Tuesday, January 13, 2009

Credit Cards... More problems?

As we see the financial meltdown evolving and its effects particularly on the financial system where banks continue struggling to operate, it is becoming clearer that people's perception is becoming negative because of examples of financial scams, as to the credit cards industry, such perspective is basically the same: the public is increasingly concerned about the impact of the crisis on a retirement as well as (among other things) credit cards where latest events indicate that according to The Boston Globe that another seemingly non explained credit card charge has appeared on credit card statements.

Let's consider an interesting analysis for Bankrate about the current situation involving credit cards in the United States:

American views about credit cards: negative

Americans have mixed feelings about credit cards. On the one hand, they seem to put card issuers in the same category as bullies: 82 percent say card issuers are not entitled to change the terms of accounts at any time for any reason. In fact, card firms certainly do have those rights and exercise them regularly.

And a whopping 92 percent of Americans believe the industry should be more closely regulated. In fact, that wish will come true, as the Federal Reserve Board, Office of Thrift Supervision and National Credit Union Administration recently adopted new rules designed to safeguard consumers from credit card abuses. Those rules won't go into effect, though, until July 2010.

But if their credit lines were to dry up today, 40 percent of Americans claim they wouldn't care a whit.

Bankrate commissioned GfK Roper to learn about the attitudes Americans have about credit cards. The results indicate complex emotions are involved, dominated by a strange mixture of attraction and aversion, with emphasis on the latter.

Please don't take my credit cards
Some people would be upset if their sources for revolving credit dried up. Fifty-nine percent of those surveyed expressed some emotion at the prospect of losing their credit, ranging from mild annoyance (34 percent) to stoic acceptance of the ensuing pain (20 percent) to outright devastation (5 percent).

How would you feel if your credit lines dried up?

Considering that the desiccation of credit is a big issue in this country at the moment -- combined with rising costs for staples, stagnant wages, lost jobs, plus the shriveling of our collective net worth -- one would imagine that the prospect of losing credit options would engender a little more anxiety. But that sentiment wasn't apparent in this poll.

"I thought it was interesting that such a high percentage wouldn't really care if their credit dried up. In this economy it surprises me somewhat," says Scott Peterson, managing director of Market Platform Dynamics, a management consulting firm.

"The fact that so few people said they would be devastated because they depend on it so much does not sync up with the realities in the marketplace," he says. "People do, I think, depend a lot more on credit cards."

Gerri Detweiler, credit adviser for Credit.com, agrees.

"Realistically, when it comes to trying to juggle the bills, it would be pretty tough not to have any credit to fall back on," she says.

Credit card issuers can do what they want
The nation's disenchantment with credit cards could be related to the slightly masochistic relationship some people have with credit issuers.

Certain industry practices have left credit cardholders feeling bruised and mistrustful. The general sentiment is that credit card companies should not be entitled to change the terms of your account at any time for any reason.

Yet 18 percent of Americans feel the opposite, saying that credit card companies are entitled to change the terms of their accounts at any time, which factually is the case and will be for another year and a half.

Not-so-sanguine sentiments

People who strongly or somewhat agree with these statements:
Credit card companies should be more closely regulated 92%
Credit cards make it too easy for American consumers to spend more than they earn 90%
Taxpayers should bail out consumers who find themselves in a big financial bind due to credit card debt 21%
Credit card companies are entitled to change the terms of your account at any time for any reason 18%

"They can do it, and everybody should know it by now," says Steve Bucci, Bankrate.com's Debt Adviser and president of Money Management International Financial Education Foundation.

"The surprise to me here is that anyone would strongly agree that credit card companies should be able to change your terms for any reason," says Peterson.

But he's not surprised by the high numbers of people who believe credit card companies should be more closely regulated.

"Quite frankly, the credit card companies probably pushed the way that they change interest rates and charge penalties further than people feel is fair," Peterson says.

Does credit make it too easy to spend?
Ninety percent of those surveyed say that credit cards make it too easy for American consumers to spend more than they earn.

Interestingly, one age category took issue with that statement more than other generations: 33 percent of 18- to 24-year-olds somewhat or strongly disagreed that credit cards make it too easy for consumers to spend.

Young folks' sense of entitlement

Credit cards make it too easy for American consumers to spend more than they earn.
Total 18-24
year olds
Strongly or somewhat agree 90% 67%
Strongly or somewhat disagree 10% 33%

One might think that they were strongly in favor of personal responsibility, but a later question belies that assumption. Bankrate's Debt Adviser Bucci suggests that a sense of entitlement is actually what drove their answers.

"The young folks are looking at this in a very shortsighted way. They see it as a way to get what they want and get it now. So that is why the much larger percentage disagree it's not too easy -- it's something they deserve. This just makes it happen," he says.

The consumer bailout
The next question reveals the younger generation's bias more startlingly. Asked whether taxpayers should bail out consumers who find themselves in a big financial bind due to credit card debt, 18- to 24-year-olds answered affirmatively in large numbers.

Thirty-five percent of the younger generation agreed with a bailout solution. Overall, for all age groups, 79 percent disagreed.

Most disagree on a bailout solution ...

Taxpayers should bail out consumers who find themselves in a big financial bind due to credit card debt Total 18-24
year olds
Strongly or somewhat agree 21% 35%
Strongly or somewhat disagree 79% 65%

"I'm incredibly disturbed that such a high percentage of the 18- to 24-year-olds agree," says Peterson. "The most significant thing about this is that 18- to 24-year-olds do not take personal responsibility for their actions," he says.

Bill Hardekopf, CEO of Lowcards.com, concurs with that assessment.

"Maybe we've spoiled them too much. Older people feel, 'You've made your bed, you have to sleep in it.' And kids may feel like, 'Hey Mom and Dad, you've always bailed me out. How come someone else won't?'" he says.

Bucci casts a different spin altogether and postulates that the varied responses could have more to do to with time spent in the working world.

"When you get into the workplace and start earning money you say, 'Well, I pay my bills. Why can't other people pay their bills?'" Bucci says.

Do you even have a credit card?
While they have plenty of against-the-grain opinions, most 18- to 24-year-olds don't have credit cards. Fifty-four percent say they don't currently have any plastic. Credit card use goes up with age, though. Only 16 percent of people 65 and older say they don't have a credit card.

Most Americans rely on plastic

Do you have any credit cards? Total 18-24 25-34 35-49 50-64 65+
Yes 72% 46% 67% 76% 75% 84%
No 28% 54% 31% 24% 25% 16%

"The older you are, the more likely you are to have a credit card," says Hardekopf.

Credit card use also increases with income; 93 percent of those who earn more than $75,000 a year report having a credit card, compared to 46 percent of those earning less than $20,000 a year.

"I was a little surprised by the income breakout. People who make less than $30,000 a year, only half of them have a credit card. I guess people who have a lower income might not have qualified for a credit card," says Hardekopf.

Changes to lines of credit
Credit card companies recently have attempted to reduce their risk by cutting credit lines.

Did your credit line change?

That can be a problem for consumers. It affects their credit score directly and also limits their purchasing power. Many people use credit cards to cover emergencies or as a secondary -- or primary -- emergency fund.

Yet in Bankrate's survey, only 6 percent of Americans have experienced a credit line reduction in the past year and 44 percent report that their credit line has remained unchanged. Forty-one percent actually say their credit limit was increased.

The numbers struck some experts who reviewed the poll as somewhat dubious based on their experiences.

"Six percent who have had their credit limit decreased, that doesn't jibe with what I'm hearing out there," says Bucci.

"We're getting a lot of complaints about credit lines being decreased, says Detweiler. "I guess we hear from the people who are having problems and not the ones that are not having problems."

Bucci believes that the 44 percent who said that their credit lines have not changed may be simply unaware that their limits have been cut.

"I would bet that these people don't know if their credit line was changed. People who didn't pay attention to their mortgages don't pay attention to their credit card terms either. I think that is why the unchanged number is so high," he says.

Hardekopf also believes that some of those in the unchanged camp were blithely oblivious.

Will you change your usage?

"My concern is that consumers just aren't aware that their credit line could have been cut. It's very important to check that," he says.

"The issuer does not take out a billboard in front of your house that says your credit line has been decreased from $10,000 to $6,000. It can come as a stuffer in your monthly bill, it can come as a separate mailer that may look like a piece of junk mail. As a consumer, it is your responsibility to know," Hardekopf says.

Those with higher incomes were more likely to get a credit increase, proving that when you have money, financial institutions can't wait to give you more. More than half (51 percent) of people making $75,000 per year or more had their credit limits increased this year.

"Nevertheless, when you see big issuers like Citibank, Bank of America and Chase taking action on credit lines, it's surprising to have this many people saying their credit lines were increased," says Detweiler.

Changes in usage
In the context of these hard recessionary times, how will Americans change their credit card habits in the future?

Bankrate's survey says 50 percent of Americans with credit cards do not plan to change their habits, but 32 percent say they will probably charge less, and 15 percent plan to abstain from credit cards entirely in 2009.

"I would have thought that the number of people saying they would charge less would be higher," says Peterson.

"But only about 40 percent of credit card accounts are revolved," he says, referring to people with outstanding balances each month. "The people that will probably charge less are those who do carry a balance," he says.

Why we charge
Why do we use credit cards? The answer depends somewhat on age group. Not surprisingly, 28 percent of consumers between 18 and 24 use credit cards to get by when they run out of cash.

What's the single biggest reason you use credit cards?

Across all age and income categories, 40 percent of Americans use credit cards because they're convenient. A small number use cards to rack up rewards, points and cash -- only 10 percent, which, according to Hardekopf, could change if consumers pay their bill in full every month.

"Credit cards are a wonderful financial tool. You can have the credit cards work for you, you can get cash back or get money for any passion or hobby you have: NFL, college team," he says.

Despite the usefulness of cards, Americans aren't enamored with plastic. It's like a marriage of convenience -- a relationship not based on trust. On the one hand, we use credit cards because they are expedient, yet we also feel that maybe they're too easy.

"It could be that Americans are concerned that credit is too widely available -- for other people," says Detweiler.

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Financial Culture / Cultura Financiera
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