Due diligence, American style

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Terwijl de meeste Amerikanen onder de huidige economische omstandigheden
niet weten hoe ze moeten rondkomen, gaan de creditcard-maatschappijen
gewoon door met verhogen van hun tarieven.
Niets aan de hand, business as usual.

Binnenkort wordt naar verwachting een wet van kracht die dit gaat
regelen, en tot die tijd moet je halen wat er te halen valt.
Due diligence, American style.

Groet / Cees

Nov. 6, 2009, 8:01 a.m. EST
Credit-card countdown: Higher rates abound
Credit cards gouge consumers ahead of new law

By Jennifer Waters, MarketWatch

CHICAGO (MarketWatch) -- If you're one of the millions of Americans
holding a credit card, this isn't necessarily news: Credit-card issuers
are hiking interest rates, penalties and fees in full force ahead of
stringent new laws that take effect in February.

In fact, some 400 credit cards from the nation's 12 largest bank issuers
-- accounting for 90% of the $89.8 billion in outstanding consumer
credit -- are still using most of the same tactics that the Federal
Reserve has called "unfair or deceptive" and that will be outlawed in
fewer than four months, according to a new report from the Pew Health
Group's Safe Credit Cards Project.

"Until the law takes effect we're seeing that all the major credit-card
issuers on the bank side are continuing to engage in these unfair and
deceptive practices," said Nick Bourke, project manager of the Safe
Credit Card Project. "The numbers of unfair and deceptive practices have
grown and in some cases are worse."

Among the other findings:
 * 99.7% of bank cards allowed issuers to boost interest rates on
outstanding balances -- a jump from 93% in December
 * 95% of bank cards are applying payments first to low-rate balances, a
practice the Federal Reserve has said will likely cause substantial
financial injury to consumers
 * 90% of bank cards had penalty rate hikes with the vast majority
imposed by so-called "hair triggers" of one or two late payments in a
year. The median bank penalty rate was 28.99%.
 * As of July, interest rates spiked an average of 20% across the board
from December of 2008 with some issuers jacking up rates 30% and in at
least one case 50% -- even on their best customers.

Many -- but not all -- of the interest rate increases were tied to user
credit scores, which have been dropping as many consumers' credit lines
have been cut or cancelled, Bourke said.
Credit-card losses mount

There's no question that the economic malaise and the millions of people
without jobs has had a damaging effect on credit companies too.
Credit-card charge-offs and delinquencies this year have doubled, even
tripled in some cases, and are still hovering in record territory at the
nation's largest banks with the outlook only worsening. Credit-card
charge-offs retreated in September from August's record high, but are
still in double digits, according to Moody's Investor Service.

Moody's charge-off index, a measure of credit-card loans that aren't
expected to be repaid -- slipped to 10.72 in September from August's
peak of 11.49. However, loans at least 30 days late, considered a gauge
of future losses, climbed to 5.97 from 5.8. Charge-offs and
delinquencies closely follow the jobless numbers: As unemployment rises
so too does bad debt.

"Some of (those interest-rate and fee hikes) occurred because of the
economic environment we're in," Bourke admitted. "But the timing is
pegged at getting a lot of changes in before the bill takes effect."

The American Bankers Association agreed that some higher rates are being
pushed ahead of February, but said the embattled economy that is leaving
issuers with boatloads of unpaid, unsecured debt is the real driver of
such huge interest-rate increase.

"We have to take into account the losses in the credit-card space," said
Peter Garuccio, ABA spokesman.

J.P. Morgan Chase (NYSE:JPM) , the nation's largest credit-card lender,
reported that its credit-card division lost $700 million in the third
quarter and expects losses to be higher next year. Bank of America's
(NYSE:BAC) global card services division reported a loss $1.04 billion
in the third quarter and Citi Holdings (NYSE:C) , which includes the
private-label cards, mortgages and other consumer loans, showed a $1.9
billion quarterly loss.

Credit-card companies recognize the pain they are inflicting on many
consumers. "We understand that customers don't like price increases,
especially in difficult economic times," Citi said in a statement.
"However, these actions are necessary given the doubling of credit card
losses across the industry from customers not paying back their loans
and regulatory changes that eliminate repricing for that risk."
Moving ahead of law

The Pew study looked at rate and fee increases from January to July and
doesn't include hikes made since then as issuers press consumers before
the law takes effect Feb. 22. Nor does the study take into account the
initial credit-card legislation that took effect in August.

American Express Blue (NYSE:AXP) card users, for example, weren't
slapped with material interest-rate increases during the first part of
2009, but got smacked in recent months, according to BillShrink.com's
research. Since then, published regular-purchase rates have shot up
nearly 50%. Capital One's (NYSE:COF) Platinum Prestige card's rate on
new purchases surged 66% while Citi's CashReturns MasterCard's rate
jumped 46%.

"I don't expect to see compliance on these rules from card issuers until
they absolutely have to," said Samir Kothari, co-founder of BillShrink,
the online consumer-credit service. "Some of these rules are so
impactful on their businesses that they will wait until the absolute
last minute to put them in place."

ABA's Garuccio noted, however, that bad economy or not, the legislation
was bound to lead to higher interest rates and tighter lending policies
that would leave some consumers out in the cold. "This would be an issue
no matter what," he said.
Fees going up

The Pew study also doesn't include key changes that became law Aug. 20.
Card issuers must now alert customers 45 days ahead of any increases and
allow them to opt out, moves that eliminated the hair- trigger repricing
and gave consumers the choice to say no.

In recent weeks, many cardholders have received those notices, some with
pages of explanations. They've also been informed of new fees coming as
card issuers look at ways to offset the loss of the hefty revenues
streams they have long enjoyed from upping interest rates "at any time,
for any reason," as the disclosures generally stated, as well as late
and transfer fees.

Annual fees, for example, will turn up on the February statements of
some cardholders with Bank of America -- even for some consumers who pay
off their cards regularly. The bank notified a limited group of
cardholders that it will start charging $29 to $99 annually, with the
rates dependent on the risk and profitability of selected accounts. The
group cuts across all types of cardholders and is not focused on say,
slow-paying consumers or just those who don't carry balances.

The fees, however, are purely a test for Bank of America to determine
how consumers value their credit cards, spokeswoman Betty Reis said.

"We have not made any final decisions on whether we'll apply an annual
fee going forward," she said.

Citigroup cardholders who don't put more than a specific amount on their
cards -- generally about $2,400 a year -- are getting hit with annual
fees. Then there are those banks that are charging inactivity fees if
the credit cards aren't used during a specific time period.

Chase Card Services and United Airlines recently unveiled three premium
credit cards with annual fees that range from $130 to $375.

Expect more of the same and then some from other card issuers that are
likely to follow the herd.

"Actions like these are rarely singular events," said Bill Hardekopf,
chief executive of LowCards.com, an online credit-card information
resource. "One issuer takes a new step and the others likely follow."

Many cards, for example, have pared and even taken away cash-back and
other rewards programs, BillShrink found. Others have substantially
upped balance-transfer fees and default fees.

American Express, for example, has done away with a two-tier rate for
missed payments. Instead of a "default rate" for one missed payment and
a "seriously default rate," which was substantially higher, for two and
more missed payments, it has only a default rate. However, that rate is
now at the higher level, according to BillShrink.

"These are levers that credit-card companies can and will pull to try to
make money when and where they can," BillShrink's Kothari said.
Some carrots for consumers

At the same time, issuers are launching new cards, cleaning up
disclosures and offering flat rates. Bank of America brought out the
BankAmericard Basic Visa card that features one basic rate for all
transactions -- charges, balance transfers and cash advances -- that is
14% above the prime rate, no matter what that rate is. Other cards are
tailored to what consumers want more, cash back, rewards or cheap
introductory rates.

Chase is taking a similar route with its Blueprint cards, which let
cardholder keep interest rates at 0% on everyday purchases that they pay
off monthly and pay interest only on big-ticket buys that take months to
pay off.

Citi is offering consumers a chance to earn back some of the 29.99%
interest rate they'll be charged at the end of the month. Consumers who
make their payment on time will receive a 10% credit of the total
interest charge. Interest earned back in December and January will be
fully credited on statements no later than February 2010 and monthly
there after.

"We also recognize that customers are frustrated by complicated notices
and a perceived lack of options," the company said.

"Nearly all of our customers now have the opportunity to earn back a
portion of the increase each month. And eligible customers who do more
business with us will have the most opportunity to reduce their rates,"
according to Citi.

The escalating rates and fees have not gone unnoticed in Washington.
Last week Sen. Chris Dodd, D-Conn., proposed a bill to freeze interest
rates and fees until the law was fully enacted. He charged that banks
were raising rates "to squeeze customers" ahead of the Feb. 22 effective
date.

"At a time when families are struggling to make ends meet, jacked-up
rates can quickly create crushing debt," he said. "People need to be
responsible with their money but they shouldn't be taken to the cleaners
by outrageous fees."

On Wednesday, the House voted to limit banks' rate increases on existing
credit and to move up the start date for many of the credit-card rule
changes. The bill needs Senate approval and a signature by the president
before it becomes law.

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