What effects are we seeing in today’s credit card industry as a result of the current economic conditions? Another question in many minds is what trends might we expect to see in the future?
Continuing increases in unemployment have had a domino effect on the industry, causing delinquencies and charge-offs to climb to its highest level ever. These trends have translated into a large number of financial institutions having to greatly tighten up their lending standards.
According to a recent Federal Reserve survey, almost half of the banks surveyed noted that they increased the minimum credit score ranking that a consumer needs to meet before they would extend credit to them.
Additionally, institutions have been raising interest rates, lowering credit limits, and adding fees onto current credit card consumer accounts regardless of their credit or payment histories. This has had a negative effect on consumers who have been diligently making their payments in a timely manner. This trend has also left many consumers little hope of paying off their credit card balances anytime soon.
Many consumer advocates realize the challenges banks are facing but at the same time stress the importance of taking into consideration individual accounts as they implement changes.
Linda Sherry, national priorities director for nonprofit education and advocacy group Consumer Action states “If done carefully, it’s quite responsible to limit lines in this economy. But we have heard from so many people who were moved close to their existing balance, or who were subject to repeated lowering of limits, that we have concluded that banks need to be far more sensitive to the individual accounts when making such changes.”
In response to these unfortunate economic circumstances, the federal government has prepared new credit card regulations, which will offer much greater protection for the consumers than the previous regulations. The new regulations are slated to take effect in July 2010.
Although typical credit card agreements permit credit card issuers to change terms at any time, the new policy will require that they give consumers 45 days notice of any changes rather than the 15 days currently in effect. The additional time will not only eliminate unfair surprises for consumers, but also allow them more time to look for other options.
Along with several other reforms, the new policy also requires that credit card companies issue very clear descriptions of their terms and conditions so there is a better chance that the consumers will understand the agreement.
Also many credit card issuers offer an opt-out alternative in which consumers may decline the new rate and stop using the account while paying the balance off. There is also the option to ask the credit card issuer to reconsider changing the terms.
Many financial institutions are rebalancing their portfolios as they prepare to abide by the new regulations. Several card issuers are also putting together programs that are designed to assist card members through this financial crisis.
For instance, Discover Card is continuing its practice of proactively contacting customers to offer assistance to those who appear to be heading toward financial trouble. Discover also helps customers who contact them directly by offering payment programs and account adjustments; in 2008, over one million customers were assisted in this fashion.
Although there are some concerns about being able to adequately provide credit to consumers and small businesses while complying with the new rules, Discover continues to strive to meet the challenge.
“Discover remains committed to achieving appropriate consumer protections while preserving the availability of credit for consumers and supporting the objectives of the economic stimulus;” stated Jon Drummond, Senior Manager, Corporate Public Relations for Discover Financial Services.
Discover has also teamed up with other industry leaders by creating a resource called Help with My Credit, a program designed to increase consumer awareness as to the assistance that is available to them from credit card issuers. The institution has also implemented a variety of other tools such as Spend Analyzer which helps card holders track their purchases by category so that they may be able to make more informed decisions regarding their future spending.
Consumers have been tightening their belts as well, as they attempt to rely less on credit and purchase more on their debit cards. For example, in 2008, Visa has seen debit card expenditures exceed Visa credit cards for the first time.
As we approach the future, analysts are predicting unemployment to rise to about 10 percent in the next year and charge-offs to top out at 12 percent in the first half of 2010. They are also expecting less available credit, increased risk for lenders, and a decrease in card usage. In addition, consumers may experience a significant change in rewards programs as credit companies attempt to inspire consumers to save more. Card issuers are also more likely to demonstrate a greater appreciation for the higher end low risk consumer.
It will be quite challenging to achieve a good balance between credit issuers providing necessary lending to stimulate the economy, while at the same time offering the highest level of protection to the consumer.
