Fresh Finance: Credit Card Shuffle

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In just a couple of weeks, a lot of us will be getting together with family to enjoy Thanksgiving dinner.  A lot of you are already looking past Thanksgiving to Black Friday, the highest anticipated shopping day of the year.  As you all begin to get into the holiday spirit, there are a couple of things you should be thinking about financially in preparation for your shopping experience this year.  Mainly, you should be asking yourself two questions.

First, how much will you be spending this holiday season?  If you have been budgeting, this should be an easy question to answer.  How much free money do you have available and how much of it can be splurged on gifts?  Will you still have enough to pay your bills for November and December?

Second, you should be asking yourself what combination of your spending will consist of credit and how much will consist of cash.  This is a very important question because any ratio of cash and credit can lead to overspending.

In addition to asking yourself these two questions, you should make yourself aware of some things that are changing in the credit card industry.  It may alter your cash to credit spending ratio this holiday season.

Congress recently passed the Credit CARD Act of 2009 in response to industry abuse and credit’s role in the overall collapse of the economy.  The Credit CARD Act of 2009 was designed to limit when lenders can raise interest rates on existing balances.  Also, it requires lenders to alert card holders of increases.  The law doesn’t go into play until February of 2010 giving banks plenty of time to change their marketing plans and financing structures.

In response to the legislation, banks are introducing new rules to consumers, raising interest rates, cutting down credit lines and issuing new fees.  The credit business has been very profitable over the last decade raking in tens of billions of dollars in annual profits.  The recession has caused an adverse effect on the industry.  The percentage of noncollectable balances has hit record highs while legislation is threatening to further reduce a card’s profitability.

According to the publisher of The Nilson Report, an industry newsletter, over the last 12 months the number of MasterCard, American Express, Discover and Visa card accounts in the U.S. fell by 72 million.  In the same timespan, banks lowered credit limits by 26% to $3.4 trillion according to Foresight Analytics.  Federal records show interest rates are up 13.71%.  During the boom years, credit card companies made a large amount of money off a small group of customers who routinely paid late or exceeded their balances.  Given the high default rates, companies are now courting a more sophisticated customer with credit scores of well over 700.  This smaller pool of qualified applicants will pay for the privilege of holding their cards by paying annual fees and variable interest rates rather than fixed rates.

According to a recent study by Pew Charitable Trusts, the 12 largest banks, that issue 80% of the credit cards, continue to use practices the Fed has concluded are “unfair or deceptive” and in violation of recent laws passed by Congress.  In response to a Federal Reserve survey, almost 50% of banks responded saying they were increasing rates and reducing credit lines on borrowers with good credit scores.  About 40% are charging higher fees among other changes and restrictions.   To combat this abuse, the House of Representatives has passed a new bill that would make the law effective immediately.  The bill is now on its way to the Senate with no vote currently scheduled.

As a credit card holder and user, you should be aware of these changes as they will affect your status with your respective card company.  If you aren’t being dropped completely, you should be on the look out for sudden rate changes and/or the addition of annual fees.  Don’t expect notices in the mail either since they aren’t required by law to send them as of yet.

Article by Kevin Breckenridge

Helping to raise the financial conscious of those who are consciously aware of the necessity to obtain financial freedom. Through education, exposure, open discussion, and action we can eliminate the financial strain on our pockets. Doing so will allow us to build the capital and asset portfolio necessary to truly enjoy our life as well as elevate the launching pad for our future generations. Follow me on Twitter @Legacieinmotion

Kevin has written 32 article(s) for us.