Financial Planning Pointers
A Rose of Sharon Publication
(c) Copyright 2009, Walter O. Smith, CFP, ChFC, CLU  All rights reserved

Notice:  The content of this newsletter is intended for purposes of consumer financial educaiton only.  The content is not, nor intended to be accounting, tax, legal, or financial planning advice of a personal nature to readers.  If you want, or need, professional advice, you are advised to consult a properly qualifed professional.  The author is soley responsible for all content.  This newsletter is a free benefit to members of GMAX1, a faith-based consumer financial education organization. 
 

Issue #3
Credit Cards
5/21/09

Note:  At the time this was written Congress was in the process of working on legislation intended to liberalize terms and conditons for credit cardholders.  I decided to leave the content "as is" without treating the legislation because, no matter what is enacted, much depends on how such legislation is enacted in effect.  Once matters get settled and resolved--and clearer--I'll cover this credit card legislation in a future issue of the newsletter.  Hopefully there will be reality of good news of relief for consumers.  Already, one thing appears to be clear:  Whatever relief there may be, it won't be immediate.  As proposed, the legislation won't take effect until 9 months from the date President Obama signs it.

To understnd the problem you have to understand the situation.

The situation   There are more than 6,000 credit card issuers.  In 2007, the industry had $40.7 billion of profits.  Nearly half of those profits, $18.1 billion, were generated by penalty fees issuers imposed on cardholders.  (a 50% increase since 2003)  On March 18, 2009 it was reported that industry losses had increased an average of 56% over the past year.  The increase in past-due accounts led the indusry to tighten up the definiton of those considered seriously delinguent from an averge of 180 days past due to 60 days, for imposing tough collection practices.  At about the same time, on March 17, 2009, it was reported in The Wall Street Journel that the estimated $5 trillion of credit card lines of credit would be cut by $2 trillion in an effort to reduce card issuer exposure to losses because of the condition of the economy.  About 60% of cardholders do not pay off their balances in full each month.  In the industry, those people are called, "revolvers".  The other 40%, who do pay off their card balances in full each month, are called "deadbeats".  An ironic term, but used because those people, unlike revolvers, don't contribute as much to card issuer profits.  Nonetheless, it does reflect the perspective, and objectives of card issuers toward their customers.  On average, carrying a continuing blance on credit cards can effectively triple the cost of purchases made by use of credit cards.  That was illustrated in an example published on July 27, 2008.  A $3,200 purchase carried on a credit card ended up costing the customer over $10,000.  Obivously, the credit card business is very profitable to issuers, and very costly to consumers.  (even with, "losses")  How the credit card industry is allowed to get away with egregious abuses was outlined in the editorial of USA Today published on August 13, 2008, entitled, "Backlash Against the Banks".  The editors of USA Today noted that, "banking regulators and Congress have coddled the industry. "No wonder.  The editorial went on to point out that banks have a virtual "army of lobbyists and contributed over $200 million in campaign contributions".  Moreover, while most consumers have little to no interest in commenting on Federal Reserve proposed regulations, the one in connection with the egregious abuses by credit cared issuers drew a record 56,000 comments.  The marketing strategies of card issuers target the credit-injured, and the financially inexperienced.  In the August 10, 2008 issue of Parade Magazine it was noted that 30% of credit card offering mailings in the first quarter of 2008 were aimed at people in "steep debt".  Moreover college students get addicted to credit cards early.  (with kickbacks to educational institutions)  In the September 11, 2008 issue of The Wall Street Journal it was disclosed a Nellie Mae (a student lender) survey found the average credit card debt of graduates amounted to $2,748.  For graduate and professional school students, the average was over $5,000.  All in all it's fair to say the marketing campaigns of credit card companies are very successful.  For them.  But, overall?  We're a credit card addicted society.  According to The Wall Street Journal issue of September 10, 2008 credit card debt in America is at a trillion dollars.  ($969.9 billion, as of that date)
According to the Consumer Federation of America (5/3/08) that works out to an average of about $17,000 per household of credit card debt.  That's summarizes the situation with the credit card industry.  
Some of the latest news developments in connection with the credit card industry is talk about legislative changes that could have the effect of stopping some of their abuses of consumers, but as of now, it's too early to tell if anything of a signficant nature will actually get passsed by Congress to protect consumers.  Let's hope it's more than just "talk".  Let's hope meaningful legislation actually gets enacted.  In actual effect.

 CONTINUED ON NEXT PAGE -- CLICK CREDIT CARDS CONTINUED