Credit Card Debt Drops to Lowest Level in 8 Years

Associated Press

 

The amount consumers owed on their credit cards in this year's second quarter dropped to the lowest level in more than eight years as cardholders continued to pay off balances in the uncertain economy.

The average combined debt for bank-issued credit cards - like those with a MasterCard or Visa logo - fell to $4,951 in the three months ended June 30, down more than 13 percent from $5,719 in the same period a year ago, according to TransUnion.

The credit reporting agency said it was the first three-month period during which card debt fell below $5,000 since the first quarter of 2002.

Credit card debt remained the highest in Alaska, but slid 7 percent there to $7,148. A total of 22 states recorded debt higher than the national average.

Residents of Alabama paid off the most debt, dropping their average balance by 27 percent to $4,753.

More borrowers also made payments on time. The rate of cardholders past due by 90 days or more fell to 0.92 percent in the second quarter, from 1.17 percent last year.

That's the first time the delinquency rate has been below 1 percent since the second quarter of 2007, before the recession, said Ezra Becker, director of consulting and strategy in TransUnion's financial services unit. The rate fluctuates during the year, he said, but the improvement is more evidence that consumers are working to make sure their credit cards remain in good standing.

That concern reflects several economic factors, from the fear of unemployment to the fact that the collapsed housing market means it's harder to cash in on home equity when money gets tight. "You can't buy groceries with your house anymore," Becker said.

Reflecting the weak economies in the states hardest hit by the housing crisis, the delinquency rate was highest in Nevada, at 1.5 percent of cardholders, followed by Florida, 1.24 percent, Arizona, 1.11 percent and California, 1.08 percent. In all, 16 states fared worse than the national average for delinquencies.

The lowest delinquency rates remained in North Dakota, at 0.54 percent, and South Dakota, at 0.55 percent.

In a twist, Becker said the foreclosure crisis could be helping to improve the timeliness of credit card payments and lower balances. When people don't make mortgage payments, he suggested, they have a short-term cash boost.

"That can provide extra money to pay down credit cards," he said.

Besides paying down debt, consumers are getting fewer new cards. Nationwide, the number of new accounts opened dropped almost 6.5 percent from last year.

TransUnion predicts that the national delinquency rate will remain below 1 percent for the rest of the year. However, on the high end, the Nevada rate is forecast to edge up to 1.6 percent.

New Credit Card Rules can Help, But don't get Complacent

USA Today

 

In the past, making a late credit card payment was like forgetting your mother's birthday. Repairing the damage could take months. Sometimes, years.

Now, though, the repercussions of a tardy credit card payment may not be as long-lasting or severe. Federal rules that took effect Aug. 22 limit the amount of late fees banks can charge. The rules also make it more difficult for banks to permanently raise your interest rate if you make a late payment.

The rules, adopted by the Federal Reserve Board in June, implement provisions of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act that was signed into law last year. What's new:

•Ceiling on late fees. Most late-payment fees are now capped at $25. Lenders are also barred from charging a fee that exceeds the amount of the violation. For example, if you're late making a $20 payment, the penalty can't exceed $20.

Previously, banks charged a median penalty fee of $39 for late payments or transactions that exceeded the card's limit, according to the Pew Health Group's Safe Credit Cards Project. The median penalty fee for credit unions was $25.

The law gives issuers the right to charge a higher penalty fee if they can justify the need for a higher amount. However, most issuers will probably play it safe and stick with the $25 limit, says Nick Bourke, manager of the Safe Credit Cards Project.

•Cooling off period for penalty interest rates. Banks can still hike your interest rate if you make a late payment, but they must wait at least 45 days before raising your rate, says Curtis Arnold, founder of CardRatings.com.

This gives customers time to resolve any billing issues that could have caused the missed payment, he says. Even if you were at fault, the 45-day window gives you time to pay off the balance or transfer it to a lower-rate card before the new rate kicks in.

•Time limits on penalty rates. Once a lender imposes a penalty rate, it's required to review the rate after six months. If you haven't missed any payments during that period, the bank will have to roll back the rate, unless it can give the Federal Reserve a good reason for keeping it.

•No penalties for inactivity. Do you keep an extra credit card in the back of your wallet for emergencies? Now, it won't cost you anything to do that. Lenders are prohibited from charging you a fee if you don't use your credit card to make new purchases. Your issuer could, however, close your account.

•No piling on. Card issuers are prohibited from charging you multiple fees based on a single late payment or other single transaction.

Now, the bad news

Don't let these changes lull you into thinking it's OK to get sloppy about your bills. The ceiling on penalty fees is limited to one misstep. If you make more than one late payment in a six-month period, your issuer can charge you up to $35.

Even worse is what could happen to your interest rate. Since February, card issuers have been prohibited from raising rates on your existing balance unless your account is 60 days past due. However, once you're 60 days late on a payment, your interest rate could skyrocket.

While the law says penalty fees must be "reasonable and proportional," it places no limit on penalty interest rates, Bourke says. "If you're experiencing some financial difficulty and become 60 days past due on your credit card account, the credit card issuer still has the right to impose any size of (interest rate) penalty on you it wants," he says.

And escaping that high rate won't be easy. Issuers must lower your rate to the pre-penalty level if you make on-time payments for the first six months the penalty rate is in effect. But a big increase in your interest rate could make it harder for you make minimum payments, Bourke says. And if you make a late payment during the six-month period, he says, "The penalty rate can last forever."

At least 94% of bank cards and 46% of credit union cards include the right to impose an interest rate penalty in their card holder agreements, according to Pew's analysis. Among those that disclosed their rates, the median rate in March was 29.99%, up from 28.99% in July 2009.

To avoid costly oversights, take advantage of free e-mail reminders provided by many credit card issuers, says Bill Hardekopf, chief executive officer of LowCards.com.

"My advice is, do everything you can to make your monthly payment on time."