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By Dar Haddix
UPI Business Correspondent
Published 3/23/2004 10:49 PM
WASHINGTON, March 23 (UPI) -- As consumers' debt load has risen,
so have credit card fees, delinquencies and bankruptcies. Is the
credit industry cashing in on the U.S. debt crisis, or are consumers
just not managing their money?
America's love-hate relationship with credit was
highlighted Tuesday, as the American Bankers Association announced
that credit card delinquencies shot up to 4.43 percent of accounts
in the fourth quarter of 2003, from 4.09 percent in the third
quarter.
"It was a rare combination where credit card
delinquencies increased as all other consumer lending delinquencies
declined," said ABA chief economist James Chessen. "It
took the gloss off of what would be outstanding news."
Greenspan in late February reassured Americans
about their increasing debt load, citing the stable debt service
ratio for homeowners (about 70 percent of households), which has
remained at about 13 percent, and the financial obligations ratio,
which has lingered at about 18 percent.
Nevertheless, many analysts have expressed concerns
that U.S. credit may not be as solid as others think. The debt
ratio for renters -- nearly a third of households -- rose to 28.8
percent of their income in fourth-quarter 2003 from about 22 percent
a year earlier. Forty-two percent of Americans are making minimum
or no payments on their credit-card balances, according to a recent
Cambridge Consumer Credit Index poll -- better than in the past
few years, but still approaching half of all credit-holders. Personal
bankruptcies in 2003 totaled 1.63 million, up about 5.6 percent
from the prior year, according to the American Bankruptcy Institute.
Average U.S. credit card debt is $9,205, according to Cardweb.com.
In all, consumers have built up about $745 billion
in credit debt, according to Federal Reserve data.
The latest survey by consumer advocacy group Consumer
Action showed credit card companies inflicting harsher penalties
on cardholders, gradually lowering minimum payments, and maintaining
minimum APR rates.
In fact, 30 percent of all cards surveyed by Consumer
Action charged a $29 late fee and 16 percent charged $35. Twenty-one
credit cards charged $35 late fees, more than double the prior
year's figure of 10 cards. About three-quarters of the 143 cards
surveyed raised interest rates for cardholders who made late payments
either once or twice in six months. And 25 percent of all banks
surveyed maintained minimum APR rates that would not drop beyond
a certain rate even if the prime rate fell.
And 39 percent of credit card companies, which
pull credit reports to do periodic credit reviews on cardholders,
said they would raise cardholder rates based on cardholders' other
accounts.
"People find this grossly unfair," said
Linda Sherry, Consumer Action's editorial director. "The
general reaction is, 'What business is it how I handle my other
accounts?' But just as card issuers use your credit report to
decide whether or not to give you a card in the first place, they
use your credit report to keep tabs on your risk throughout the
relationship."
At the same time penalty fees are rising, minimum
payment requirements are falling, so consumers who only make the
minimum payment end up paying more interest. Fifty-three percent
of all cards surveyed required minimum payments of only 2 percent
of the monthly balance each month, while last year 43 percent
of all cards surveyed asked for 2 percent minimum payments.
Cardweb.com noted that on average grace periods
have shrunk from 27.8 days to 20.6 days since 1990, and that fees
for exceeding the credit limit rose from an average of $12.75
in 1994 to $29.23 in 2004.
Lydia Sermons-Ward, senior vice president of Marketing
& Communications for the National Association of Credit Counselors,
said that the lower minimum payments "certainly entice more
people" to get credit, which these days is easier than ever
she said, but it comes at a price.
"Credit card companies are offering credit
based on risk scores ... the lower your credit score, the more
the credit will cost you. In the past the general practice was,
if you had a bad or low credit score you were not extended credit,
you were just denied. So by virtue of now [opening] up lines of
credit to even those who have bad credit, ultimately more people
are going to be in debt. More people are getting access to credit
but it's costing them more money," she said.
"Every year we uncover more anti-consumer
practices in the industry," said Sherry. "So many of
these policies seem greedy and short-sighted. If you look at them
as a whole -- tiny minimum monthly payments, outrageous late fees
and significantly higher penalty rates -- they seem designed to
drive cardholders into bankruptcy."
These days, though, people need credit cards to
rent a car, shop online, get a cell phone for a reasonable rate,
and a lot of other things. Debit cards can be used sometimes,
but often not.
And many of these changes, including flexible pricing
based on risk and lower minimum payments, have also allowed many
more people to obtain credit, said Fritz Elmendorf, spokesman
for the Consumer Bankers Association, an industry group that includes
consumer finance institutions.
"More people are approved for cards that would
have been turned down in earlier years -- people that have marginal
credit histories. But why they are being approved for cards is
that there is risk-related pricing," meaning higher interest
rates for higher-risk customers and lower interest rates for cardholders
with better credit.
He also noted that over the long-term, interest
rates, historically at about 18 percent, have gone down, as have
annual fees; cardholders today also get perks like reward miles
when they fly.
Elmendorf emphasized that penalty fees are just
that: penalty fees. "Some of the penalty fees have gone up
that's true ... but those are fees that are not paid by people
that pay on time or stay within their credit limits," he
said.
Elmendorf advocates keeping minimum payments flexible
as well.
"Credit is designed to be convenient and flexible,
and that's good and bad - it does put more responsibility on credit
users today to use it responsibly because they do have access
to more credit. You could presumably by government regulation
make the terms of credit less flexible for people. I think a lot
of people would not like that because they do use credit responsibly
-- there are months when they pay more than the minimum and there
are months where they can only pay the minimum ... the flexible
aspect of it lets people manage their finances through variable
conditions ... that's the attraction of flexible terms and minimum
payments, and it can be abused, that's the problem," he said.
Last year, about 9 million people sought help with
debt; 1 million of those sought assistance from NACC members.
According to organization data, consumers that came to NACC members
for help were on average 39 years old, female (56 percent), married
(44 percent), made about $30,400 a year, owed about $29,000, was
beholden to about eight credit card companies, and paid an average
of $380 per month. The reason most people -- 49 percent -- cited
for accumulating so much debt was financial mismanagement. Unemployment
and reduced income was the next most-prevalent reason, affecting
26 percent of clients.
As debt has increased so has the number of credit
and debt management organizations - from about 200 to more than
1,000 in the last decade -- but so have the number of complaints.
The Better Business Bureau reported that complaints about credit-counseling
services went up from 261 in 1998 to 1,480 in 2002. Counseling
firms hardly ever charged for services ten years ago, but now
charge fees, sometimes hundreds of dollars, for help.
But a few years earlier, banks began to reduce
their payments to credit-counseling companies. Banks historically
reimbursed credit counselors about 15 percent of what they helped
banks recover, according to a report by the Consumer Federation
of America and the National Consumer Law Center. As of 2002, many
companies reported that they received 8 percent or less of what
they recovered for banks. And almost half of the banks surveyed
have raised the interest rates they offer to people who are in
debt management programs, which makes bankruptcy a more attractive
alternative, the study said.
The bottom line apparently is that people need
to be savvy shoppers and well-informed consumers, both in choosing
credit cards and counseling or debt consolidation if credit burdens
get out of hand.
"I think what's happened is that there's more
variety and very strong competition and more consumers can take
advantage of that ... there's more deals than there ever have
been on cards, but consumers need to shop around and do need to
be aware of terms," Elmendorf said.
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