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Mixed blessing: credit card reform may shock some
New credit card law restricts bank tactics, but sent interest rates up and credit lines down
ap

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Companies:
o American Express Company
o Bank of America Corporation
o Citigroup, Inc.

Eileen Aj Connelly, AP Personal Finance Writer, On Sunday February 21, 2010, 2:29 pm EST

NEW YORK (AP) -- Your next credit card statement is going to contain an ugly truth: how much that card really costs to use.

Now, thanks to a long-awaited law that goes into effect Monday, you'll know that if you pay the minimum on a $3,000 balance with a 14 percent interest rate, it could take you 10 years to pay off.

"Jaws will drop," said David Robertson, publisher of The Nilson Report, a newsletter that tracks the industry. "I don't doubt for a nanosecond that it's going to give a lot of people a sinking feeling in their stomachs."

That's not all that will make them queasy.

During the past nine months, credit card companies jacked up interest rates, created new fees and cut credit lines. They also closed down millions of accounts. So a law hailed as the most sweeping piece of consumer legislation in decades has helped make it more difficult for millions of Americans to get credit, and made that credit more expensive.

It wasn't supposed to be this way. The law that President Barack Obama signed last May shields card users from sudden interest rate hikes, excessive fees and other gimmicks that card companies have used to drive up profits. Consumers will save at least $10 billion a year from curbs on interest rate increases alone, according to the Pew Charitable Trust, which tracks credit card issues.

But there was a catch. Card companies had nine months to prepare while certain rules were clarified by the Federal Reserve. They used that time to take actions that ended up hurting the same customers who were supposed to be helped.

Consumer advocates say the law still offers important protections for the users of some 1.4 billion credit cards.

"We expected some rate increases; we expected some annual fees," said Ed Mierzwinski of the U.S. Public Interest Research Group, an advocacy organization that lobbied for the law.

To be sure, the law takes effect while credit card companies are still reeling from the recession.

In 2007, the top 12 card issuers earned a combined $19 billion from credit cards, according to The Nilson Report. A year later, amid the financial meltdown, profits for those companies fell more than 65 percent to $6.32 billion. The plunge was largely because defaults ballooned as unemployment soared.

Profit figures for 2009 aren't yet available. But banks wrote off about $35 billion in credit card debt last year, as the unemployment rate topped 10 percent. Analysts predict the default rate will remain at least twice as high as normal through this year, and longer if unemployment stays high.

At the same time, the law is expected to cut into future profits. FICO Inc., the company best known for its credit scores, projects the average card will generate less than $100 a month in revenue within three years, down from $200 a month before the law.

That helps explain why the industry reacted so aggressively to the legislation. Among the moves it made:

-- Resurrected annual fees.

Annual fees, common until about 10 years ago, have made a comeback. During the final three months of last year, 43 percent of new offers for credit cards contained annual fees, versus 25 percent in the same period a year earlier, according to Mintel International, which tracks marketing data. Several banks also added these fees to existing accounts. One example: Many Citigroup customers will start paying a $60 annual fee on April 1.

-- Created new fees and raised old ones.

These include a $1 processing fee for paper statements for cards issued by stores such as Victoria's Secret and Ann Taylor. Another example is a $19 inactivity fee Fifth Third Bank now charges customers who haven't used their card for six months.

Other banks increased existing fees. JPMorgan Chase, for instance raised the cost of balance transfers from one card to another to 5 percent of the transfer from 3 percent.

-- Raised interest rates.

The average rate offered for a new card climbed to 13.6 percent last week, from 10.7 percent during the same week a year ago -- meaning cardholders had to pay almost 30 percent more in interest, according to Bankrate.com.

For millions of other accounts, variable interest rates that can rise with the market replaced fixed rates. The Fed is expected to start raising its benchmark interest rates later this year, which would likely trigger an increase on those cards.

Besides making credit more expensive, banks also made it harder to get and keep credit cards. One big reason: Since the financial meltdown, many credit card issuers have been trying to reduce risk.

The number of Visa, MasterCard and American Express cards in circulation dropped 15 percent in 2009, for example. Rarely used cards were among the first cut off. Some cards linked to rewards programs for purchases like gasoline were likewise shut down.

Card companies also slashed credit limits for millions of accounts that remain open. About 40 percent of banks cut credit lines on existing accounts, according to the consultant TowerGroup, which estimated that such moves eliminated about $1 trillion in available credit. Much of that was unused.

Credit lines were frequently cut in regions most affected by the housing crisis and high unemployment, such as Florida and California, said Curt Beaudouin, a senior analyst at Moody's Investors Service. "They're not doing it willy nilly, they're doing it systematically," he said.

Companies are also making fewer solicitations. Mailed offers for new cards increased in the final three months of 2009 for the first time in two years, but there were only about 575 million. That's about a third of the average number of quarterly offers from 2000 through 2008, according to Mintel.

Because the law makes credit cards less profitable, some subprime borrowers may not be able to get cards at all, at least for the next few years. There's no fixed definition, but subprime borrowers generally have a FICO score below 660. For a good portion of this group, options may be limited to alternatives like PayPal and other electronic payment services, prepaid cards and payday lenders.

"Not everyone either deserves or should have an open-ended credit card," said Roger C. Hochschild, chief operating officer of Discover Financial Services.

Joining those who won't easily get cards: college students and others under age 21. The law strictly limits card marketing on campuses, ending giveaways like T-shirts and pizza Cards can only be granted to applicants who show they have the means to repay, or those who have a co-signer who can pay.

"Some of the more vulnerable parts of the population are a little bit more protected," said Georgetown University finance professor James Angel. But he predicts card companies will find ways around most of the new restrictions. And once the economy recovers, he expects the lending spigot to open again.

In the meantime, there is one group of consumers that banks will chase after -- those who carry a balance from month to month for at least part of the year, and pay their bills on time. They're the most profitable and least risky group for banks.

Also a target customer: anyone willing to do more business with the bank that issues their card, say opening a checking or savings account or taking out a mortgage.

"What we want is a deeper relationship with our customers," said Andy Rowe, an executive vice president with Bank of America's card business. Customers willing to stick with a single bank may even be able to get annual fees waived or get a better interest rate, he said. "That's where the competition will be."

Copyright © 2010 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten, or redistributed without the prior written authority of The Associated Press.

Does Money Make You Happy?

This is a question that I have asked many clients, and it never amaze me the answers that I get. Some clients such as P.J. feel that money makes them feel important. It allows them the ability to dress nice, travel abroad and buy really cool toys. Being a young, single male who recently graduated from college, I can relate to his thought pattern. He feels that money is to be enjoyed today and that the future will take care of itself. Actually I have counseled older individuals that think the same way.

I have other clients, like S.C., who hoard every penny they make. S.C.,a single mother in her 30’s, feels that in order for her to be a “good parent” that she must make sure that she pays for her child’s college. This feeling may have come from the fact that her parents were not able to pay for her to go to college when she was younger.

I understand why both P.J. and S.C. think about money the way that they do, however, there are positives and negatives to both approaches. As a young college grad years ago, I too just wanted to travel and have fun. I didn’t think twice about charging things to my credit card such as rims for my car. I could care less about saving for retirement, or anything else for that matter, such as a house. The problem with thinking like this is that after all the spending you are left with a lot of debt and the benefit of working until you die.

The problem with S.C. is that she is missing out on enjoying life today, obsessing over the future. Having a family should not be an excuse for individuals to forgo everything today. From my experiences, meeting in the middle is the best solution. As long as one does not have debt, then they should budget a certain amount monthly, quarterly or annually in which to have fun. That can be vacations, shopping, ski diving or anything else that is fun. But the key thing to remember is if one is COMPLETELY debt free, except for the house.

So How Do I Get There From Here?

My mother always told me that the first step is always the hardest. The same holds true for starting a budget. The first step is not hard, but it can be very time consuming. You have to gather at least 3 to 6 months of statements for ALL financial documents. These documents include, but are not limited to:

Pay Stubs
Checking and Savings Accounts
Mortgage/Lease monthly statement
Home Equity Line of Credit (HELOC)
Credit card statements
Insurance statements (car, home, disability) – amount and type
Retirement account (401k, IRA, etc.)
College savings accounts
Rental Real Estate income, etc.

Once you have gathered all of these important documents, the second step that you need to do is set up a proper filing system. This could be as simple as an envelope up to scanning into a computer. This is perhaps the most important step mainly because you will be relying on these documents on a monthly, quarterly and annual basis. If you don’t like the system then you will not use it. Putting in a box or a drawer is not a filing system.

Depending on where you are financially will determine the next step. If you are in debt and just can’t stay afloat, then please keep reading. For the individuals who are not in debt, but just don’t know how to go to the next level, check back in a couple of weeks.

Now for the folks who are drowning in debt your next step is to add up all of your income (paychecks, child support, etc). Your next step is to then add up all of your debts. These include, but not limited to, all credit cards, car payments, rent/mortgage and any other creditor. This even includes loans made by your family members, friends, etc. This will bring us to our next topic­ – Net Worth.

I'm Not Like Them

So many people in America are lying to themselves about money. If you don’t believe me, just read the newspapers and watch the news. Money is the #1 reason for divorce in America today, for both young and old couples. Even for the marriages that survive, many more people are filing for bankruptcy. Debt is really becoming an epidemic in America today.

Around Thanksgiving, I saw a very interesting news segment on one of the popular 24 hour news stations. It was quite funny to me. The guest on the show was explaining to the host, what Lay-A-Way was. Being a product of the 70’s that was how my mother shopped. And the funny thing is that it did not kill me. The stores would not allow any items to leave their store until AFTER it was completely paid for. This was the true meaning of delayed gratification.

Now, there are some people in America who truly are wealthy. However, these people normally do not even “look” rich. According to Thomas Stanley, author of The Millionaire Next Door, most of these wealthy folks are teachers, small business owners and other non high-income earners.

The thing about high income earners, like Mr. Griffin from the previous blog, is that they have to spend a lot of money just to maintain their status. This includes spending thousands of dollars a year on clothes, jewelry and automobiles. This leaves them with little money to invest for later in life. I do have to admit that there are some high income earners that are very good with managing money.

If you are one of the few people that are in good financial condition, I would like to say congratulation. However, if you feel that there is room for improvement, financially speaking, then stick around. We will begin explaining some simple steps in which you can use to improve your finances. Just remember that it is never too late to take control of your finances.

Rich vs Wealthy

According to websters-online.com the following are definitions for both rich and wealthy:

Rich: having an abundant supply of desirable qualities or substances.

Wealth: the state of being rich and affluent; having a plentiful supply of material goods and money:

It never ceases to amaze me how many Americans confuse being rich with being wealthy. Just because someone is rich, or a high-income earner, does not mean that they are wealthy.

I will use a recent television show as a prime example. While channel surfing on vacation, I came across a reality show about an actor named Eddie Griffin. As an actor I’m sure that he has earned millions of dollars over his career, however this episode shows the pitfalls of poor budgeting. After coming home from a shopping spree, he heard a tow truck outside his house. After running outside, he realized they were there repossessing his prized Bentley. Of course he cussed and threatened the driver to no avail.

After watching his Bentley be hauled off, Mr. Griffin made a bee line to his accountants’ office. Blowing pass the receptionist, Mr. Griffin proceeded to cuss out Marty, the accountant. After about 10 minutes of threats to fire Marty, Marty finally said what I had been waiting to hear. Marty told Mr. Griffin that because he spends his money as quick as he gets it, there is nothing left to pay all of his bills. Marty then explained that not only did Mr. Griffin not have enough money to pay his car payment, but Mr. Griffin did not have enough money to pay his mothers mortgage payment that month. Wow! And he is rich.

Now let’s compare Mr. Griffin to Warren Buffet, the second wealthiest man in the world. I once saw a documentary on Mr. Buffet that was very interesting. Not only does he live in a small city, Omaha, he lives in the same house for the past 30 years in a middle class neighborhood. And guess what kind of car he drives. An American made Cadillac not a Bentley.

In conclusion, making a lot of money does not mean that you are wealthy. The best gauge for determining your wealth is to figure out your Net Worth. This topic will be discussed in a future blog.

Holiday Season

Greetings,
This blog will begin after the New Year. But we want to wish everyone a safe and happy Holiday Season.