originally appeared in The Wall Street Journal:
The cards that many Americans swiped to bring Christmas cheer this year known as deferred-interest credit cards, could deliver a lump of coal in 2013.
Personal-finance experts are warning consumers that a failure to pay off just a few dollars of their purchases on some credit cards from Apple Inc., Wal-Mart Stores Inc. and other big-name retailers can leave them with major finance charges later on.
The deferred-interest credit cards offered by those stores allow customers to pay for purchases interest-free for a set period. But borrowers who fail to pay off their initial purchases in full by the end of the promotional period must pay interest on the original amount that they charged—even the parts they have already paid off.
The backdated interest is often at rates as high as 25%.
Deferred-interest credit cards are one of the worst abuses by credit-card lenders, according to a staff attorney for the National Consumer Law Center, which in the past has pushed for a ban on deferred-interest cards.
Under the programs, a borrower who bought a $1,000 computer with one of these cards who has even just a few dollars remaining at the end of their deferred-interest period could conceivably wind up having to pay hundreds of dollars in interest charges.
Such cards, which have been around for years, are pitched by retailers including Amazon.com Inc., Office Depot Inc. and Home Depot Inc. The programs give merchants a way to entice consumers to spend, and give consumers the ability to make a big-ticket purchase without having to pay anything up front.
The National Consumer Law Center, which has long called for a ban on deferred-interest cards, plans to urge the U.S. Consumer Financial Protection Bureau, the agency launched in 2011 to monitor credit cards, mortgages and other financial products for abusive practices, to propose rules that would restrict lenders from offering the programs. The group argues that legislation passed in 2009 known as the CARD Act intended to curb deferred-interest programs but regulators failed to do so when issuing the specific rules for carrying out the law's provisions.
A spokeswoman for CFPB declined to comment on whether such cards are on its agenda but said the agency has received consumer complaints about deferred-interest programs. She declined to say how many complaints it has received.
Lenders who offer the programs on behalf of retailers say they can benefit consumers by giving them a window of time to pay off purchases without finance charges.
General Electric Co., whose finance arm is one of the biggest issuers of store credit cards, says it takes steps to ensure transparency on the terms and conditions of its programs, which include cards marketed to customers of Amazon, Wal-Mart and others.
All billing statements for deferred-interest programs include details about the promotion, including the minimum principal payments borrowers are required to make each month, the expiration date and amount of interest that has accrued, a GE spokeswoman said. She added that two months prior to the expiration of the promotional period, consumers are alerted that the clock is ticking.
GE said the vast majority of borrowers pay off their balances before the promotional periods end.
The Amazon card, which offers six, 12 or 24 months of deferred-interest financing depending on the dollar amount spent or items a customer purchases when opening the card. Customers who don't pay off their balances in full incur a 25.99% standard APR on the full amount charged from the purchase date, according to the fine print included on the Web page advertising the card.
CardHub.com, a credit-card comparison website, cited the Amazon card along with several others for lacking transparent policies on how interest is charged in a study released earlier this year.
Amazon didn't respond to requests for comment.
"Deferred interest in my opinion should be outlawed," according to the chief executive officer of Evolution Finance, which owns CardHub.com. He says deferred-interest cards hide the true cost of financing.
CardHub.com's study found that more than 80% of major retailers offer customers financing options, and of those more than 60% offer a deferred-interest plan.
Apple, another retailer on CardHub.com.'s list of worst offenders, offers a deferred-financing card through Barclaycard, the credit-card division of Barclays PLC. The bank currently offers no-interest financing for six, 12 or 18 months depending on the size of a customer's purchase. The standard rate that applies after the promotional period ends is 22.99% on the amount they charged when they first opened the account as well as new purchases made going forward, according to online terms and conditions for the card.
Spokeswomen for Apple and Barclaycard declined to discuss the programs.
A research scientist in Cedar Rapids, Iowa, said he has a deferred-interest credit card through Apple, Best Buy Co. and Lowe's Cos. I've never had any issues, I only get these if I can pay it off, according to the scientist.
He uses his Lowe's card to buy supplies for home-improvement projects and the Best Buy card, which he is currently paying off, to buy a new TV.
Overall, I think it's a great deal for an astute consumer who knows what they're doing and can pay them off, he said. However, he said the contracts aren't well written and can be confusing.
A leading consumer-credit expert agrees deferred-interest plans can benefit consumers who know they have the money to pay off their balances before the promotional period ends. However, she recommends consumers consider opening a general-purpose credit card direct through a bank.
Many credit-card issuers today offer promotional 0% financing for as long as 18 months when first opening an account. The difference is such cards don't retroactively charge interest to past balances a consumer has paid off. Rather, the interest rate is applied only to any balance left at that time and new purchases made going forward.
It's a little more of a safety net just in case you can't pay the entire thing off, according to the consumer-credit expert. It still requires planning and forethought. But if there's a purchase you need to make and it's going to take a year to pay it off that could be a good strategy.
Showing posts with label Consumer Credit. Show all posts
Showing posts with label Consumer Credit. Show all posts
Friday, December 28, 2012
Tuesday, October 5, 2010
Visa, MasterCard Changes will benefit Merchants, and maybe Consumers
LA Times
The credit card issuers, in an accord with the Justice Department, will let shopkeepers disclose processing fees to customers and offer discounts to those using cards that carry lower fees.
Consumers may be in for a major break on credit card purchases under an new agreement reached Monday between the U.S. Department of Justice and the nation's two biggest card companies.
At issue are the merchant fees that businesses pay credit card companies such as Visa and MasterCard to process the charges. Until now, shopkeepers had been forbidden to tell consumers about the fees — or offer discounts to customers using cards with lower merchant fees.
But on Monday, Visa and MasterCard agreed to let merchants charge less to customers who use different kinds of credit cards that charge smaller fees to shopkeepers.
"We want to put more money in consumers' pockets, and by eliminating credit card companies' anticompetitive rules, we will accomplish exactly that," Atty. Gen. Eric Holder said at an afternoon news conference. "The companies put merchants and their customers in a no-win situation."
The agreement came as part of a lawsuit filed Monday against the major credit card companies by the federal government and several state attorneys general for anti-competitive practices. MasterCard and Visa settled, but the third card company, American Express, refused to sign on to the agreement.
Retailers have complained for years that credit card companies gouge them by charging as much as 5% of the value of each purchase every time a card is used.
Now, businesses will be allowed to charge less if customers use cards that have lower fees — a move that the Justice Department's lawyers say will lead to more competition between card companies and millions of dollars in savings.
Many merchants, long frustrated by the fees, were pleased. Mitchell Goldstone, who owns Irvine photography shop and online business Scanmyphoto.com, welcomed the settlement, saying it would free up merchants to nudge consumers toward using less expensive cards.
"I was very excited today and encouraged by the Department of Justice moving forward," said Goldstone, who is also a plaintiff in a private lawsuit against the credit card companies. After employees and rent, Goldstone said, the fees are his biggest expense.
Merchants pay about $35 billion a year in fees to credit card companies, according to the Justice Department. It's money that restaurant owners, retailers and others say they can ill afford in the difficult economy.
Consumers know well that credit card companies charge interest, but many are not aware of the merchant fees.
The cost of a swipe varies widely, depending on whether the customer is using a card that offers rewards. It might cost a merchant 2% of the purchase price if a customer uses a no-frills card. But if the purchase is made with a card that offers airline miles, for example, the merchant might pay as much as 5%.
MasterCard and Visa praised the settlement in news releases. Both companies said that they already allow some of the measures called for in the agreement.
Josh Floum, general counsel for Visa Inc., said that allowing merchants to offer discounts based on the cost of fees is "a reasonable accommodation."
The company already allows businesses to offer discounts to customers who pay cash or use debit cards in the type of transaction in which they use their PIN numbers to take cash right out of their accounts.
The agreement is expected to take effect as soon as it gains court approval, perhaps in a few months. The lawsuit and settlement were filed in federal court in New York.
But American Express said the agreement was unfair and vowed to fight it in court.
"Our attitude is that this is bad law, bad economic policy," American Express spokesman Michael O'Neill said. "We don't think there is anything in it for consumers."
Far from offering discounts to consumers, O'Neill said, merchants are just as likely to keep the savings on cheaper credit card fees for themselves.
"You never hear the retail associations say, 'If we save money on this, we're going to pass it on to consumers,' " he said. "They're not willing to make that commitment."
Moreover, he said, American Express is considerably smaller than Visa and MasterCard, and should not be included as an example of a company large enough to impede competition.
Because American Express did not settle, the lawsuit will continue against the credit card company. The Justice Department says American Express accounts for 24% of all credit card spending in the U.S. MasterCard accounts for 27% and Visa, 43%.
Scott Hauge, president of advocacy group Small Business California, said credit card fees are a huge issue for small-business owners, many of whom must accept credit cards in order to stay in business. He urged American Express to drop its resistance to the agreement.
"I've always thought it was outrageous that the credit cards could dictate to the merchants with those higher costs," Hauge said. "American Express should be ashamed of themselves."
Consumers may be in for a major break on credit card purchases under an new agreement reached Monday between the U.S. Department of Justice and the nation's two biggest card companies.
At issue are the merchant fees that businesses pay credit card companies such as Visa and MasterCard to process the charges. Until now, shopkeepers had been forbidden to tell consumers about the fees — or offer discounts to customers using cards with lower merchant fees.
But on Monday, Visa and MasterCard agreed to let merchants charge less to customers who use different kinds of credit cards that charge smaller fees to shopkeepers.
"We want to put more money in consumers' pockets, and by eliminating credit card companies' anticompetitive rules, we will accomplish exactly that," Atty. Gen. Eric Holder said at an afternoon news conference. "The companies put merchants and their customers in a no-win situation."
The agreement came as part of a lawsuit filed Monday against the major credit card companies by the federal government and several state attorneys general for anti-competitive practices. MasterCard and Visa settled, but the third card company, American Express, refused to sign on to the agreement.
Retailers have complained for years that credit card companies gouge them by charging as much as 5% of the value of each purchase every time a card is used.
Now, businesses will be allowed to charge less if customers use cards that have lower fees — a move that the Justice Department's lawyers say will lead to more competition between card companies and millions of dollars in savings.
Many merchants, long frustrated by the fees, were pleased. Mitchell Goldstone, who owns Irvine photography shop and online business Scanmyphoto.com, welcomed the settlement, saying it would free up merchants to nudge consumers toward using less expensive cards.
"I was very excited today and encouraged by the Department of Justice moving forward," said Goldstone, who is also a plaintiff in a private lawsuit against the credit card companies. After employees and rent, Goldstone said, the fees are his biggest expense.
Merchants pay about $35 billion a year in fees to credit card companies, according to the Justice Department. It's money that restaurant owners, retailers and others say they can ill afford in the difficult economy.
Consumers know well that credit card companies charge interest, but many are not aware of the merchant fees.
The cost of a swipe varies widely, depending on whether the customer is using a card that offers rewards. It might cost a merchant 2% of the purchase price if a customer uses a no-frills card. But if the purchase is made with a card that offers airline miles, for example, the merchant might pay as much as 5%.
MasterCard and Visa praised the settlement in news releases. Both companies said that they already allow some of the measures called for in the agreement.
Josh Floum, general counsel for Visa Inc., said that allowing merchants to offer discounts based on the cost of fees is "a reasonable accommodation."
The company already allows businesses to offer discounts to customers who pay cash or use debit cards in the type of transaction in which they use their PIN numbers to take cash right out of their accounts.
The agreement is expected to take effect as soon as it gains court approval, perhaps in a few months. The lawsuit and settlement were filed in federal court in New York.
But American Express said the agreement was unfair and vowed to fight it in court.
"Our attitude is that this is bad law, bad economic policy," American Express spokesman Michael O'Neill said. "We don't think there is anything in it for consumers."
Far from offering discounts to consumers, O'Neill said, merchants are just as likely to keep the savings on cheaper credit card fees for themselves.
"You never hear the retail associations say, 'If we save money on this, we're going to pass it on to consumers,' " he said. "They're not willing to make that commitment."
Moreover, he said, American Express is considerably smaller than Visa and MasterCard, and should not be included as an example of a company large enough to impede competition.
Because American Express did not settle, the lawsuit will continue against the credit card company. The Justice Department says American Express accounts for 24% of all credit card spending in the U.S. MasterCard accounts for 27% and Visa, 43%.
Scott Hauge, president of advocacy group Small Business California, said credit card fees are a huge issue for small-business owners, many of whom must accept credit cards in order to stay in business. He urged American Express to drop its resistance to the agreement.
"I've always thought it was outrageous that the credit cards could dictate to the merchants with those higher costs," Hauge said. "American Express should be ashamed of themselves."
Friday, September 10, 2010
Credit Card Use Continues to Fall amid Economic Uncertainty
USA Today
Americans have sharply reduced their use of credit cards, and some analysts believe the trend will continue even after the economy has fully recovered.
The Federal Reserve Board reported this week that credit card borrowing fell at a 6.3% annual rate in July. The last time borrowing with credit cards increased was in August 2008.
Separately, a survey by Javelin Strategy & Research found that 56% of consumers used credit cards in 2009, down from 87% in 2007. Credit card usage could fall as low as 45% this year, the report said.
Reasons for the decline:
•Economic uncertainty. "People are being extraordinarily cautious because of concerns about a double-dip recession, and jobs not being returned," says Javelin President James Van Dyke. Consumers are opting for debit cards, because they're "one of those mechanisms that allows you to spend what you have," says Martha Doran, an accounting professor at San Diego State University.
•Less available credit. To reduce their risks, lenders have slashed consumers' credit limits, in some cases by as much as 90%, says Robert Livingstone, president of IdealCost.com, a consulting firm based in West Palm Beach, Fla. Under a provision in the credit card reform bill, most college students can't get a credit card without a co-signer.
•Incentives to use debit over credit. Some cash-strapped businesses, unwilling to pay transaction fees associated with credit cards, are giving consumers incentives to pay with a debit card or cash. Livingstone says he received a 7% discount on his wife's engagement ring by paying with a check rather than a credit card.
•A generational shift. Young consumers who are accustomed to having up-to-date information at their fingertips don't want to wait 30 days to see how a credit card purchase will affect their bank account, Van Dyke says. "Younger people have an inherent preference for real-time payment methods like debit," he says. They are also more inclined to be aware of credit risk management practices, having come of age during this economic downturn.
In 2009, payment volume for debit cards exceeded credit cards for the first time, a trend that's expected to continue in 2010, Javelin says.
Many banks are responding to the trend by adding rewards programs and other features to their debit cards, says Ken Lin, chief executive of Credit Karma, a website that provides free credit scores. Banks "realize the new cash cow is going to be on the debit side of the business," he says.
The American Bankers Association says it's too soon to determine whether the trend will continue after the economy has recovered. "Consumers are clearly reacting to an uncertain economy right now, so it is unclear what they will do in the future when it comes to choosing between debit and credit card use," says Kenneth Clayton, ABA senior vice president and general counsel.
The Federal Reserve Board reported this week that credit card borrowing fell at a 6.3% annual rate in July. The last time borrowing with credit cards increased was in August 2008.
Separately, a survey by Javelin Strategy & Research found that 56% of consumers used credit cards in 2009, down from 87% in 2007. Credit card usage could fall as low as 45% this year, the report said.
Reasons for the decline:
•Economic uncertainty. "People are being extraordinarily cautious because of concerns about a double-dip recession, and jobs not being returned," says Javelin President James Van Dyke. Consumers are opting for debit cards, because they're "one of those mechanisms that allows you to spend what you have," says Martha Doran, an accounting professor at San Diego State University.
•Less available credit. To reduce their risks, lenders have slashed consumers' credit limits, in some cases by as much as 90%, says Robert Livingstone, president of IdealCost.com, a consulting firm based in West Palm Beach, Fla. Under a provision in the credit card reform bill, most college students can't get a credit card without a co-signer.
•Incentives to use debit over credit. Some cash-strapped businesses, unwilling to pay transaction fees associated with credit cards, are giving consumers incentives to pay with a debit card or cash. Livingstone says he received a 7% discount on his wife's engagement ring by paying with a check rather than a credit card.
•A generational shift. Young consumers who are accustomed to having up-to-date information at their fingertips don't want to wait 30 days to see how a credit card purchase will affect their bank account, Van Dyke says. "Younger people have an inherent preference for real-time payment methods like debit," he says. They are also more inclined to be aware of credit risk management practices, having come of age during this economic downturn.
In 2009, payment volume for debit cards exceeded credit cards for the first time, a trend that's expected to continue in 2010, Javelin says.
Many banks are responding to the trend by adding rewards programs and other features to their debit cards, says Ken Lin, chief executive of Credit Karma, a website that provides free credit scores. Banks "realize the new cash cow is going to be on the debit side of the business," he says.
The American Bankers Association says it's too soon to determine whether the trend will continue after the economy has recovered. "Consumers are clearly reacting to an uncertain economy right now, so it is unclear what they will do in the future when it comes to choosing between debit and credit card use," says Kenneth Clayton, ABA senior vice president and general counsel.
Wednesday, September 8, 2010
Home Depot, Dell Drive Issuance to 7-Month High: Credit Markets
Bloomberg
Home Depot Inc., Dell Inc. and Burlington Northern Santa Fe LLC led the busiest day for U.S. corporate bond issuance in more than seven months as investment- grade borrowing costs hover near the lowest on record.
Companies sold $15.4 billion of the debt as yields fell to 3.83 percent yesterday and reached as low as 3.74 percent on Aug. 24, according to Bank of America Merrill Lynch’s U.S. Corporate Master index. In Europe, banks sold 8.5 billion euros ($10.8 billion) of bonds as lenders rushed to refinance almost a quarter-trillion euros of debt due this year.
U.S. investment-grade sales soared following signs last week the economy won’t slip back into recession. Private payrolls climbed more than economists expected and pending home sales rose from a record low, even as the unemployment rate rose to 9.6 percent last month. Treasury yields are rising from this year’s low on Aug. 25.
Yields on investment-grade debt are “probably as low as they’re going to get,” said Anthony Valeri, a market strategist in San Diego at LPL Financial Corp., which oversees about $277 billion of assets. “This level is an ideal trade-off of investors recognizing the fundamentals of a slow-growth economy are OK for corporate bonds.”
Home Depot, the largest-home improvement retailer, sold $1 billion of debt due in 10 and 30 years in its first offering since December 2006, according to data compiled by Bloomberg.
Dell, Burlington
Round Rock, Texas-based Dell, the third-biggest personal computer maker after Hewlett-Packard Co. and Acer Inc., raised $1.5 billion in a three-part sale.
Burlington Northern, the Fort Worth, Texas-based railroad company acquired this year by Warren Buffett’s Berkshire Hathaway Inc., sold $750 million of debt in a two-part offering, according to data compiled by Bloomberg.
Issuance may set a record for the week and month, said Tom Murphy, a money manager who helps oversee more than $25 billion of investment-grade credit at Columbia Management in Minneapolis.
“You’re seeing people definitely want to be invested in the market and definitely put money to work,” Murphy said. “The first week after Labor Day is considered the beginning of the push toward the end of the year.”
Elsewhere in credit markets, the extra yield investors demand to own company debt instead of similar-maturity government bonds was unchanged at 178 basis points, or 1.78 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Yields averaged 3.516 percent, down from 3.585 percent.
Bondholder Protection
The cost of protecting corporate bonds in the U.S. from default rose after falling for four straight days.
The Markit CDX North America Investment Grade Index Series 14 increased 3.3 basis points, the most since Aug. 11, to a mid- price of 107 basis points as of 5:37 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 4 basis points to a mid-price of 109.5, also the first increase after four trading days of declines.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 3 basis points to 125 basis points as of 8:40 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of investments.
Most-Traded Bonds
Bonds from Atlanta-based Home Depot were the most actively traded U.S. corporate securities by dealers, with 182 trades of $1 million or more. Ranked second was New York-based Goldman Sachs Group Inc., the most profitable firm in Wall Street history, with 79 trades.
Dearborn, Michigan-based Ford Motor Co., with 35 trades, was the most active in junk bonds, which are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
The Canada Pension Plan Investment Board and Onex Corp. plan to raise $1.6 billion of leveraged loans to help fund their buyout of Tomkins Plc. Potential lenders were invited to a meeting today in New York to discuss a six-year $1 billion term loan, according to two people familiar with the situation who declined to be identified because the matter is private.
The rest of the financing will be raised through a $300 million term loan and a $300 million revolving credit line, both maturing in five years, one of the people said.
Loan Prices
Leveraged loan prices fell, with the S&P/LSTA US Leveraged Loan 100 Index declining 0.14 cent to 89.43 cents on the dollar, the first drop after three days of increases. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, returned 4.3 percent this year.
In emerging markets, the extra yield investors demand to own company debt rather than government bonds climbed the most in a week. Spreads widened 13 basis points to 288 basis points, according to JPMorgan Chase & Co. index data.
U.S. corporate borrowers are taking advantage of yields to raise “very inexpensive” money, said Zane Brown, fixed-income strategist at Lord Abbett & Co. in Jersey City, New Jersey.
“It reflects investors’ preference for risk and companies that want to take advantage of low absolute levels on yields,” said Brown, who helps oversee $53 billion of debt.
The yield on the benchmark 10-year Treasury note was at 2.60 percent at 10:17 a.m. in Tokyo today, 18 basis points higher than this year’s low, according to data compiled by Bloomberg.
Bond Issuance
U.S. investment-grade issuance yesterday was the most since $17.6 billion on Feb. 4, Bloomberg data show. There was one sale of high-yield debt as Richardson, Texas-based MetroPCS Communications Inc. issued $1 billion of notes due in 2018. It was the third-busiest day for corporate bond issuance this year with $16.4 billion of sales.
Companies sold $10.1 billion of dollar-denominated debt on the day following the Labor Day holiday last year, and $29.7 billion of notes in that week, Bloomberg data show.
Pending sales of existing houses unexpectedly climbed in July from a record low, figures from the National Association of Realtors showed Sept. 2. The index of purchase contracts rose 5.2 percent after a revised 2.8 percent drop the prior month.
Companies in the U.S. added more jobs than economists forecast in August, Labor Department figures in Washington showed Sept. 3. Private payrolls climbed 67,000 after a revised 107,000 increase in July.
‘Stay Very Busy’
“It’s going to stay very busy as long as the markets are this receptive to new issuance,” said Jim Kochan, the chief fixed-income strategist at Wells Fargo Funds Management, which oversees $175.6 billion of debt assets. “It’s been extremely busy on a trend basis all year, as yields kept coming down.”
Commerzbank AG and UniCredit SpA led the most bank bond sales in Europe in five weeks, Bloomberg data show. The cost of insuring bank debt against default rose by the most in a month on speculation the Basel Committee on Banking Supervision will propose higher capital requirements.
France Telecom SA sold $1.39 billion of bonds in euros and dollars. The nation’s biggest phone company issued $750 million of five-year notes that were priced to yield 82 basis points more than similar-maturity Treasuries and 500 million euros of 12-year bonds priced at 75 basis points more than swaps, Bloomberg data show.
Companies sold $15.4 billion of the debt as yields fell to 3.83 percent yesterday and reached as low as 3.74 percent on Aug. 24, according to Bank of America Merrill Lynch’s U.S. Corporate Master index. In Europe, banks sold 8.5 billion euros ($10.8 billion) of bonds as lenders rushed to refinance almost a quarter-trillion euros of debt due this year.
U.S. investment-grade sales soared following signs last week the economy won’t slip back into recession. Private payrolls climbed more than economists expected and pending home sales rose from a record low, even as the unemployment rate rose to 9.6 percent last month. Treasury yields are rising from this year’s low on Aug. 25.
Yields on investment-grade debt are “probably as low as they’re going to get,” said Anthony Valeri, a market strategist in San Diego at LPL Financial Corp., which oversees about $277 billion of assets. “This level is an ideal trade-off of investors recognizing the fundamentals of a slow-growth economy are OK for corporate bonds.”
Home Depot, the largest-home improvement retailer, sold $1 billion of debt due in 10 and 30 years in its first offering since December 2006, according to data compiled by Bloomberg.
Dell, Burlington
Round Rock, Texas-based Dell, the third-biggest personal computer maker after Hewlett-Packard Co. and Acer Inc., raised $1.5 billion in a three-part sale.
Burlington Northern, the Fort Worth, Texas-based railroad company acquired this year by Warren Buffett’s Berkshire Hathaway Inc., sold $750 million of debt in a two-part offering, according to data compiled by Bloomberg.
Issuance may set a record for the week and month, said Tom Murphy, a money manager who helps oversee more than $25 billion of investment-grade credit at Columbia Management in Minneapolis.
“You’re seeing people definitely want to be invested in the market and definitely put money to work,” Murphy said. “The first week after Labor Day is considered the beginning of the push toward the end of the year.”
Elsewhere in credit markets, the extra yield investors demand to own company debt instead of similar-maturity government bonds was unchanged at 178 basis points, or 1.78 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Yields averaged 3.516 percent, down from 3.585 percent.
Bondholder Protection
The cost of protecting corporate bonds in the U.S. from default rose after falling for four straight days.
The Markit CDX North America Investment Grade Index Series 14 increased 3.3 basis points, the most since Aug. 11, to a mid- price of 107 basis points as of 5:37 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 4 basis points to a mid-price of 109.5, also the first increase after four trading days of declines.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 3 basis points to 125 basis points as of 8:40 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of investments.
Most-Traded Bonds
Bonds from Atlanta-based Home Depot were the most actively traded U.S. corporate securities by dealers, with 182 trades of $1 million or more. Ranked second was New York-based Goldman Sachs Group Inc., the most profitable firm in Wall Street history, with 79 trades.
Dearborn, Michigan-based Ford Motor Co., with 35 trades, was the most active in junk bonds, which are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
The Canada Pension Plan Investment Board and Onex Corp. plan to raise $1.6 billion of leveraged loans to help fund their buyout of Tomkins Plc. Potential lenders were invited to a meeting today in New York to discuss a six-year $1 billion term loan, according to two people familiar with the situation who declined to be identified because the matter is private.
The rest of the financing will be raised through a $300 million term loan and a $300 million revolving credit line, both maturing in five years, one of the people said.
Loan Prices
Leveraged loan prices fell, with the S&P/LSTA US Leveraged Loan 100 Index declining 0.14 cent to 89.43 cents on the dollar, the first drop after three days of increases. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, returned 4.3 percent this year.
In emerging markets, the extra yield investors demand to own company debt rather than government bonds climbed the most in a week. Spreads widened 13 basis points to 288 basis points, according to JPMorgan Chase & Co. index data.
U.S. corporate borrowers are taking advantage of yields to raise “very inexpensive” money, said Zane Brown, fixed-income strategist at Lord Abbett & Co. in Jersey City, New Jersey.
“It reflects investors’ preference for risk and companies that want to take advantage of low absolute levels on yields,” said Brown, who helps oversee $53 billion of debt.
The yield on the benchmark 10-year Treasury note was at 2.60 percent at 10:17 a.m. in Tokyo today, 18 basis points higher than this year’s low, according to data compiled by Bloomberg.
Bond Issuance
U.S. investment-grade issuance yesterday was the most since $17.6 billion on Feb. 4, Bloomberg data show. There was one sale of high-yield debt as Richardson, Texas-based MetroPCS Communications Inc. issued $1 billion of notes due in 2018. It was the third-busiest day for corporate bond issuance this year with $16.4 billion of sales.
Companies sold $10.1 billion of dollar-denominated debt on the day following the Labor Day holiday last year, and $29.7 billion of notes in that week, Bloomberg data show.
Pending sales of existing houses unexpectedly climbed in July from a record low, figures from the National Association of Realtors showed Sept. 2. The index of purchase contracts rose 5.2 percent after a revised 2.8 percent drop the prior month.
Companies in the U.S. added more jobs than economists forecast in August, Labor Department figures in Washington showed Sept. 3. Private payrolls climbed 67,000 after a revised 107,000 increase in July.
‘Stay Very Busy’
“It’s going to stay very busy as long as the markets are this receptive to new issuance,” said Jim Kochan, the chief fixed-income strategist at Wells Fargo Funds Management, which oversees $175.6 billion of debt assets. “It’s been extremely busy on a trend basis all year, as yields kept coming down.”
Commerzbank AG and UniCredit SpA led the most bank bond sales in Europe in five weeks, Bloomberg data show. The cost of insuring bank debt against default rose by the most in a month on speculation the Basel Committee on Banking Supervision will propose higher capital requirements.
France Telecom SA sold $1.39 billion of bonds in euros and dollars. The nation’s biggest phone company issued $750 million of five-year notes that were priced to yield 82 basis points more than similar-maturity Treasuries and 500 million euros of 12-year bonds priced at 75 basis points more than swaps, Bloomberg data show.
Cash or Credit? More Consumers Turning to Debit Cards
CNBC
Wary of the economy, shoppers are increasingly shying away from credit cards, opting to use cash, checks or debit cards rather than to "pay later" on a credit card.
In fact, use of debit cards surpassed that of credit cards last year, according to a new study released by Javelin Strategy & Research.
The study found that in 2009, only 56 percent of consumers surveyed during a particular month had used a credit card, down sharply from 87 percent in in 2007.
What's more, if this trend persists, credit card usage in 2010 could fall to 45 percent, the market research firm said.
"People are extremely wary," said James Van Dyke, president and founder of Javelin. "They can't tell which way the economic winds are blowing. They are just incredibly uncertain."
Van Dyke sees this as "a sea change" in consumer behavior.
Javelin suspects debit card usage will continue to grow in the years to come. Based on Javelin's research, the total purchase value for debit cards rose between 3 percent and 7 percent depending on the card brand from 2007 to 2009.
Consumers in their twenties helping to drive the trend as they are more likely to use a debit card than other forms of payment, Van Dyke said. One reason is that some consider it a better way to budget their money.
"Credit cards don't make sense for many young people," Van Dyke said.
Then, there are lower-income consumers, some of whom are being paid their salaries on reloadable prepaid cards rather than by getting a paycheck deposited into an account, Van Dyke said.
One danger here is that reloadable prepaid cards is a payment category that remains largely unregulated under the new credit card laws.
That's more bad news for the nation's biggest credit card issuers. These companies are already seeing a less profitable future as consumers spend less and pay off their credit card bills. And, raising interest rates and imposing new types of fees isn't likely to fill the gap.
Instead, credit card issuers will need to come up with new types of products to encourage card-spending.
MasterCard, for example, announced last month that it plans to offer its Citi cardholders a new card that allows users to set spending controls and receive real-time spending alerts aimed at helping them avoid overspending. The program, dubbed inControl, also will allow customers to determine where, when, how and for what types of purchase their cards may be used.
This type of product goes right to the heart of why some cardholders are refraining from using their credit cards—they want to be in control of their spending.
Roughly 16,000 companies in the U.S. issue credit cards, but the six largest lenders are Citigroup, JP Morgan Chase, Bank of America, Capital One Financial, American Express and Discover Financial Services.
Credit-card loan balances at these six lenders have dropped 20 percent since their peak in the second quarter of 2008, to $544 billion, according to Credit Suisse.
The decline reflects not only moves by consumers to pare back debt, but also bank efforts to weed out risky borrowers.
A month look at consumer credit will be issued later Wednesday by the Federal Reserve.
In fact, use of debit cards surpassed that of credit cards last year, according to a new study released by Javelin Strategy & Research.
The study found that in 2009, only 56 percent of consumers surveyed during a particular month had used a credit card, down sharply from 87 percent in in 2007.
What's more, if this trend persists, credit card usage in 2010 could fall to 45 percent, the market research firm said.
"People are extremely wary," said James Van Dyke, president and founder of Javelin. "They can't tell which way the economic winds are blowing. They are just incredibly uncertain."
Van Dyke sees this as "a sea change" in consumer behavior.
Javelin suspects debit card usage will continue to grow in the years to come. Based on Javelin's research, the total purchase value for debit cards rose between 3 percent and 7 percent depending on the card brand from 2007 to 2009.
Consumers in their twenties helping to drive the trend as they are more likely to use a debit card than other forms of payment, Van Dyke said. One reason is that some consider it a better way to budget their money.
"Credit cards don't make sense for many young people," Van Dyke said.
Then, there are lower-income consumers, some of whom are being paid their salaries on reloadable prepaid cards rather than by getting a paycheck deposited into an account, Van Dyke said.
One danger here is that reloadable prepaid cards is a payment category that remains largely unregulated under the new credit card laws.
That's more bad news for the nation's biggest credit card issuers. These companies are already seeing a less profitable future as consumers spend less and pay off their credit card bills. And, raising interest rates and imposing new types of fees isn't likely to fill the gap.
Instead, credit card issuers will need to come up with new types of products to encourage card-spending.
MasterCard, for example, announced last month that it plans to offer its Citi cardholders a new card that allows users to set spending controls and receive real-time spending alerts aimed at helping them avoid overspending. The program, dubbed inControl, also will allow customers to determine where, when, how and for what types of purchase their cards may be used.
This type of product goes right to the heart of why some cardholders are refraining from using their credit cards—they want to be in control of their spending.
Roughly 16,000 companies in the U.S. issue credit cards, but the six largest lenders are Citigroup, JP Morgan Chase, Bank of America, Capital One Financial, American Express and Discover Financial Services.
Credit-card loan balances at these six lenders have dropped 20 percent since their peak in the second quarter of 2008, to $544 billion, according to Credit Suisse.
The decline reflects not only moves by consumers to pare back debt, but also bank efforts to weed out risky borrowers.
A month look at consumer credit will be issued later Wednesday by the Federal Reserve.
Saturday, February 20, 2010
Credit-Card Fees: the New Traps
The Wall Street Journal
A new federal credit-card law that takes effect Monday could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers are already deploying new tactics that could prove costly for even the most cautious cardholder.
The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.
Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.
"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.
Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.
The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.
The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent.
All this represents a huge change from three years ago when banks were tripping over themselves to issue credit cards to just about anybody, and consumers were on a spending spree. Banks have pruned many of their more profligate cardholders, and are using higher transaction fees to raise more money from cardholders who pay their bills each month rather than run up huge balances.
The biggest new tactic may be one of the oldest: raising rates. As long as credit-card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge whatever they want. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.
U.S. banks on average increased the interest rate on their credit cards by about two percentage points between December 2008 and July 2009, according to Pew Charitable Trusts, a nonprofit group. Some consumers say that their accounts have been hit with sudden interest-rate increases even if they haven't been late on a payment.
Bank of America says it hasn't raised interest on credit-card accounts since the law was passed last spring, except in the case where a cardholder has repeatedly paid late.
In a statement, Citigroup said: "We understand that customers don't like price increases, especially in difficult economic times. 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 re-pricing for that risk."
Card companies also plan to collect more interest by switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now. But they give the companies more flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.
Cardholders should expect to see more fees for extra services, such as requesting a year-end itemization of all your purchases, paper statements or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.
Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees—the cost customers pay for purchases made in foreign currencies—but they are expanding the definition of what qualifies as a foreign transaction.
In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.
American Express Co., which is known for its lucrative rewards programs, recently added new fees to its co-branded Hilton Hotels, Starwood Hotels and Delta Air Lines cards. Cardholders who pay late will lose their rewards points. They can reinstate them to their accounts if they pay a $29 fee. An American Express spokeswoman said the fees are consistent with policies on its other cards and is aimed at encouraging cardholders to pay their bills on time.
For new customers, the days of 0% teaser rates and no-annual-fee boasts are dwindling. After cutting back substantially on mail offers, card companies are once again trying to woo new cardholders. But this time around, the avalanche of pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.
Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have an annual fee, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs—but also fees. Plain-vanilla cards that don't have any annual fees (or rewards programs) represented just 11% of mail offers in the fourth quarter, according to Mintel Comperemedia, which tracks credit-card mail offers. J.P. Morgan's Chase card unit and American Express are among those that have recently introduced new cards with annual fees.
Consumers can fight back against some of the industry's tactics. You only need one or two credit cards that are widely accepted. So it can make sense consolidating debt on the card that has the lowest interest rate, assuming it makes sense after taking into account the balance-transfer fee.
True, shedding cards can hurt your credit score. But John Ulzheimer of Credit.com has a rule of thumb to preserve it while closing accounts: If you are able to keep your overall "credit utilization" on your cards—the amount of credit used as a percentage of your overall available credit—below 10% then closing accounts to avoid paying extra fees could make sense, he said.
So use the card or lose it because there may be a price to pay for inactivity. Fifth Third Bancorp is charging customers $19 if they don't use their credit card in a year.
And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.
Bob Depweg, who owns a security-consulting firm in the Los Angeles area, intends to keep playing hardball in order to what he wants out of his credit-card companies. Since the law was passed by Congress, he says he has successfully convinced American Express to drop its annual fee on his card by threatening to take his business elsewhere. And when Citi raised the interest rate on his wife's credit card to 29.9% from 14%, he closed the account.
Regulations going into effect later this year will place even more constraints on credit-card companies. Starting Aug. 20, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to tell a credit-card company that they don't accept a change of terms in their card agreement. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.
Consumers who carry a balance may want to steer clear of retail cards, which woo customers with discounts. The money you save in the beginning could be eclipsed by the higher rates these cards typically charge as you pay off the balance.
Credit unions often offer lower rates than large banks, although some of their rewards programs are less generous than those of big banks. There are more than 8,000 credit unions in the U.S., and they tend to have pretty expansive definitions of who can join. The criterion for joining some credit unions is as simple as your Zip Code. Navy Federal, the nation's largest retail credit union, offers rates as low as 7.9% on a basic platinum Visa card for three million members of the Army, Navy, Air Force, and Marine Corps and their families.
That compares with an interest rate as low as 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by Lowcards.com, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.
Besides rates, reward programs are one of the other big considerations in choosing the right card. Cash-back cards are likely to offer the best deals in the new regulatory environment since banks have been making their own reward programs less rewarding. They are shortening the expiration periods, raising redemption fees or implementing earnings caps on rewards.
Although issuers have also been trimming cash-back rates in general—the standard rate today is 1% compared with 3% to 5% a few years ago—consumers can still earn higher rates by shopping in certain categories, such as gas or groceries.
"For the average person, if you're going to do a loyalty rewards program, simple is best," said Mr. Manning of the Responsible Debt Relief Institute. "Take the cash back."
The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.
Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.
"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.
Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.
The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.
The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent.
All this represents a huge change from three years ago when banks were tripping over themselves to issue credit cards to just about anybody, and consumers were on a spending spree. Banks have pruned many of their more profligate cardholders, and are using higher transaction fees to raise more money from cardholders who pay their bills each month rather than run up huge balances.
The biggest new tactic may be one of the oldest: raising rates. As long as credit-card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge whatever they want. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.
U.S. banks on average increased the interest rate on their credit cards by about two percentage points between December 2008 and July 2009, according to Pew Charitable Trusts, a nonprofit group. Some consumers say that their accounts have been hit with sudden interest-rate increases even if they haven't been late on a payment.
Bank of America says it hasn't raised interest on credit-card accounts since the law was passed last spring, except in the case where a cardholder has repeatedly paid late.
In a statement, Citigroup said: "We understand that customers don't like price increases, especially in difficult economic times. 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 re-pricing for that risk."
Card companies also plan to collect more interest by switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now. But they give the companies more flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.
Cardholders should expect to see more fees for extra services, such as requesting a year-end itemization of all your purchases, paper statements or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.
Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees—the cost customers pay for purchases made in foreign currencies—but they are expanding the definition of what qualifies as a foreign transaction.
In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.
American Express Co., which is known for its lucrative rewards programs, recently added new fees to its co-branded Hilton Hotels, Starwood Hotels and Delta Air Lines cards. Cardholders who pay late will lose their rewards points. They can reinstate them to their accounts if they pay a $29 fee. An American Express spokeswoman said the fees are consistent with policies on its other cards and is aimed at encouraging cardholders to pay their bills on time.
For new customers, the days of 0% teaser rates and no-annual-fee boasts are dwindling. After cutting back substantially on mail offers, card companies are once again trying to woo new cardholders. But this time around, the avalanche of pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.
Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have an annual fee, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs—but also fees. Plain-vanilla cards that don't have any annual fees (or rewards programs) represented just 11% of mail offers in the fourth quarter, according to Mintel Comperemedia, which tracks credit-card mail offers. J.P. Morgan's Chase card unit and American Express are among those that have recently introduced new cards with annual fees.
Consumers can fight back against some of the industry's tactics. You only need one or two credit cards that are widely accepted. So it can make sense consolidating debt on the card that has the lowest interest rate, assuming it makes sense after taking into account the balance-transfer fee.
True, shedding cards can hurt your credit score. But John Ulzheimer of Credit.com has a rule of thumb to preserve it while closing accounts: If you are able to keep your overall "credit utilization" on your cards—the amount of credit used as a percentage of your overall available credit—below 10% then closing accounts to avoid paying extra fees could make sense, he said.
So use the card or lose it because there may be a price to pay for inactivity. Fifth Third Bancorp is charging customers $19 if they don't use their credit card in a year.
And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.
Bob Depweg, who owns a security-consulting firm in the Los Angeles area, intends to keep playing hardball in order to what he wants out of his credit-card companies. Since the law was passed by Congress, he says he has successfully convinced American Express to drop its annual fee on his card by threatening to take his business elsewhere. And when Citi raised the interest rate on his wife's credit card to 29.9% from 14%, he closed the account.
Regulations going into effect later this year will place even more constraints on credit-card companies. Starting Aug. 20, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to tell a credit-card company that they don't accept a change of terms in their card agreement. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.
Consumers who carry a balance may want to steer clear of retail cards, which woo customers with discounts. The money you save in the beginning could be eclipsed by the higher rates these cards typically charge as you pay off the balance.
Credit unions often offer lower rates than large banks, although some of their rewards programs are less generous than those of big banks. There are more than 8,000 credit unions in the U.S., and they tend to have pretty expansive definitions of who can join. The criterion for joining some credit unions is as simple as your Zip Code. Navy Federal, the nation's largest retail credit union, offers rates as low as 7.9% on a basic platinum Visa card for three million members of the Army, Navy, Air Force, and Marine Corps and their families.
That compares with an interest rate as low as 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by Lowcards.com, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.
Besides rates, reward programs are one of the other big considerations in choosing the right card. Cash-back cards are likely to offer the best deals in the new regulatory environment since banks have been making their own reward programs less rewarding. They are shortening the expiration periods, raising redemption fees or implementing earnings caps on rewards.
Although issuers have also been trimming cash-back rates in general—the standard rate today is 1% compared with 3% to 5% a few years ago—consumers can still earn higher rates by shopping in certain categories, such as gas or groceries.
"For the average person, if you're going to do a loyalty rewards program, simple is best," said Mr. Manning of the Responsible Debt Relief Institute. "Take the cash back."
Saturday, January 9, 2010
Consumer Credit Suffers Biggest Monthly Decline On Record
Bloomberg
Consumer credit in the U.S. dropped a record $17.5 billion in November as unemployment close to a 26- year high discouraged borrowing and banks limited access to loans.
The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October, Federal Reserve figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease of $5 billion. The figures track credit card debt and non-revolving loans, such as those to buy autos.
A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.
“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.”
The series of 10 straight declines in consumer credit was the longest since record-keeping began in 1943.
Treasury two-year notes gained the most in three weeks after the Labor Department said today that companies reduced payrolls in December by 85,000 workers after adding 4,000 a month earlier. The unemployment rate held at 10 percent.
Stocks, Yields
Two-year Treasury yields dropped below 1 percent, to 0.97 percent at 4:52 p.m. in New York, from 1.02 percent late yesterday.
Consumer credit in October was revised from a previously reported $3.5 billion decline, and the forecast for November was based on the median of 32 estimates in a Bloomberg News survey. Projections ranged from decreases of $2 billion to $10 billion. Credit dropped at an 8.5 percent annual rate in November.
Revolving debt, such as credit cards, plunged by a record $13.7 billion in November, the Fed’s statistics showed. Non- revolving debt, including loans for autos and mobile homes, declined by $3.8 billion. The Fed’s report doesn’t cover borrowing secured by real estate.
Auto sales in the U.S. climbed in November to a seasonally adjusted annual rate of 10.92 million, up from 10.45 million in October. The pace increased to 11.23 million in December, the strongest since 14.09 million in August, when Americans took advantage of government incentives.
Consumer Spending
Consumer spending increased in November for the sixth time in seven months as Americans took advantage of discounts during the holidays, Commerce Department figures showed Dec. 23. Faster growth in sales and improvement in households’ balance sheets depends on job creation.
“U.S. consumer credit quality remains under considerable stress due to persistently weak labor market conditions,” said Michael Dean, managing director at Fitch Ratings. A report from Fitch on Jan. 5 showed delinquent balances on credit cards at a record level.
At American Express Co., defaults and delinquencies fell to 2009 lows. AmEx was the only one of the “Big 6” credit-card issuers to post November declines in write-offs and delinquencies, the New York-based lender said in a Dec. 15 regulatory filing.
Bank of America Corp. Chief Executive Officer Brian T. Moynihan has said the largest U.S. lender needs to reduce the loss rate on credit cards, which ranked highest among the nation’s six biggest card companies in November. Bank of America’s card defaults are “still very high,” Moynihan, 50, said.
‘Significant Bubble’
“As an industry, we over-lent and customers over-borrowed, and that led to a fairly significant bubble,” Moynihan said Jan. 4 in an interview on Bloomberg Television in Raleigh, North Carolina. “We have to help lead the economic recovery. At the same time, we have to be responsible lenders.”
Banks have responded by tightening credit standards, for consumers and companies. Fed Governor Elizabeth Duke said in a Jan. 4 speech that total loans on banks’ books fell at an annual rate of more than 11 percent in the third quarter. While banks are reducing lines of credit and tightening lending standards, small businesses are also losing their business relationships with banks as firms fail, merge or reduce their loan portfolios, Duke said.
Broken Relationships
“When existing lending relationships are broken, time may be required for other banks to establish and build such relationships, allowing lending to resume,” Duke said.
Britt Beemer, chairman of consumer polling firm America’s Research Group, said in a Dec. 21 interview that if lenders weren’t cutting customer spending limits and rejecting more credit-card applications, holiday sales would have been stronger.
December same-store sales climbed 3 percent, the biggest gain since April 2008, Retail Metrics Inc. said yesterday in an e-mailed statement.
The slump in credit to $2.46 trillion was more than anticipated and followed a revised $4.2 billion drop in October, Federal Reserve figures showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease of $5 billion. The figures track credit card debt and non-revolving loans, such as those to buy autos.
A labor market that’s shed 7.2 million jobs since the recession started in December 2007 is restraining consumer spending that accounts for about 70 percent of the economy. Fed policy makers have said tighter bank lending standards and reductions in credit lines are hampering the recovery.
“Double-digit unemployment is eroding consumer confidence and the uncertainty is prompting consumers to pay down their credit card debts,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “We have not seen such a wholesale reduction in consumer credit since the last time we had double-digit unemployment rate following the early ‘80s recessions.”
The series of 10 straight declines in consumer credit was the longest since record-keeping began in 1943.
Treasury two-year notes gained the most in three weeks after the Labor Department said today that companies reduced payrolls in December by 85,000 workers after adding 4,000 a month earlier. The unemployment rate held at 10 percent.
Stocks, Yields
Two-year Treasury yields dropped below 1 percent, to 0.97 percent at 4:52 p.m. in New York, from 1.02 percent late yesterday.
Consumer credit in October was revised from a previously reported $3.5 billion decline, and the forecast for November was based on the median of 32 estimates in a Bloomberg News survey. Projections ranged from decreases of $2 billion to $10 billion. Credit dropped at an 8.5 percent annual rate in November.
Revolving debt, such as credit cards, plunged by a record $13.7 billion in November, the Fed’s statistics showed. Non- revolving debt, including loans for autos and mobile homes, declined by $3.8 billion. The Fed’s report doesn’t cover borrowing secured by real estate.
Auto sales in the U.S. climbed in November to a seasonally adjusted annual rate of 10.92 million, up from 10.45 million in October. The pace increased to 11.23 million in December, the strongest since 14.09 million in August, when Americans took advantage of government incentives.
Consumer Spending
Consumer spending increased in November for the sixth time in seven months as Americans took advantage of discounts during the holidays, Commerce Department figures showed Dec. 23. Faster growth in sales and improvement in households’ balance sheets depends on job creation.
“U.S. consumer credit quality remains under considerable stress due to persistently weak labor market conditions,” said Michael Dean, managing director at Fitch Ratings. A report from Fitch on Jan. 5 showed delinquent balances on credit cards at a record level.
At American Express Co., defaults and delinquencies fell to 2009 lows. AmEx was the only one of the “Big 6” credit-card issuers to post November declines in write-offs and delinquencies, the New York-based lender said in a Dec. 15 regulatory filing.
Bank of America Corp. Chief Executive Officer Brian T. Moynihan has said the largest U.S. lender needs to reduce the loss rate on credit cards, which ranked highest among the nation’s six biggest card companies in November. Bank of America’s card defaults are “still very high,” Moynihan, 50, said.
‘Significant Bubble’
“As an industry, we over-lent and customers over-borrowed, and that led to a fairly significant bubble,” Moynihan said Jan. 4 in an interview on Bloomberg Television in Raleigh, North Carolina. “We have to help lead the economic recovery. At the same time, we have to be responsible lenders.”
Banks have responded by tightening credit standards, for consumers and companies. Fed Governor Elizabeth Duke said in a Jan. 4 speech that total loans on banks’ books fell at an annual rate of more than 11 percent in the third quarter. While banks are reducing lines of credit and tightening lending standards, small businesses are also losing their business relationships with banks as firms fail, merge or reduce their loan portfolios, Duke said.
Broken Relationships
“When existing lending relationships are broken, time may be required for other banks to establish and build such relationships, allowing lending to resume,” Duke said.
Britt Beemer, chairman of consumer polling firm America’s Research Group, said in a Dec. 21 interview that if lenders weren’t cutting customer spending limits and rejecting more credit-card applications, holiday sales would have been stronger.
December same-store sales climbed 3 percent, the biggest gain since April 2008, Retail Metrics Inc. said yesterday in an e-mailed statement.
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