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Drop in Credit Card Defaults Points to Economic Recovery

March has proved to be a tricky month in recent years for consumers to keep on top of their credit card payments after holiday shopping trips. This year, delinquency and default rates in March dropped, and the balances that credit card issuers had to charge off as uncollectible declined.

Assuring Lows in Credit Card Industry

The top credit card companies — Chase, Bank of America, Discover, Capital One, Citibank and American Express — reported a drop in delinquency and charge-off rates in March. In fact, both rates are the lowest they’ve been since mid-2008.

Capital One and Discover boasted the greatest improvements in delinquency rates and credit card defaults this month, according to The Associated Press. Bank of America reported the highest delinquency rate at 4.82% of balances, while American Express reported the lowest delinquency rate at 1.8% of balances.

According to the Federal Reserve, overall charge-off rates dropped in the fourth quarter of 2010 to 7.7% of balances from a high of 10.9% in the second quarter of that year. Bank of America and Discover reported the greatest improvements in their charge-off rates. Bank of America’s charge-off rate was still the highest among top credit card issuers at 8.18%, while American Express had the lowest rate at 3.7%.

According to Moody’s Investors Service, it is likely we will see this trend continue in the coming months. The drop in delinquency rates is a particularly good sign, a Moody’s analyst told The AP.

Consumers Improve Delinquency Rates

The post-holiday months can be a challenging time for consumers, yet they seem to have a stronger foothold in the management of their bills as the economy gradually recovers. The increase in employment rates certainly helps consumers to better manage their finances, but many of us have also learned to be smarter, more cost-efficient shoppers in the face of economic challenges. Both these factors might contribute to the drop in delinquent payments, which is defined as a payment that is at least 30 days late.

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Recent California Supreme Court Ruling Drives Lawsuits

After a ruling in February in the California Supreme Court, it is now illegal for a retailer in the state to request the zip code of customers paying with a credit card. Apparently this information was being used for marketing purposes although consumers were led to believe otherwise. The result: more than 150 class-action lawsuits have been filed in California against numerous companies. The retailers include Kohl’s, J.C. Penney, Bed Bath & Beyond and Wal-Mart.

More than 40 of these lawsuits were filed in San Francisco Superior Court but include other jurisdictions in California as well.

Consumers claim the basis for these lawsuits is they were deceived into providing personal information under the assumption it was pertinent to finalizing the credit card transaction or for fraud prevention. Instead, consumers are learning this information seems to have been used for marking purposes.

The court ruled that collecting zip codes is illegal under a law that bars stores from collecting “personal identification information” when it is not needed for a transaction. The law was originally put in place to prevent customers’ personal data from being misused. But that is the same justification stores are using for taking zip codes; they say it is an anti-fraud measure.

In the Supreme Court Case, Pineda v. Williams-Sonoma Stores, Inc., a woman sued the home store Williams-Sonoma after the company used her name and zip code to find her address and added it to a marketing database.

Clearly most consumers would not have divulged personal information, such as their zip code, if they knew what it was really being used for. Stores in California certainly won’t be asking for zip codes moving forward, but that isn’t enough for many consumers who feel they’ve been violated and deceived in a big way.

Bill Dombrowski, president of the California Retailers Association told The San Francisco Examiner: “Most of the time, it’s being used to verify the credit card is your credit card, so it’s for fraud prevention.”

But the California Supreme Court disagrees.

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Consumer Spending Drives Economic Growth

The economy has been kicking back into gear, and consumer spending plays a big role in driving this upswing, as it accounts for 70% of the economy. With the recent profit increases credit card companies have seen, it seems consumers are back out there using their cards to make purchases instead of cash or debit cards. As card companies report increasing earnings, mailboxes are filling with credit card applications once again.

Increase in Consumer Spending

As mentioned in a previous Credit-Land.com article, after this past holiday season, consumers in all income brackets said they had no intention of putting a hold on their spending this year. The holiday season might remind consumers it can also be fun to shop for ourselves once in a while. Also, with unemployment rates decreasing, consumers who have kept to a strict budget might be letting loose for a change, an maybe filling out a credit card application or two, because they can finally afford to do so. Consumers have more confidence in the slowly improving economy and are less worried about keeping a tight budget and saving money. This is shown in a report by the U.S. Bureau of Economic Analysis, which reported a 4% increase in consumer spending in the fourth quarter of 2010. This is the largest percentage increase in 5 years.

Consumers Not Afraid to Use Their Credit Cards

With a decrease in credit card delinquency in the fourth quarter of 2010, it seems consumers are more confident in their financial position. Because they are making more of their payments on time, cardholders are facing fewer late payment fees and interest rate hikes. This is most likely encouraging to consumers, who feel secure to once again use their credit cards for purchases.

Credit Card Companies See Increases All Across the Board

Of course if people are spending more money, it’s no surprise they are using their credit cards more, too. Credit card companies are seeing an increase in their net income and in card member spending. For instance, American Express reported net income of $1.1 billion in the fourth quarter of 2010, compared with $716 million a year earlier. A large percentage of this gain can be attributed to cardholders charging more to their credit cards.

 

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Wells Fargo and Chase Introduce Microchip Credit Cards in U.S.

It appears the U.S. is finally making an effort to catch up with other countries in the implementation of microchip-embedded credit cards, also known as EMV-chip technology. Wells Fargo & Co. announced Wednesday that they will test EMV chip cards with 15,000 customers who travel abroad frequently. On Thursday, JPMorgan Chase announced that it would add a chip to its high-end Palladium card.

The U.S. has lagged behind countries such as Japan, Mexico, China, Brazil and most European countries that have already made the conversion from magnetic strips to microchip-embedded credit cards. American Express Blue cards originally offered microchip credit cards, but without the necessary payment infrastructure at U.S. ATMs and merchants, the feature was unpopular. Fearing a drop in credit card applications, American Express replaced the chip with RFID, the technology that allows payment by holding the credit card near a reader, in 2005.

Microchip Versus Magnetic Strip Credit Cards

EMV technology has already become the standard throughout Europe and other countries because it provides heightened security and protection against fraudulent charges. It is beneficial to every party involved, including consumers, retailers and credit card issuers. Every in-person transaction requires a PIN. One reason the U.S. has fallen behind is that U.S. issuers have focused on RFID technology — also known as PayPass or Blink — instead, hoping to drive credit card applications.

U.S. Travelers Face Difficulty

Almost 10 million American travelers had trouble using credit cards in 2008, costing about $4 billion in lost transactions and $447 million in lost revenue for card issuers, according to Bloomberg News. In some cases, consumers can show identification to verify the card is indeed theirs, but many European retailers simply refuse to accept credit cards without the microchip. Additionally, travelers have faced difficulty using the ever-growing number of automated kiosks in Europe, many of which only accept microchip-embedded credit cards. As discussed in other Credit-Land.com articles, credit cards are often the most convenient payment method for travelers and it is not the smartest idea to travel with a large amount of cash.

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ABA Reports an Improvement in Most Loan Delinquencies

Consumers are doing a better job of paying their credit card bills on time. According to a recent report by the American Bankers Association, bank-issued credit card delinquencies dropped to their lowest rate of 3.28% in the last quarter of 2010, compared with the 3.64% it had been in the previous three months. A delinquency is defined by the ABA as a payment overdue by 30 days or more. This is the lowest bank-issued credit card delinquency since the first quarter of 2001, nearly ten years, and it is also below the 15-year average of 3.92%.

The rate of unemployment has been falling steadily and dropped to 8.8% in March. Private-sector employers added 216,000 jobs that month. Clearly, our economy is slowly but surely recovering, and consumers are better able to make their credit card payments in a timely manner.

In addition to bank-issued credit card delinquencies, the overall delinquency rate decreased in the final quarter of 2010 from 3.01% to 2.68%. In fact, 9 out of 11 loan categories that the ABA tracks decreased in the fourth quarter. In the category of home improvement loans, ABA reported a slight rise in loan delinquencies to 1.26% from 1.23%. The only other category that did not show a delinquency decrease was housing loans, but these remained unchanged at 4.05%.

ABA chief economist James Chessen believes these figures to be encouraging.  “I’m feeling hopeful about further declines in delinquencies because of continuing job growth, but the unknowns are the impact of higher gas and food prices,” he said in a statement.“The 2% reduction in federal payroll taxes that began in January was intended to boost discretionary income. Unfortunately, rising prices have dashed any chance of that.”

The Associated Press reported in March that food prices in February saw the biggest rise in 36 years. Cold weather was mostly to blame, The AP said, but prices on food commodities have risen sharply over the last year.

The national average gasoline price on April 11 was $3.77, compared with $2.86 a year ago, according to AAA. Instability in oil-producing countries like Libya pushes gas prices up, along with rising demand as Americans travel to work more and once again have money to travel on vacation.

Clothing retailers, too, are raising prices. The price of cotton has more than doubled in the last year, according to The AP, and synthetic fabrics cost nearly 50% more. As shoppers return to stores, steep discounts are no longer needed.

With recent world events and rising gas and food prices, consumers will certainly continue to face challenges. But the fact that unemployment rates are improving seems hopeful. The more money consumers make, the more they will be able to make necessary payments on time. Hopefully, we will continue to see delinquency rates drop throughout 2011.

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Save Money with Credit Cards

One of the best perks to having a credit card is the rewards program many of them offer. Credit card companies use this benefit to attract new customers and keep their current ones. That doesn’t mean credit card reward programs are a free gift to you from the credit card companies; certain restrictions do apply, and it might not be worth it to participate in a rewards program depending on the circumstances. However, rewards benefits from a credit card company can really add up to some substantial benefits, if you approach them the right way. Here are some suggestions on getting the most from the best rewards credit card.

Save Money with Credit Cards

  • Most rewards credit cards require you to pay off your balance every month. If you have a balance that carries over, the benefits may be reduced or you could be ineligible for rewards at all.
  • Typically, credit cards that offer rewards will have a higher APR than ones who don’t. Make sure you shop around to get the best APR you can while still receiving rewards.
  • You might have to do a little bit of math. If you have to spend an obscene amount of money for a $30 gift card, is it really worth it? Probably not.
  • If you travel often, a credit card offering free air miles might seem like a good idea. Keep in mind you’ll have to charge and pay off a lot of purchases before you are able to redeem those miles. There may be blackout dates and expiration dates that prevent you from using earned miles – it’s important to read the fine print of any offers.
  • Speaking of expiration dates, these may occur on travel miles, lodging discounts, points, even merchandise and cash back offers.
  • Fuel rewards are very popular, especially with the soaring fuel prices today. However, most credit cards require you purchase your fuel from specific places in order to earn rewards. Generally, places like supermarkets or smaller stations are not included in the cashback plan.
  • Know the limits placed on earned rewards on credit cards by the company. For instance, some credit cards only allow you to earn up to a certain percentage and then you won’t earn any more. If your credit card company has a rewards program that gives you points up to 1% and not a penny over, you have to decide if it’s worth it.

Credit card reward programs can definitely add a lot to the credit card experience, but you have to know the ins and outs to make the most from rewards credit cards. Do a little homework and compare credit cards and what they have to offer to choose the best one for your lifestyle. Don’t forget to read the fine print, and don’t be afraid to walk away and find a better credit card that better suits you. After all, this is your money you’re spending.

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Big Spender Alert: Credit Card Rewards for High-End Users

If you’re wealthy enough to own an American Express Platinum or Centurion card, you’ve already been enjoying the more than 40 perks of being a cardholder. But your deal just got even better. American Express recently announced three new perks for high-end customers who also happen to be frequent travelers. The first two perks are for both Platinum and Centurion cardholders, and the last is solely for Platinum cardholders. Although both of these cards come with fairly substantial annual fees, these new programs can definitely benefit the right cardholder.

The first new benefit is Priority Pass Select, which involves access to more than 600 lounges in airports all over the world, a perk that typically costs $399 for unlimited access. In the past, cardmembers could already use American Airlines, Delta and US Airways’ lounges. But with this new program, cardmembers will have additional lounges available to them. Also, cardmembers have the option of signing up for a Priority Pass card, which benefits them with complimentary snacks, refreshments and Internet access in more than 300 cities.

The second new perk added for cardholders is Global Entry credit, which offers expedited clearance for pre-approved, low-risk travelers. Before enjoying these credit card rewards, cardmembers must complete an in-depth background check and interview conducted by Customs and Border Protection. They also have to pay a $100 application fee, which covers them for five years. But if cardmembers pay the fee with their Platinum card, they can request reimbursement. Once completing the screening with CBP, cardmembers can save considerable time when traveling – up to 70 percent of the typical wait time involved in international traveling.

That’s not all: American Express has also become one of a few credit card companies to offer cards with no currency exchange fees for its Platinum cardholders. Cardmembers can make international purchases while saving the 2.7% foreign transaction surcharge.

American Express isn’t the only one courting its high-end users. Chase is partnering with British Airways to offer bonus miles for new enrollees to the British Airways Visa Signature Card who apply by May 6. This is the equivalent of 2 free round-trip flights. Cardholders receive 50,000 miles after their first purchase and another 50,000 miles if they spend $2,500 within the first three months. It’s tempting to take advantage of these kinds of offers, and these programs can certainly benefit a frequent international traveler.

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5 Steps To Debt Freedom

Experiencing personal debt can feel like falling into quicksand: no matter how hard you try to climb out, you just keep sinking further down.  In a society where more is better, it can be difficult to watch your peers enjoying the finer things in life while the collections agencies are knocking at your door.

If you’re in debt, you’ve probably made yourself a lot of big promises.  “I will conquer this,” you’ve said, and three days later you were completely overwhelmed.  This may be what’s tripping you up.  The world’s problems are not fixed overnight, just like weight isn’t lost by taking one magic pill.  Be honest with yourself.  Arm yourself with knowledge both about your own behaviors and the many options available to help you reach debt freedom.

5 Steps To Debt Freedom

Step 1 – Understand Your Situation

First, know what you’re dealing with.  Take a pad of paper with you wherever you go for one week and write down everything you spend.  Then rate each purchase on a scale of “must have” to “want to have” to “don’t need.”

If you rely more on debit cards, sign up for a money-tracking site like mint.com to have your spending automatically tracked and categorized.  This will also help you evaluate how you pay for your purchases.

If you have more than one credit card, cut the extra ones up.  Once you’ve evaluated your spending, cut out your “don’t needs,” and think critically about your “want to haves”.  Is there any way you can make them cheaper?  For instance, if you “want to have” coffee, can you make it at home six days out of seven?  Can you use generic rather than brand products?

You don’t need to cut out all of your creature comforts, but by identifying them as such, you can determine just how important they are to you, and instead use them as occasional rewards rather than as givens.

Once you’ve made these decisions, add up all that you’ve cut out.  If you’ve saved, say, $300 per month, this is money you will be able to apply in later steps to paying off your debts.

Step 2 – Organize Your Debt

Next, open up a spreadsheet and start making columns.  Make one column for your fixed expenses-costs that do not change, like mortgage or rent, health insurance, and so on.  Make another column for your variable payments-things like gas, gifts, and restaurants.  Make one more for your debts, and another for your income.

In your debt column, highlight “good” vs. “bad” debt; that is, student loans with lower interest rates vs. credit cards higher rates.  Then add it all up. This is a great way to visualize just where your money is flowing and what you can do about it.

Step 3 – Make a Spending Plan

Now, make a spending plan.  Start by paying your fixed expenses and minimum balances.  Then pay any variable expenses you must to avoid going into more debt.  These are the things you just have to do to keep your head above water.

Take a look at that $300 you’re now saving every month by cutting out extras.  It’s not just a lump of money; it can do things!  Put that money away in a savings or money market account with as high an interest rate as you can find, and keep doing so until you reach the $1,000 mark.  This is your emergency fund; it will help you stay out of more debt should something unexpected come up.

Step 4 – Eliminate Debt Strategically

Choose a target.  Which debt do you want to tackle first?  Start on one with a higher interest rate.  19% might not seem like a lot more than 15%, but it adds up quickly.  If you have many debts with high rates, call the companies and try to renegotiate for a lower one.  You’d be surprised what the term, “I’m a loyal customer” can do!

Step 5  – Increase Your Income

If you’re finding after taking these steps that you still do not have anything left to pay off more than the minimum balances on one debt at a time, then it may be time to consider increasing your income.  This could be by searching for a higher-paying job, but if this is too intimidating, stick to that small steps mentality.

Can you make that extra $300 per month by babysitting? How about working in a coffee shop, or doing some freelance work on the side?

Summary

To summarize, that’s: one credit card (or none!), cut out extras, pay off minimums, focus on one high-interest debt, increase income. You may also want to try old fashioned approaches, like paying only in cash, separating all of your expenses into envelopes labeled, “fixed,” “variable,” and “debt” and not spending anything after those envelopes are empty.  You can also put limits on your cards, or make automatic alerts on an online payment tracker.

Remember, this is about understanding your own mentality.  What can you do to make money more concrete to you?

Feeling overwhelmed?  Here’s a little secret: we all have debt-especially those people you see driving fancy cars.  The theme in any “get out of debt” plan should be moderation.  If you find yourself sliding, try to figure out why rather than beating yourself up.  Did you have a tough week and really need an extra purchase on iTunes?  This shouldn’t be a big deal now that you know your finances intimately.  Just look at your upcoming week and see how you can make up for it.

If you ever start really feeling deprived, make a wish-list and write down things you desire as they come up.  Once you’ve addressed your debt, look back at that list and see what things you can now afford.  You may find that time has satiated those desires more than the purchase itself.

While paying off debt is never fun, remember that you’re paying for your future.  Get the past settled so you can move on and start doing what you’d really like to with that hard-earned money!

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Banks to Reduce Credit Card Interest Rates

The credit card industry has been doing back flips to reach the good graces of the credit consumer. And they have made a step in the right direction.

Since the passage of the Credit CARD Act in 2009, banks have been losing money, and began to charge consumers for services that used to be free. Bank of America began charging credit card users a $59 annual fee, and Chase implemented a $5 ATM fee. Well, these same banks and others, under the guidance of the CARD Act are starting to do something that actually helps pack our wallets – welcome, a decrease in credit interest rates.

Last year, millions of consumers experienced credit card interest hikes, before the passage of the Credit CARD Act due to bank scandals, an unruly economy, and pending reforms. According to Federal Reserve, the average interest rate increased almost a full percent, from 13.57 percent in 2008 to 14.31 in 2009.  Credit-Land.com estimates that between 91 million and 121 million credit cards experienced rate hikes during the recession.

A section of the Credit CARD Act requires credit card companies to review any rate hikes that happened since January 2009. The law explains that if a state’s interest rate was increased due to high credit risk or market conditions, those issues had to be reconsidered every six months. The law then demands that the rates be cut when credit risk declines and market conditions improve.

By law, once the rate has been lowered it can not be raised again, according to Ken Clayton, general counsel for card policy at the American Bankers Association. The law requires banks to warn customers about rate hikes 45 days in advance and limits increases on new purchases.

But any decrease in payment can mean big savings for the consumer. According to www.Credit-Land.com the average balance on a credit card at the end of 2010 was $4,965. At a 19 percent interest rate it would take 13 years, 9 months to pay it off. Interest would be $3,894. If interest rates were cut to even 16 percent it would only take 12 years, 5 months to pay off. Interest would drop to $2,906.

Millions will feel the reprieve. Bank of America said that it will reduce the interest rate on about 1 million of its cards, according to the Associated Press. JP Morgan Chase & Co. , Citigroup Inc., Capital One Financial Corp., Discover Financial Services and American Express haven’t revealed the number of cards affected, but all confirmed that some customers will receive lower rates. If all banks changed rates on 2% of their cards like Bank of America is doing, then over 10.5 million card will be affected.

Consumers will not only see the changes in their pockets, they will also see it on their bank statements. Consumers who saw hikes in interest rates during the recession due to poor payment histories and did not reconcile their debts, will not be eligible for the reducing interest rates.

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Bank of America Implementing New Credit Card Annual Fee

With the CARD Act enforcing credit card regulation, banks have begun fishing for money in a sea of consumer pockets. Bank of America, one of the most popular banks in the United States will be adding a $59 annual fee to consumers’ credit cards. The new changes are set to take place April 11, and set to affect 5% of credit card holders, or approximately 2 million out of 40 million customers.

According to a Bank of America representative, consumers that would not be able to qualify for the card if they were to apply for the credit card today will be the ones being charged in April. The Credit Card Accountability Act, also known as the CARD Act has put some pressure on banks to limit the reasons they change interest rates and fees. In the Act, it states that credit card issuers cannot increase interest rates on an existing credit card unless the card holder is 60 or more days late in making a payment. The act also dictates when credit card issuers can make these moves. By providing consumers with cards that the banks know consumers can’t afford, it effectively allows banks to collect more money from consumers through higher interest rates. If a consumer is using a credit card they can’t afford, they are more likely to be late on payments, and late payments are profitable for banks.

The restrictions laid out in the CARD Act are proving costly to banks, as they must think of new ways to pocket consumer money. It is estimated that the loss of revenues due to the CARD Act will total $25 billion annually for banks across the nation. In order to circumvent this, banks are charging consumers for previously free services, such as new fees for calling customer service representatives and transaction fees. Financial experts agree that the $59 annual fee is driven to increase bank profit. Implementing the annual fee will generate approximately $118 million for Bank of America.