit to those who have SOME means of paying for it isn't a bad thing. The bill, as passed today, does not impact business cards so the impact to businesses would be to those who use personal cards for business expenses.
roger
 
  1  
Reply Tue 19 May, 2009 02:39 pm
@JPB,
JPB wrote:

Quote:
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.


Then I would stop using credit cards and go back to cash/check for my purchases. I don't have to use credit cards. I do it because it's convenient and easier to write one check rather than 20. Any cc company that implements those fees would lose my business in a heartbeat. If they don't want the fees that my purchases generate through the retailer then that's fine with me.



Sounds good, but what happens to your credit rating when you cancel all the cards you've been carrying for 20 or more years? You might never need that good rating, but you can't really be sure. This is something I'm looking at from a personal standpoint, by the way. Citi recently cut my credit limit and raised the interest rate. So far, so good. I never came within $3,500 of the lower limit, and don't pay interest or late fees, thanks to no late payments. If they impose an annual fee, I probably put my good rating at risk when I drop the card.
roger
 
  1  
Reply Tue 19 May, 2009 02:42 pm
@engineer,
Still, they are borrowing the money they are loaning to you. Ah, I'm sure they're not losing money on the transaction, but it is part of the equation.
0 Replies
 
JPB
 
  1  
Reply Tue 19 May, 2009 02:48 pm
@roger,
I recall many, many years ago my ex inlaws being told by their bank to maintain a $1 balance on their mortgage so that they would have an active credit history. They were billed $0.06 annually for the interest that that $1 carried. Things have gotten much more complicated since then (mid-70s) but there will always be a mechanism to maintain an active credit file.

When I was first starting out and had no credit I purchased some appliances from Sears. They were known for giving young couples "revolving credit" on specified purchases. Sure, there was interest involved, but it allowed us to establish a good payment history on limited purchases. The same can be done with store cards and "same as cash" deals which allow you to pay off specific purchases in a certain time-frame interest free. I don't think your good credit rating will be effected long term, but there are ways of keeping an active file without paying bank fees.
0 Replies
 
JPB
 
  1  
Reply Tue 19 May, 2009 03:00 pm
@JPB,
Quote:
Other provisions of the Senate bill include:

* 45 days' advance notice of significant changes in credit card terms.
* Banning universal default and double-cycle billing.
* Prohibiting over-limit fees unless consumers agree to allow transactions that exceed their credit limits to go through rather than be denied.
* Fees for late payments, over-limit charges or other penalty fees must be reasonable and related to the violation.
* Extending the life of gift cards and gift certificates so that they cannot expire within five years of activation. Banning dormancy or inactivity fees on gift cards unless there has been no activity in a 12-month period.
* Banning credit cards for people under the age of 21 unless they have adult co-signers or show proof that they have the means to repay the debts. College students must get permission from parents or guardians to increase credit limits on joint accounts they hold with those adults.
* Requiring that card issuers disclose how long it would take to pay off credit card balances if cardholders make only minimum payments each month and how much users would have to pay each month if they want to pay off their balances in 12, 24 or 36 months.


I think the limitations on college students is an Excellent idea!
0 Replies
 
engineer
 
  2  
Reply Tue 19 May, 2009 03:01 pm
@ebrown p,
roger wrote:

Still, they are borrowing the money they are loaning to you. Ah, I'm sure they're not losing money on the transaction, but it is part of the equation.

I think you are ignoring the cost of doing this another way.

The money we would otherwise use to pay these bills is sitting in the bank where the bank can use it to make loans. For people who pay their bills in total every month, they are getting a free loan, but essentially they are borrowing their own money. If people paid by check instead of credit cards, the cost of processing costs go up significantly for both the bank and the vendor. The vendor also takes on the risk of default. Paying by credit card (and now debit card) is much more efficient, so the system is not a win-lose system where the poor support the rich.
ebrown p
 
  1  
Reply Tue 19 May, 2009 03:14 pm
@engineer,
Engineer,

Credit card companies make much of their profits on penalties, higher prices, legal traps and usurious interest rates-- all paid in large part by the part of society that is least able to afford them.

I have no problem with a reasonable system of consumer credit that is based on the sound economic principles of lending and borrowing-- where both sides have rights and where neither side gets screwed. This does not describe the current system.

This legislation is a step in the right direction.

But, moving toward a balanced a fair system does mean the people who are getting a free ride are going to have to start paying their fair share for the services they are getting.

DrewDad
 
  1  
Reply Tue 19 May, 2009 03:17 pm
@ebrown p,
That is a problem related to allowing credit card companies to be based out of whichever state has the least restrictive regulations, not a problem with credit in general. All of the credit card companies have fled to Delaware.

I heard somewhere that they're discussing allowing the same thing for insurance companies.....
0 Replies
 
roger
 
  2  
Reply Tue 19 May, 2009 04:38 pm
@ebrown p,
Interest and late charges are caused by late payments. Those who pay late are most likely to default. They have to pay their own freight.
0 Replies
 
 

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