Economy > Consumer > Credit
p. 15 7 November 2008
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The great credit card scandal
Companies defy ministers
by increasing charges
plunging interest rates
Tuesday, 9 December 2008
By Kate Hughes,
Deputy Personal Finance Editor,
and Andrew Grice
Credit card companies are facing an investigation by competition watchdogs
after defying government warnings to improve their lending practices.
An analysis by The Independent has found that the cost of card borrowing has
risen over the past three months despite three cuts to the Bank of England base
rate. Cardholders are now facing average interest rates of 17.7 per cent on
credit cards, up from 16.6 per cent 12 months ago.
The Business Secretary, Lord Mandelson, had given providers two weeks to come up
with fair principles to help cardholders manage their debts following a summit
with card providers in November. By Thursday, the Government is expecting
proposals from the industry on how it will implement fair principles on existing
debt, responsibly provide credit and support households in difficulty.
Failing to do so could see the card companies facing investigation by the Office
of Fair Trading (OFT), but so far card providers have made no move to reduce the
expensive lending rates which so often plunge debtors into further financial
One government source said last night: "We are not backing off. If the companies
don't move, if necessary, we will go down the OFT route."
Only two cards, those designed to track the base rate, have reduced rates since
Lord Mandelson's ultimatum and Yorkshire Bank and Clydesdale Bank have gone
ahead with increases to the rates and fees they charge their Gold Mastercard
customers. Halifax and the Bank of Scotland have also increased balance transfer
A spokesman for Clydesdale Bank said: "The changes in our rates were announced
in October and our rates remain very competitive. We fully support the
Government's initiatives for helping people in difficulties."
Store card debtors are facing even higher rates despite cheaper borrowing for
lenders. The average cost of borrowing is now 25 per cent a year, up from 23.9
per cent this time last year, with no sign of a cut in rates even though the
base rate has dropped from 5.25 per cent to 2 per cent over the same period.
But based on the industry's response this week, Lord Mandelson and the Consumer
Affairs minister Gareth Thomas are expecting to produce a plan to address the
dramatic increases in some cardholders' bills.
A spokeswoman for the Department for Business, Enterprise and Regulatory Reform
said: "We've asked lenders to report back by the end of this week and have been
in continuing talks with industry following our summit [on 26 November]. We have
every expectation that industry will come back with proposals to stop the
pockets of bad behaviour that we have identified in risk-based repricing and
will continue to work with them to ensure borrowers are treated fairly,
responsibly and consistently."
Vince Cable, the Liberal Democrats' Treasury spokesman, said: "The Government
has got to get tough with credit card companies determined to make a quick buck
out the millions of people struggling to make ends meet. Tough words are
worthless unless they are backed up with real action."
Alan Duncan, the Conservatives' business spokesman, accused ministers of pumping
out "hot air". He said: "The Government's policy after the banks' bailout has
clearly not reached the credit card sector. It has done nothing to clamp down on
credit card ownership – particularly by the most vulnerable people."
Industry leaders have been summoned to another meeting with Mr Thomas on
Apacs, the UK payments association, denied interest-rate rises were the problem.
"Risk-based pricing is not about the base rate at all," said a spokeswoman.
"This is about a customer with a card whose APR may go up as a consequence of
changes to their circumstances. It is a feature of credit cards that the
interest on this unsecured borrowing may be adjusted. If the customer can't pay,
the provider has no security on getting the money back and may decide to
re-price the cost of using the card. The agreements that were made [at the
summit] were about breathing space for customers in difficulty."
Critics of the move believe a half-hearted approach will make little difference
to consumers. Martin Lewis, of Moneysavingexpert.com, said: "This ultimatum is
absolute nonsense, and shows that Lord Mandelson has never had any connection to
credit cards in his life. Is he saying that credit card companies should drop
their interest rates in line with the base rate drop, from an average of 18 per
cent to one of 15 per cent? To make this work they would actually have to cut
their interest rates by 60 per cent to mirror the real changes in the base rate,
so if even if every credit card on the market took 3 per cent off their interest
rates it would mean nothing."
Credit and store card companies have long been accused of employing dirty tricks
to boost income. The order of payments is regularly skewed so that the most
expensive debt, with the highest interest rate, is paid off last.
Companies defy ministers
by increasing charges despite plunging interest rates,
$200 billion consumer credit facility
Tue Nov 25, 2008
WASHINGTON (Reuters) - The Federal Reserve, with the backing of the Treasury,
launched a $200 billion lending facility to support the market for consumer debt
Following are details of the plan, called the Term Asset-backed Securities Loan
* Federal Reserve Bank of New York will lend up to $200 billion on non-recourse
basis to holders of certain triple-A rated asset backed securities backed by
newly originated and recently originated consumer and small business loans.
* ABS issuance in consumer categories such as auto loans, student loans and
credit cards were roughly $240 billion in 2007 but essentially ground to a halt
in October, according to the U.S. Treasury Department.
* The new Fed facility is intended to assist credit markets by facilitating
issuance of ABS and improving ABS market conditions.
* The Treasury will provide $20 billion in credit protection to the New York Fed
for the program. The Treasury will purchase subordinated debt issued by a New
York Fed special purpose vehicle to finance the first $20 billion of asset
purchases. The New York Fed will fund any purchases above that amount by lending
additional funds to the vehicle up to $200 billion.
*The Treasury funds will come from the unallocated portion of the first tranche
of its $700 billion financial rescue fund, known as the Troubled Asset Relief
Program (TARP). The action leaves the Treasury just $20 billion in unallocated
funds before it must seek Congressional approval to access the TARP's second
* All cash flows from assets in the program will be used to first repay
principal and interest to the New York Fed, and second, to repay principal and
interest on the $20 billion from the Treasury TARP fund. Any residual returns
will be shared between the New York Fed and the Treasury.
* The New York Fed will apply a "haircut" to the value of the securities used as
collateral for loans under the program, based on the rpice volatility of each
class of eligible collateral.
* The New York Fed will offer a fixed amount of loans from the facility on a
monthly basis. These loans will be awarded to borrowers each month based on a
competitive, sealed bid auction process and the bank will set minimum interest
rate spreads for bidding.
(Reporting by David Lawder, Editing by Chizu Nomiyama)
FACTBOX: Fed launches
$200 billion consumer credit facility, R, 25.11.2008,
Retailers and credit card lenders
at odds in crunch
Fri Nov 21, 2008
By Alexandria Sage - Analysis
SAN FRANCISCO (Reuters) - The need by U.S. retailers' to sell in hard times
has put them at odds with the lenders backing their credit cards. While stores
aggressively promote use of their cards, lenders are increasingly wary of
That conflict of interest, a direct result of the global credit crunch, could
fuel escalated risk in 2009 following a holiday season in which more consumers
are offered store credit cards that they may be less likely to repay.
"From the retailers' point of view, the more people who open up cards, the
better it is for sales," said Laura Nishikawa, an analyst with Innovest
Strategic Value Advisors.
But in the midst of the economic downturn, banks are working hard to protect
themselves against defaults from existing cardholders, not to mention weeding
out consumers with bad credit and maxed out accounts who seek new cards.
"As a bank right now, you're afraid you're picking up the bad apples," Nishikawa
added. "That's one of the reasons a lot of the banks are tightening their
The tug-of-war between retailers and lenders is accelerating, particularly as
store chains pull out all the stops to ring up holiday sales in what is expected
to be the worst shopping season in nearly two decades.
Stores from Home Depot Inc (HD.N: Quote, Profile, Research, Stock Buzz) to
online jeweler Blue Nile Inc (NILE.O: Quote, Profile, Research, Stock Buzz) have
seen potential sales evaporate due to their customers' inability to access
credit to pay for big-ticket items, whether a diamond ring or a kitchen remodel.
"Large consumer durables are extremely credit sensitive," said Citigroup analyst
Steven Wieting, citing autos, furniture and electronics as vulnerable sectors.
"People simply do not buy a new car without credit."
Blue Nile Chief Executive Diane Irvine said recently the credit freeze had hurt
"purchases of high-ticket items, as traditional avenues of financing have now
NO CREDIT? USE THIS CARD!
One solution for retailers is to offer shoppers yet another credit card. These
private label cards, backed by lenders such as GE Money (GE.N: Quote, Profile,
Research, Stock Buzz), Citi (C.N: Quote, Profile, Research, Stock Buzz) or HSBC
(HSBA.L: Quote, Profile, Research, Stock Buzz), carry varying interest rates and
limits set by the lenders themselves based on credit worthiness.
"The retailer has no interest in the card being repaid. They just want the loan
to be made in the first place so they can get the sale," said Nishikawa.
At stores from Cost Plus (CPWM.O: Quote, Profile, Research, Stock Buzz) to Ann
Taylor (ANN.N: Quote, Profile, Research, Stock Buzz), salespeople ask shoppers
if they want to apply for a card, offering discounts if they do.
Retailers, desperate for revenue in a dismal selling environment, "are trying to
sell anything at any price," said David Bassuk, managing director in the retail
practice of Alix Partners, a business advisory firm.
"They are pushing the credit card down your throat because they find when you go
into a store and they offer you 10 percent off if you open a credit card today,
it creates a motivation to buy more stuff," Bassuk said.
Red Gillen, senior analyst with Celent, a financial research and consulting
firm, said retailers are "stuck between a rock and hard place."
"On the one hand they want the shoppers to buy more, and on the other hand they
don't want their shoppers' applications to be denied," he said. "That leaves a
very bad taste in their mouths."
But ultimately, it's the underwriters who hold the (proverbial) cards, experts
say. To protect themselves, applications can be rejected, credit limits or
higher interest rates can be imposed, and all lenders have the right to tinker
with terms after they've signed up someone new.
"The underlying issue is the credit underwriters bear the risk so their position
holds sway," Gillen said.
HOME DEPOT, BEST BUY CREDIT
Home Depot has been scaling back its programs to offer no payments and no
interest for 12 months. This week, an offer on the company's website advertised
a six-month, no payment, no interest credit card on purchases over $299.
Some 30 percent of new account applications for Home Depot credit cards are
rejected, executives said. Its average approval limit has decreased 5 percent
from last year.
"As we look out, continuing pressure on credit availability could potentially
impact sales," said Chief Financial Officer Carol Tome in a quarterly conference
call with analysts.
Best Buy Co Inc (BBY.N: Quote, Profile, Research, Stock Buzz), aware that people
can't charge new televisions, computers or stereo systems without financing,
advertises an HSBC credit card with no interest for 18 months for purchases over
A holiday marketing program by Kohl's Corp (KSS.N: Quote, Profile, Research,
Stock Buzz) to get shoppers into stores includes charge card promotions like a
two-day shopping pass with additional discounts.
A spokesman for Macy's Inc (M.N: Quote, Profile, Research, Stock Buzz) said its
card was not being promoted any more than usual in the new environment. Still,
even as write-offs increase, use of the Macy's credit card is rising.
But after consumers sign up for cards to get a discount on purchases, they often
let their new cards lapse. Lenders are keeping an eye on these inactive store
credit cards, worried that a sudden flurry of activity means that the cardholder
is "in a tight spot," said Nishikawa.
And with the approach of the holidays, a time when a large chunk of sales are
purchased on credit cards, banks are increasingly wary, experts say.
Alix Partner's Bassuk said he sees "more risk and more downside" as retailers
promote cards and lenders raise rates.
"The holiday season is going to be (about) retailers pushing these bargains,
people taking out high-rate credit cards, more and more defaults, and we'll see
an escalation of the economic problems we're facing."
(Reporting by Alexandria Sage, editing by Richard Chang)
Retailers and credit
card lenders at odds in crunch, R, 21.11.2008,
Consumers Feel the Next Crisis:
It’s Credit Cards
October 29, 2008
The New York Times
By ERIC DASH
First came the mortgage crisis. Now comes the credit card
After years of flooding Americans with credit card offers and sky-high credit
lines, lenders are sharply curtailing both, just as an eroding economy squeezes
The pullback is affecting even creditworthy consumers and threatens an already
beleaguered banking industry with another wave of heavy losses after an era in
which it reaped near record gains from the business of easy credit that it
Lenders wrote off an estimated $21 billion in bad credit card loans in the first
half of 2008 as more borrowers defaulted on their payments. With companies
laying off tens of thousands of workers, the industry stands to lose at least
another $55 billion over the next year and a half, analysts say. Currently, the
total losses amount to 5.5 percent of credit card debt outstanding, and could
surpass the 7.9 percent level reached after the technology bubble burst in 2001.
“If unemployment continues to increase, credit card net charge-offs could exceed
historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer,
Faced with sobering conditions, companies that issue MasterCard, Visa and other
cards are rushing to stanch the bleeding, even as options once easily tapped by
borrowers to pay off credit card obligations, like home equity lines or the
ability to transfer balances to a new card, dry up.
Big lenders — like American Express, Bank of America, Citigroup and even the
retailer Target — have begun tightening standards for applicants and are culling
their portfolios of the riskiest customers. Capital One, another big issuer, for
example, has aggressively shut down inactive accounts and reduced customer
credit lines by 4.5 percent in the second quarter from the previous period,
according to regulatory filings.
Lenders are shunning consumers already in debt and cutting credit limits for
existing cardholders, especially those who live in areas ravaged by the housing
crisis or who work in troubled industries. In some cases, lenders are even
reining in credit lines after monitoring cardholders who shop at the same stores
as other risky borrowers or who have mortgages from certain companies.
While such changes protect lenders, some can come back to haunt consumers. The
result can be a lower credit score, which forces a borrower to pay higher
interest rates and makes it harder to obtain loans. A reduced line of credit can
also make it harder for consumers to manage their budgets, because lenders have
30 days to notify their customers, and they often wait to do so after taking
The depth of the financial crisis has shocked a credit-hooked nation into
rethinking its habits. Many families once content to buy now and pay later are
eager to trim their reliance on credit cards. The Treasury Department, which is
spending billions of dollars in taxpayer money to clean up an economic mess
brought on in part by all sorts of easy credit, recently started an advertising
campaign inviting consumers to check into the “Bad Credit Hotel,” an online game
that teaches the basics of maintaining good credit.
At the same time, the fear factor among lenders has deepened just as the crisis
makes it harder for some financially stretched consumers to wean themselves from
credit cards for even basic needs, like gas and food.
“We are not going to say, ‘Yahoo, this is over,’ and extend credit like we did
without fear,” Jamie Dimon, JPMorgan Chase’s chief executive, said in a recent
conference call. “If you’re not fearful, you’re crazy.”
Even those with good credit ratings are not excepted. American Express, which
traditionally catered to more upscale cardholders, said it would be increasing
effective interest rates by 2 or 3 percentage points for some of its credit card
holders — a move that could, for example, push a 15 percent rate up to 18
“We think it’s prudent given the nature of those products and the economic
environment we face,” Daniel Henry, its chief financial officer, said in a
recent conference call.
Some reward programs have also gotten stingier as lenders cut corners to save
money. Card companies, for example, have taken to substituting cheaper brands
for a Sony big-screen television as a way of lowering the cost of their
For less creditworthy customers, issuers are pulling back on promotional offers
that allowed borrowers to pay no interest for months as they try to get ahead of
stiffer lending rules that have been proposed by federal banking regulators and
The regulations, while beneficial to consumers, will curb profits on card
issuers’ riskiest customers. JPMorgan said that it was withdrawing some
teaser-rate loans that were only marginally profitable. Discover Financial
shortened the duration of its zero-balance offers.
And lenders, over all, are slowing the flood of mail offers to a trickle with
moves that would translate for the average American household into about 13
fewer pieces of credit card junk mail a year than its peak in 2005. Mail offers
to new and existing customers are on pace to drop below 8.4 billion pieces, the
lowest level since 2004, according to Mintel Comperemedia, a direct marketing
Online credit card applications have fallen for the first time in five quarters,
in part because customers are receiving fewer mail offers that drive them to the
Web, according to data from comScore, an Internet marketing research firm.
“We used to get a couple of offers a week, but I haven’t seen a credit card
offer in over a year,” said Brett Barry, who owns a real estate agency outside
Phoenix and described his credit record as strong. “What blows me away is these
companies are in the business of extending credit, but they don’t want to do it
Mr. Barry said that, without any notice, American Express had reduced the credit
limit on his business and personal credit card at least four times in the last
year, which he said had lowered his credit score. The moves have also made it
difficult for him to manage his payroll and budget, he said.
“Credit card issuers have realized their market is shrinking and that there is
no room for extra credit cards, so they have to scale back,” said Lisa Hronek, a
research analyst at Mintel. “People are completely maxed out with mortgages,
home equity lines and credit card debt.”
At the same time, credit card profit margins have been narrowing, largely
because lenders’ own financing costs remain elevated as investors spurn credit
card bonds, just as they did mortgages. Another factor is that the interest
rates banks charge even creditworthy borrowers have come down after the
emergency actions taken by the Federal Reserve to ease the credit crisis.
Meanwhile, bank executives say consumers are starting to curb their spending, to
an extent that may become clearer Wednesday when Visa reports its third-quarter
In previous downturns, banks could make up the missing profits by raising fees.
This time, there may be less room to maneuver.
“The last time credit costs spiked, the late fees were much lower, so card
issuers could turn to that and reprice more nimbly,” a Morgan Stanley analyst,
Betsy Graseck, said. “There is just more scrutiny now, and coming after the
subprime mortgage crisis, the world is more sensitive to the way lenders
Consumers Feel the
Next Crisis: It’s Credit Cards,
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