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Credit Card Legislation – Companies No Longer Allowed to Offer Perks

Free pizza, free coffee, and other goodies just by showing up? Why not. This is the reasoning on the minds of college students when they are approached by credit card marketers that promise these freebies for nothing. But there is a catch. When you arrive at the restaurant to booth to claim the free stuff, you’ll be asked to sign up for the credit card to get free food.

It is no wonder that the average college student has an outstanding debt of $4,100 in 2008 against the $2,900 figure back in 2004. Fortunately, measures are being undertaken to stop these tactics. Come February 22, 2010, college students will no longer be tempted by goodies offered by these credit card companies. This is the time when marketing restrictions on credit cards will take effect. It is expected that this will result to less debt for consumers below the age of 21.

Oftentimes, companies expect college students or those falling under the same age bracket to stay loyal to the first credit card they have. That’s the reason why they specifically target this segment with endless marketing ploys; sometimes going to the extent of getting this information from colleges itself for a fee. Students end up getting cards with high fees and high interest rates that can easily accumulate debt.

The amount of credit cards available to college students today has become worrisome. In fact, a significant number of younger consumers have four or more credit cards at their disposal. And only 17 percent of them said they always pay off debts in full every month.

Despite the less-than-stellar facts surrounding credit card usage, it has its good points. Some students use their cards to pay for necessities like textbooks. Another big change underway requires Americans under the age of 21 to get a co-signer if they cannot provide a proof of income. In essence, the co-signer (parent or older friend) is taking responsibility for the action of the college student.  Credit cards can also be beneficial for those under banked consumers who are continually charged huge debit card fees by their banks.

Credit Card Index – Better Last July

It is true that Americans still have a hard time making ends meet and paying their obligations but the pressure seems to have eased up last July. According to Moody’s Investor Service, more people were able to pay their bills in July; this is a reversal of the earlier trend wherein defaults and delinquency rates continually increased.

Charge of Rate Down

US charge-off rate on credit cards dropped to 10.52 percent in July from 10.76 in June. The charge-off rate is annualized percentage of the total outstanding principal balance that is written off as uncollectable. While the improvement may not seem like much, it is actually the first month-on-month improvement since the September of last year.

Payment Rate Up

Moody’s Index reveal that payments have risen sharply in July across six major credit card companies including Citibank, American Express, and Discover. Payment rates have even reached 17.43 percent which is the highest point since October of last year. The payment rate is measured as the percentage of total outstanding principal balance that cardholders pay back each month.

Delinquency Rate

Overall, the delinquency rate for July is 5.73 percent, the lowest level in 2009. This figure is on track with the improvements seen in the months of April, May, and June. According to William Black, Moody senior vice president, “July tends of mark an inflection point with respect to seasonal trends”. That means that delinquency may be in the horizon because of back to school expenditures and holiday spending. The amounts included in the delinquency rate are monthly balances that are over 30-days delinquent.

Projection Still Bleak for 2010

The charge-off rate is expected to hit 12 to 13 percent by mid-2010. This coincides with the expected peak in unemployment rate of around 10 to 10.5 percent. However, it is important to note that these projections are simply that: projections. These presumptions can easily change if the charge-off rate and delinquency rate lowers in the next months. Comparisons of debt relief programs tell of the same tale.

Improve Your Credit Rating

With new reforms law being implemented in the finance industry left and right, it is almost inevitable for consumers to feel certain repercussions. The government, the banking industry, and the consumers are all adjusting to the new economic reality. There is a shake-up in almost everything from credit card practices, mortgage loan applications, and credit score. Our previous posts for this week dealt mostly about credit card practices. Now, we will look deeper into the expected changes on your credit report.

Justine @ Credit Karma talked about how your credit report can hurt your chances of landing a job. According to the Society of Human Resource Management, as much as 50 percent of companies look at the credit history of prospective hires. A lot of employers believe that an applicant’s credit report says much about his character, work attitude, and future job performance. For the 14.5 million individuals who had just lost their job, turning to their credit card can actually be damaging to their future employment. Be sure to have a repayment plan in place whenever you take on debt.

Sharon @ Mint listed the 10 Commandments when it comes to maintaining a good credit score. As you probably already know, the credit score can make or break your finances. In fact, it will even affect your chances of getting a job. Among the commands found on the post include not limiting loan types, not missing payments and not closing unused credit card accounts among others.

Tracy @ the Card Offers Blog offers advice to new credit card users with her post titled “What Does a New Credit Card User Need to Know?”. Basically, she cautions users against abusing their credit privileges. Less banks are issuing credit cards these days and they only do so when they have a reasonable expectation that the user can and will pay it back. If you make a lot of missteps on your first card, it might take years before additional credit is extended to you by any company.

Credit Card Reform – New Law Effective Tomorrow

It seems that Americans who worked hard to maintain good credit will be the first hit when the Credit Card Act of 2009 becomes effective tomorrow. Already, lenders are increasing interest rates across the board. The lowest available rate is now currently pegged at 11.25 percent which is significantly higher from 8.85 percent just this January. Meanwhile, customers with less-than-stellar rating have to pay 15.75 percent, up from 13.75 last January.

According to experts, banks are setting the rates this high so they can go down from there depending on market situations in the future. Fortunately, these rates increases would no longer come as a shock to consumers. Congress has given them a leeway of 45 days to reject rate increases. Americans have the choice of paying outstanding balances at current rates in a five-year timeframe. In addition, banks need to mail credit card bills 21 days before it is due.

Various parts of the credit card law are already implemented. For example, fourteen banks have dropped double-cycle billing, where finance charges are calculated on more than a single billing cycle. Meanwhile, eleven major banks have stopped the “universal default” practice wherein rates are rates because of missed payments even with another company.

What is the Catch?

The catch of the Credit Card Law is quite apparent: increased interest rates. Eleni Constantine, the director of Pew Charitable Trusts said that it has in fact increased by 20 percent from December. While increase might seem reasonable, the level at which it was increased certainly isn’t. The borrowing costs for banks are decreasing because of market condition. By raising the rates on consumers simultaneously, they are actually deriving more profits due to larger marginal lending rates.

Overall, the gains in the new Credit Card law are certainly welcome despite certain complications. However, it is important to keep in mind that it has been designed to help consumers with high balances. People with relatively good credit should be aware of these changes and decide whether they still want to use their credit cards or pay in cash instead.