Most of the practices deemed unfair or deceptive by the Federal Reserve have disappeared from new credit card offers since federal passage of the Credit CARD Act last year, according to a new report by the Pew Charitable Trusts, Two Steps Forward: After the Credit CARD Act, Cards Are Safer and More Transparent – But Challenges Remain.
The report finds that issuers have eliminated practices such as “hair trigger” penalty rate increases (disproportionate charges for minor account violations), unfair payment allocation, and raising interest rates on existing balances. However, Pew’s research also highlights a sharp rise in cash advance fees, continued widespread use of other penalty interest rates and an emerging trend of credit card companies failing to disclose penalty interest rates in their online terms and conditions.
One interesting tidbit from the report which studied the 12 largest banks and 12 largest credit unions: together these institutions control more than 90 percent of the nation’s outstanding credit card debt.
Less than 25 percent of all cards examined had an overlimit fee, which is down from more than 80 percent of cards in July 2009. Additionally, mandatory arbitration clauses, which can limit a consumer’s right to settle disputes in court, are now found in 10 percent of cards compared to 68 percent in July 2009.
At least 94% of bank cards and 46% of credit union cards (once again showing credit unions are likely to be a better option – though not always)came with interest rates that could go up as a penalty for late payments or other violations. But nearly half these warnings failed to inform the consumer of the actual penalty interest rate or how high it could climb.
Bank cash advance and balance transfer fees increased on average by one-third during this period, from 3% of each transaction to 4%. Credit union cash advance fees went up by one quarter, from 2% to 2.5%. Both increases (which again show how poorly banks fair in comparison) are unconscionable given the incredible low costs of money today. You should not pay these ludicrously high fees.
Related: Credit Card Issuers Still Seeking to Take Your Money – Continued Credit Card Company Customer Dis-Service – Legislation May Finally Pass to Address the Worst Credit Card Fee Abuse (Dec 2007)
Failing to pay for the deferred costs of current expenditures gets all those practicing credit card budget thinking in trouble. That includes lots of individuals. But it also includes many governments. They pay huge rewards to special interests and act like they think the cost doesn’t exist. Only an extremely financially illiterate society could elect so many of these people. We have not learned that in the modern financial economies financial illiteracy is a huge societal problem (along with scientific illiteracy).
Padded Pensions Add to New York Fiscal Woes
Such poor financial management by public sector organization (California is horrible also) are causing huge damage to those living in such poorly managed states.
The use of public money for outsize retirement pay really stings when budgets don’t balance, teachers are being laid off, furloughs are being planned
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Roughly one of every 250 retired public workers in New York is collecting a six-figure pension, and that group is expected to grow rapidly in coming years, based on the number of highly paid people in the pipeline.
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Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s.
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Before Yonkers adopted a richer pension formula for police in 2000, for instance, it was told the maximum cost would be $1.3 million a year. But instead, the yearly cost is now $3.75 million and rising. David Simpson, a spokesman for the mayor of Yonkers, said pension cost projections were “often lowballs,” so the city could get stuck. “Once you give something, you can’t take it away,” he said.
It isn’t complicated. So long as you elect people that are financial illiterate and only care about granting favors to special interests, not the consequences of doing so, you are setting yourself up for a great deal of pain once your credit card bill comes due.
Related: NY State Raises Pension Age to Save $48 Billion – Charge It to My Kids – Bogle on the Retirement Crisis – Politicians Again Raising Taxes On Your Children
Many people get into financial trouble in part due to their misuse of credit cards. By following a few simple rules you can avoid the missteps and use credit cards to improve you personal finances instead of falling into the credit card traps.
Most importantly, don’t use your credit card for loans. Pay off your balance each month. Pretty obvious advice but far too many people don’t follow it. If you use your credit card for a loans most of time that is a mistake and big risk to your personal financial future. Don’t do it. There is a reason pretty much all the advice from financial advisers on credit cards starts with this – it is the most important advice.
Second, if you don’t follow the advise above pay off your loan as soon as possible. Payment the minimum payment is huge mistake. You should not be making any discretionary purchases if you are not paying down your credit card debt substantially each month.
Continue reading tips on using your credit card in a smart way.
Related: Majoring in Credit Card Debt – Outrageous Credit Card Fees – Credit Card Debt and Delinquencies Decline
Credit problems create a vicious cycle. Credit card interest rates are increased, fees are onerous and even applying for jobs is negatively affected (many employers look at credit reports as one factor in the hiring process), insurance companies look at them too and can offer higher rates. Employers and insurers have the belief that bad credit is an indication of other risks they don’t want to take on. Once into the cycle there are challenges to deal with. I must admit I think it is silly to look at credit for most jobs. But a significant number of organizations do so that is an issue someone that gets themselves in this trouble has to deal with.
I think the best way to deal with this problem is to build a virtuous cycle of savings instead. We tend to focus on how to cope with a bad situation instead of how to take sensible actions to avoid getting in the bad situation. In general we spend far too much money and take on too much debt – we live beyond our means and fail to save. Then we have a perfectly predictable temporary hit to our financial situation and a vicious cycle begins.
If we just acted more responsibly when times were good we would have plenty of room to absorb a temporary financial hit without the negative cycle starting. The time to best manage this cycle is before you find yourself in it. Avoiding it is far better than trying to get out of it.
Build up an emergency fund. Don’t borrow using credit cards – or any form of consumer debt (borrowing for education, a car or a house, I think, are ok). Save up your money until you can afford what you want to purchase. Don’t buy stuff just to buy stuff.
Re: The Vicious Circle of Poor Credit
Related: Real Free Credit Report – In the USA 43% Have Less Than $10,000 in Retirement Savings – Financial Planning Made Easy
The government has stopped some of the worst abuses by credit card issuers however, those financial institutions are not without ways of continuing to take advantage of customers, Credit-Card Fees: the New Traps
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Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees—the cost customers pay for purchases made in foreign currencies—but they are expanding the definition of what qualifies as a foreign transaction.
In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.
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And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.
I’ll tell you a better way to avoid the abusive fees. Don’t deal with the large banks that the government bailed out. My credit union offers a credit card with no annual fee without any minimum spending requirements, and many others do as well.
Related: How to avoid getting ripped off by credit card companies – More Outrageous Credit Card Fees – Sneaky Credit Card Fees – USA Consumers Paying Down Debt –
Elizabeth Warren is the single person I most trust with understanding the problems of our current credit crisis and those who perpetuate the climate that created the crisis. Unfortunately those paying politicians are winning in their attempts to retain the current broken model. We can only hope we start implementing policies Elizabeth Warren supports – all of which seem sensible to me (except I am skeptical on her executive pay idea until I hear the specifics).
She is completely right that the congress giving hundreds of billions of dollars to those that give Congressmen big donations is wrong. Something needs to be done. Unfortunately it looks like the taxpayers are again looking to re-elect politicians writing rules to help those that pay the congressmen well (one of the problems is there is little alternative – often both the Democrat and Republican candidates will both provide favors to those giving them the largest bribes/donations – but you get the government you deserve and we don’t seem to deserve a very good one). We suffer now from the result of them doing so the last 20 years. Wall Street has a winning model and betting against their ability to turn Washington into a way for them to mint money and be favored by Washington rule making is probably a losing bet. If Wall Street wins the cost will again be in the Trillions for the damage caused to the economy.
Related: If you Can’t Explain it, You Can’t Sell It – Jim Rogers on the Financial Market Mess – Misuse of Statistics – Mania in Financial Markets – Skeptics Think Big Banks Should Not be Bailed Out
The credit card delinquency rate (borrowers 90 days or more delinquent on one or more of their credit cards) dropped to 1.10% percent in the third quarter of 2009, down 6 basis points from the previous quarter. Year over year, credit card delinquencies remained essentially flat from 1.09% in the third quarter of 2008.
Credit card delinquency was highest in Nevada (1.98%), Florida (1.47%) and Arizona (1.35%). Credit card delinquency rates were lowest in North Dakota (0.66%), South Dakota (0.70%) and Alaska (0.73%).
Average credit card borrower debt decreased to $5,612 from the previous quarter’s $5,719, and $5,710 for the third quarter of 2008.
“At end of the 2001 recession, the national bankcard delinquency rate had increased to a high of 1.69% as that recession came to a close (in November of 2001),” said Ezra Becker, with Transunion.
The slight declines in credit card debt are an encouraging sign that more people are taking the right action to eliminate their credit card debt.
Related: USA Consumers Paying Down Debt – Consumer Debt Down Over $100 Billion So Far in 2009 – Families Should not Finance Everyday Purchases on Credit – Some Movement on Regulating Credit Cards Companies
Retailers Ready for Fight on Credit-Card Fees
The report, released Thursday by a coalition of retailers, supermarkets, drugstores and other businesses, found that Americans currently pay about $2 in “interchange” fees for every $100 they spend using credit cards. The fee is actually paid by retailers, though consumers feel it in a higher retail price. This rate is twice that charged in the U.K. and New Zealand, four times the rate levied in Australia and more than six times the cross-border rate charged in the European Union, the study says..
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“If we paid the same low credit- and debit-card swipe fees as consumers in Australia pay, then the net benefit for American consumers would have totaled $125 billion over the last four years,” the report says.
It truly is amazing how incredibly poor the banking services in the USA are. The banks have managed to provide mediocre service at exceedingly high prices. It sure seems to be due to unfair trade practices (allowed by poor regulation). See our tips on how to avoid getting ripped off by credit card companies, though it won’t help with these excessive fees.
Related: Continued Credit Card Company Customer Dis-Service – More Outrageous Credit Card Fees – Hidden Credit Card Fees – Poor Customer Service by Discover Card
Chart showing loan default rates for real estate, consumer and agricultural loans for 1998 to 2009 by the Curious Cat Investing Economics Blog, Creative Commons Attribution, data from the Federal Reserve.As you can see real estate default rates exploded in 2008. In the 4th quarter of 2007 residential default rates were 3.02% by the 4th quarter of 2008 they were 6.34% and in the 1st quarter of this year they were 7.91% (471 basis points above the 4th quarter of 2007). Commercial real estate default rates were at 2.74 in the 4th quarter of 2007, 5.43% in the fourth quarter of 2008 and 6.5% in the 1st quarter of 2009 (a 366 basis point increase).
Credit card default rates were much higher for the last 10 years (the 4-5% range while real estate hovered above or below 2%). In the last 2 quarters it has increased sharply. From 4.8% in the 3rd quarter 2008 to 5.66% in the 4th and 6.5% in the 1st quarter of 2009. The default rate on other consumer loans are up but nowhere near the amounts of real estate or credit cards.
Agricultural loan default rates are actually about as low now as they have every been 1.71%. That is up a bit from the 1.06% low the default rate hit in the 1st quarter of 2009 but actually lower than it was for half of the last decade (the last 5 years it has been lower but prior to that it was higher – in fact with higher default rates than either real estate loan category).
Related: Mortgage Rates: 6 Month and 5 Year Charts – Jumbo Loan Defaults Rise at Fast Pace – Continued Large Spreads Between Corporate and Government Bond Yields – Nearly 10% of Mortgages Delinquent or in Foreclosure
Sneaky changes to your credit cards
Credit card interest rates are typically pegged to the prime rate, which has fallen from 5.25% a year ago to 3.25% now. But the national average rate for credit cards has actually risen over that period, moving from 11.3% to 12.4%
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* The standard balance transfer fee has risen to 3%, and Bank of America recently joined Discover in increasing that fee to 4% on certain offers.
* Cash advance fees had been 3%, but Bank of America now has 5% cash advance fees for money obtained through ATMs and at banks, and 4% fees on advances via direct deposit and checks.
* Foreign transaction fees — charged when you make purchases in other countries or use foreign banks — are going up for many cardholders. Starting June 1, Bank of America will begin charging for a service it had previously provided free: Transactions made in U.S. dollars but processed through foreign banks (such as online purchases from overseas merchants using foreign banks) will be hit with 3% fees.
The incredibly large fees are a good reason to not use your credit card for these activities. 5% to get money from an ATM. You have to be crazy to submit to such a fee. The banks continue to fight with the airlines for who can keep providing the most horrible customer service.
Related: How to avoid getting ripped off by credit card companies – Sneaky Credit Card Fees – Avoid Getting Squeezed by Credit Card Companies – Incredibly Bad Customer Service from Discover Card – more posts on credit cards