Citibank Pulling A Large Number Of Its Credit Cards Out Of The Affiliate Marketing Channel

Citibank will be pulling some 14 credit cards out of the CardOffers.com affiliate marketing channel, according to a source who is impacted by Citibank's decision. CardOffers.com is one of the largest credit-card affiliate networks on the Internet. Citibank said its move is "due to the state of the market." The departure, which impacts all of CardOffers.com's partners, is effective December 31, 2008.

Citibank is just the latest credit-card company to exit the online affiliate market. Last month, Chase said that it would exit the affiliate marketing channel as well, citing "current market conditions." Given the credit climate, and given the state of Citibank's credit-card business in particular, the move to exit the CardOffers.com channel should not come as a surprise. If there is a surprise, it's that Citibank didn't pull all of its offerings out of the channel. As it stands, Citibank is leaving five of its cards in place. The Citi Platinum Select MasterCard, Citi CashReturns MasterCard, Citi Diamond Preferred Rewards Card, Citi PremierPass Elite, and Citi mtvu Platinum Select Card for college students are unaffected by Citibank's announcement.

These are the 14 credit cards that are affected by the move:

AT&T Universal Savings and Rewards Card

AT&T Universal Savings Platinum Card

Citi PremierPass

Citi Bronze/AAdvantage Card for College Students

Citi Diamond Preferred Card

Citi Dividend Platinum Select Card for College Students

Citi Driver's Edge Card for College Students

Citi Gold/AAdvantage World MasterCard

Citi Hilton HHonors Visa Signature Card

Citi Platinum Select/AAdvantage World MasterCard

Citi Platinum Select Card for College Students

CitiBusiness/AAdvantage Card

CitiBusiness Card

CitiBusiness Card with ThankYou Network

Last month when Chase announced that it would be leaving the channel, a move that was effective immediately, I figured that it was an isolated event -- something specific to Chase. However, now that Citibank has decided to take a good portion of its affiliate portfolio out of the channel as well, I think this could be the beginning of a trend. Chase and Citibank, if I am correct, will be seen as first movers.

Citibank's departure does two things. One, it will reduce costs at Citibank's card unit. There is a cost associated with "boarding" new customers. Indeed, affiliates, for example, get a commission for every applicant who successfully turns into a customer. What's more, many of the affiliate offers also come with nice teaser promos. You'll find fewer of those on credit-card company sites. That should result in a cost reduction for Citibank as well. In addition to driving costs down, Citibank will effectively be slowing loan growth as well. Indeed, fewer applications coming from the affiliate channel means less lending overall. In the meantime, Citibank will continue to market credit cards from its own Web site.

Last month when I wrote my piece on Chase's exit (story link here), I said this: "I'll be keeping my ears and eyes open for further developments." Let's just say that Citibank's move, coupled with Chase's move last month, has my attention. This is a further development. And it bears watching.

On Sunday, Meredith Whitney, a banking analyst at Oppenheimer, said that credit card companies would rein in some $2 trillion in credit lines during the next 18 months (story link here). Whitney said the cuts will be made in "reaction to risk aversion, constrained capital and regulatory change."

Make no mistake, these recent departures from the affiliate marketing channel represent a desire to do less lending. I think we can tie some of it to the same stuff that Whitney cited in her op-ed piece: a reaction to risk aversion, constrained capital and regulatory change.

All I can say is stay tuned. I am sure there is more to come.

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Citibank Credit Card Customers: Interview Opportunity For CNN Story

Drew Griffin, an investigative reporter over at CNN, is interested in speaking with Citibank customers who have recently been notified that their interest rates are being hiked.

If you'd like to be interviewed, and you want a platform where your voice can be heard, this is a great opportunity. It doesn't get much bigger than CNN.

Drew can be reached at drew.griffin@turner.com.

You can read his biography here (link).


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Schwab Bank Invest First Visa Credit Card

I don't single out too many credit cards here at CreditMattersBlog.com, but Charles Schwab has rolled out a new credit card that may be of interest to some of you. Hat tip: persevering. Plus, Bob Wang (a reader) wanted me to do a write up of this card. How can I turn Bob down? Anyhow, the card's name is a bit unwieldy, so I'll call it the Schwab Invest Visa card. There are two features that stand out with this card: the ability to earn 2% cash back on all purchases (unlimited) and no foreign exchange fees.

Here are some of the features from the credit card:

* No limit on the cash back you can earn.
* No minimum monthly purchase amount.
* No annual fee or foreign exchange transaction fees.

If you receive an initial credit limit of $5,000 or more, you will also receive Visa Signature benefits as well. Fine-print alert: If your account does not receive an initial limit of $5,000 or more, you'll receive a platinum plus account. Whether you you receive Signature benefits or you get the platinum plus account, your cash-back rewards and other perks are unaffected. The initial limit will only determine whether you also receive Visa Signature benefits as part of your Schwab card.

Now, here is where the 2% cash back comes in. In order to receive 2% cash back on all of your purchases, you must open a Schwab One brokerage account. If you don't open a brokerage account, your card will not be able to generate cash rewards. Instead, you'll be put on a points program. According to Schwab, "the Schwab One brokerage account has no monthly service fees, no minimum balance requirements, low-cost trading, plus 24/7 online and customer support." Therefore, Schwab has made it easy to receive the 2% cash back. You simply open the brokerage account and start enjoying your 2% cash-back card.

While, you're at it, you may want to open a Schwab high-yield investor checking account, too. There is a combined application for the brokerage and checking account, which can be found here (link).

Here are some of the checking details:

Earn 1.50% variable APY— that’s 3 times the national average.

No ATM fees. We reimburse any ATM fee you are charged— worldwide.

Enjoy free standard checks, free online bill pay and a Visa Platinum Check Card.

Get full-featured FDIC-insured checking for up to $250,000.

Also, there are no minimum balance requirements and there are no account service fees. You can open the checking account with $0.

With that out of the way, here are my warnings. I would assume that you'll receive a hard inquiry for each product that you apply for. This card is underwritten by FIA Card Services, Bank of America's subsidiary. FIA/BOA is well known for pulling Experian -- though it varies, I imagine, by geography. If you apply for all three products, I would assume that you'll receive three hard inquiries. And even though there is a dual application for the brokerage and checking account (using the link I provided above), I'd just count on there being a separate pull for each product. If you only receive one inquiry for the dual application, great. But don't count on it.

Details of the credit card (including the application) can be found here (link).

After you've applied for the Schwab credit card, you can check the status of your application here (assuming you don't receive an instant approval): Schwab credit card application status (link here).

Good luck to those who apply for the card. Read more...

A Conversation With Vikram Pandit, CEO of Citigroup

Less than ten days ago, the U.S. government bailed out Citigroup. Two days later, Charlie Rose sat down with Citigroup's CEO, Vikram Pandit, and interviewed him for an hour. Rose and Pandit discussed the bailout, the economy, and the banking industry in general.

I was too busy thinking about Thanksgiving last week, so I missed the interview. I'm thinking that if I missed the interview, maybe some of my readers missed the interview as well. I was able to view the video yesterday for the first time. If you've got the time to watch it, I think it's time well spent.



Related Articles:

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Citibank To Raise Interest Rates On CreditMattersBlog.com

Citibank To Raise Interest Rates On Its Plastic

Citibank's Rate-Hike Strategy -- Where To From Here?

Citigroup Plans To Cut An Additional 53,000 Jobs

U.S. Agrees to Rescue Struggling Citigroup

Read more...

Use Your Credit Cards -- Or Watch Them Get Closed

I'm not going to write a long story this morning. But I am quite amazed at how many people are finding my site as a result of account closures that are due to inactivity. Folks, you must use your cards if you want to keep them open. It doesn't get any simpler than that. If nothing else, let this story serve as a friendly reminder.

Card companies, as I have said on numerous occasions in the past, are just looking to slash limits and close accounts. If you're not using your account on a regular basis, you're inviting the card company to close your credit-card accounts. It used to be that you could leave your card idle for six months. That unwritten rule is no longer in effect. I would advise people to use their cards at least once every three months.

I'm not saying that you have to run out and buy a big-screen television. I'm simply saying that you have to put some usage on your cards. If you're running an errand today, for example, use a credit card that you haven't used in a while. I've recently started putting some of my cards into the rotation by using them for recurring bills.

And let me add a clarification. If you have a balance, and you're paying the balance down each month, your account is considered "active" by the credit card company. This story is directed toward those who are not carrying a balance and who have not made a purchase on the card for some time. Your card could be considered dormant by the credit card company. These are the customers who should worry about account closures.

In addition to avoiding closures, some of my readers might also be helping themselves by getting FICO to recognize their credit limits again. Not aware of how inactive cards affect FICO? Read my story on the topic here (link).

That's it, readers. Consider this a public-service announcement. Use your cards or lose them.

Related Articles:

How Closed Credit Cards Impact Your FICO Score

Citibank to Students: Use Your Card or We Will Shut You Down

From the "Use it or Lose it" Department: Citibank on a Rampage with Citi Flex

Don't let Your Credit Card Accounts get Dusty

Read more...

Should Citi Field Be Renamed Taxpayer Bailout Field?

I'm not sure how big this is outside of New York, but it's a crack up from where I'm sitting. Citigroup is paying $400 million for the naming rights on the new stadium that's being built for the New York Mets baseball team. Citizens are saying that the stadium, which will be called Citi Field, should be called Taxpayer Bailout Field instead (or something similar to that). Bloomberg's Scott Soshnick has a nice reaction story on the topic.

Before we get to the Bloomberg story, though, take a look at the nice cartoon that the New York Post's Sean Delonas recently did:

Sean Delonas, New York Post -- November 25, 2008
In the meantime, here is a snippet from the Bloomberg piece:

“The whole thing’s freakin’ absurd,” says the 50-year-old Sessa, who helped build Citi Field.

Full disclosure: Danny’s sister, Danielle, is a sportswriter for Bloomberg, which seems appropriate when you consider that this is about banks, bailouts, bewilderment and baseball.

Simply mentioning Citigroup and its plan to spend $20 million a year to put its name on a baseball stadium sent Danny’s New York accent up a few decibels.

He just doesn’t understand how the second-biggest U.S. bank by assets, which is receiving government money and laying off employees, can in good conscience forge ahead with its $400 million naming-rights contract for the new ballpark being erected for the Mets.

Granted, the naming rights deal was struck well before Citigroup's stock went into the crapper -- and well before Citigroup went begging for a handout from taxpayers -- but the Citi Field thing must certainly strike a nerve with a lot of people.

I wonder how all of those Citibank customers who recently received an interest-rate-hike stocking stuffer from Citibank feel about the signage that will adorn the new stadium.

Read the entire Bloomberg story here (link). Hat tip: Scott in NJ. Read more...

Be Careful Of Debt Counselors: Some Can Make Matters Worse

Times are tough. Some debtors are near the breaking point. If you're considering a debt counselor that can help you dig out of financial trouble, be sure to do your homework, says the USA Today. Indeed, if you make the wrong decision, it could cost you thousands of dollars -- and make matters worse, not better.

From the story:

Amid signs of a steep recession, an Internet-based industry of self-described debt-counseling firms is offering consumers ways to eliminate or reduce credit card bills and repair credit records. But prosecutors, government officials and consumer advocates say some of the programs seem too good to be true — and are.

"Usually, the first form of advice some of these companies offer is to stop paying your debt, which is, quite frankly, the absolutely worst thing you can do," says Stephen Cox, spokesman for the Council of Better Business Bureaus, calling such a recommendation "one of the red flags."

Read the rest of the story here (link). Read more...

America Must Keep Consumer Liquidity Flowing

Meredith Whitney, a banking analyst over at Oppenheimer, said she expects banks to rein in some $2 trillion in credit lines over the next 18 months. She made those comments on Sunday in a research note. Indeed, I pointed to a Reuters story yesterday that highlighted her call. What you may not have caught, though, is Whitney's appearance on CNBC yesterday afternoon, right before the stock market closed.

Maria Bartiromo caught up with Whitney at the New York Stock Exchange and discussed Whitney's $2 trillion call. Bartiromo also discussed Whitney's op-ed piece that appeared in the Financial Times on Sunday.

From the op-ed piece:

I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy. My primary concern is preserving liquidity to consumers, who command more than two-thirds of gross domestic product.

Here's what I recommend. First, read the op-ed piece in the Financial Times. Then watch the CNBC video that dissects Whitney's op-ed piece.

Here is the link to the op-ed piece (link here).

And here is the link to Bartiromo's interview of Whitney (link here).

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The Citibank Opt-Out Decision -- Everything You Need To Know

This column is inspired by a reader of mine who took me to task yesterday for writing a so-called fluff piece about opting out of interest-rate hikes. This reader said that I could have added a lot of value for my readers if I had written a story about the consequences that flow from the decision to opt out of Citibank's recent interest-rate increase. Instead, this reader argues, I used the story as filler -- and nothing more. That wasn't my intention, but I took the message to heart nonetheless. As such, I've decided to write a different story today. If that reader is out there, this column is for you.

Millions of Citibank customers have recently received rate-hike notices in the mail (link here). Many customers will see their interest rates double if they accept the new terms. Therefore, the decision to opt out (or not) is an important one. Before getting to the impact that these opt-out decisions will have on customers, let's get to the facts first.

Customers have until January 31, 2009, to opt out of Citibank's interest-rate hike. In the meantime, the interest-rate hike will theoretically go into effect beginning on December 3, 2008 (tomorrow). See the disclosure here (click to enlarge):


Here is how that works. If you do not opt out, Citibank will, after January 31, 2009, go back to your account and get you for back interest (assuming you carry a balance). That makes sense. Citibank isn't going to start charging you interest on December 3 because it realizes that you have until January 31 to opt out. But you should realize that interest is silently accruing (at the higher rate) -- and will be collected if you do not opt out before January 31.

Additionally, Citibank customers, if they do decide to opt out, will be able to keep their credit cards (and use them) until the credit card expires. You'll also be able to keep your current interest rate. Once the card expires, the card will be closed (though your current terms will remain in force). Moreover, if you have a variable-rate card, your closed card will fluctuate with the prime rate (or LIBOR if your rate is pegged to that). Thus, assuming you currently have a 6.99% rate on your card, you will keep that 6.99% rate even after the card is closed. And, just as your card's rate currently fluctuates with prime, it will continue to fluctuate even after it's closed. Got that? Good.

And this caveat: even if your account is closed (and you've locked in the lower interest rate by opting out), you will be subjected to the current terms of your credit card. This means that if you miss a payment (assuming you have a balance after the account is closed), go over your limit, or do anything wrong with the account, your rate could jump to the default rate (near 30%). Again, your current terms allow that. And your opt-out terms would be no different. So take care of your closed account just as you would an open account.

Promotional rates, meanwhile, are unaffected by Citibank's recent rate hike. The rate hikes only affect purchase rates. Therefore, if you have a balance-transfer promo rate of 1.9% now, you will continue to enjoy that rate -- even if you decide NOT to opt out of the interest-rate hike. When your promo rate expires, you will go to your new (higher) rate, assuming, again, that you don't opt out. If you do opt out, however, your promo rate will remain in place until it expires. Once the promo rate expires, the rate will go to your current purchase rate (the purchase rate that you're preserving by opting out).

With that out of the way, let's look at the consequences of your decision to opt out of Citibank's rate hike. I'll use a real-life example that comes from one of my readers.

This reader has a $3,800 balance and a current interest rate of 6%. If the customer opts out, the customer will keep the 6% rate and continue to pay the $3,800 balance down using the current terms. If the reader does NOT opt out, however, the rate will go to 14.99%. Let's pencil out the difference.

If you never paid a dime of the balance (impossible), and let that balance sit for an entire year (also not possible), you would pay $228 in interest for the year if you kept a 6% rate. If you allowed the rate to move to 14.99%, you'd pay $570 in interest for the year. The difference between the two rates, then, is $342. I freeze the balance for a year, by the way, just so that I can use an apples-to-apples example. In the real world, the interest payment would come down each month. But I ignore that for my purposes here.

Because the reader plans to pay the $3,800 balance in full within the next five months, the reader -- if he or she accepts the rate hike -- will end up paying a little less that $250 in interest over that five-month period. That's not chump change but it's not likely to break the bank either.

The reader could move the $3,800 balance to another card, but the reader would likely incur a balance-transfer fee of 3%, which is standard. A 3% fee on a $3,800 balance would result in a fee of $114.

Given that my reader would likely incur a balance transfer fee of $114 (if the reader did the transfer today) and given the fact that my reader is likely to incur about $250 in extra interest as a result of the new rate increase, I would -- if it were my situation -- probably accept the rate increase and pay the account off as soon as possible. The decision would cost me a net amount of $136 ($250-$114). I'd also be able to keep my account open indefinitely. Of course, this is just one reader's situation. Everyone will have their own math to pencil out. I used this example to show the kind of analysis that goes into a decision like this.

Let's now look at what happens if my reader opts out. Assuming the reader does pay the $3,800 balance off in five months, the reader would pay about $100 in interest costs, or about $150 less than it would cost to accept the rate increase. In the grand scheme of things, we're not talking about a big difference here. The biggest downside, then, to opting out is that the card would eventually be closed by Citibank. When that closure occurs, FICO then comes into play.

With regard to my reader's FICO score, if the Citibank account is closed, my reader could get dinged because the customer's overall utilization ratio would rise (assuming there are balances on other cards). If my reader generally doesn't keep balances on any of his or her other cards, then the issue is probably moot. Indeed, account closures typically hurt people who are carrying balances -- and already utilize a lot of their available credit. The removal of available credit could make the customer look over-utilized on an overall basis. (Note that utilization is calculated both on an individual card basis and overall.)

Even if an account is closed, readers need to remember that the account continues to age for FICO-scoring purposes. What's more, the closed account will remain on a person's credit report for about ten years (though I have seen accounts fall off sooner). So, closed accounts count toward age. It's only when they fall off the credit report that the average age of credit history is readjusted. Therefore, our most immediate concern about opting out is the utilization issue.

If customers have not yet paid their balances off by the time the account is closed, there is a wild card that needs to be dealt with as well. Often, card companies reduce the available credit limit to $0 when the card is closed. If a customer still has a balance -- on a card that reports a $0 limit -- the card will appear maxed out for FICO purposes. FICO does not ignore utilization when there is a balance on a closed card. Utilization is only ignored when there is no balance on a closed card. Remember that. I don't know how Citibank is going to handle the available-credit issue when the card is closed. That's the wild card.

Something else to keep in mind: there is nothing inherently bad about opting out. Opting out does not get reported to the credit bureaus. The card company does not put a notation on your record saying that you opted out of an interest-rate increase. Indeed, interest rates aren't even reported to the credit bureaus. In the end -- when your card is finally closed by Citibank -- the only note that will be recorded is that the account is closed. It will either say that it was closed by the credit grantor (Citibank) or closed at consumer's request.

For FICO purposes, there is no distinction between an account that is closed by Citibank or by the customer. There is no difference. That said, a credit analyst (down the road) might wonder why your account was closed by a credit grantor. But all the analyst can do is wonder. There are plenty of reasons why accounts are closed by a credit grantor, which is why FICO doesn't discriminate between the two.

I mentioned this yesterday, but it bears repeating: if you haven't received an interest-rate-hike letter from Citibank yet, that doesn't mean you're safe. I've been told by a source that these rate-increase letters are being staggered. They're being sent in waves (so that customer-service reps aren't overwhelmed by a crush of phone calls at the same time).

I'd love for all of my readers to sidestep this rate hike altogether, but that's not going to happen. As such, I'm hoping that this story puts some of you at ease. I'm hoping that the information in this story serves you well and allows you to make an intelligent decision about the opt-out process.

Related Articles:

Change of Terms in Your Credit Card Agreement -- How Do You Reject The New Terms?

Citibank To Raise Interest Rates On CreditMattersBlog.com

Citibank Tells Cardholders To Take A Hike

Citibank To Raise Interest Rates On Its Plastic

Read more...

Credit Card Industry May Cut $2 trillion of Credit Lines

So says Meredith Whitney, a banking analyst over at Oppenheimer & Co. During the next 18 months, Whitney expects the credit-card industry to rein in some $2 trillion in credit lines. The move, says Whitney in a research note, couldn't come at a worse time. She called the pullback in credit both "dangerous" and "unprecedented."

From Reuters:

"In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30.

She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.

"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.

Read the rest of the story here (link). Read more...

Anonymous Banker Weighs In On The Coming Credit Card Debacle

This morning -- at my blog -- professor Levitin, in an op-ed piece, argued that the credit-card industry's business model is broken. The Executive Suite, a New York Times blog written by Joe Nocera, published an email from a anonymous banker last week, which dovetails pretty nicely with Levitin's piece. Indeed, the anonymous banker believes that the card industry's model is broken as well. He's got some ideas on how to fix it.



From the Executive Suite:

As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages. Then we ask for “household income” — as if other parties in the household could be held responsible for that debt. They cannot. And since we don’t ask for any proof of income, the customer can throw out any number they think will work for them. Then we ask if they rent or own and how much they pay. If their name is not on the mortgage, they can state zero. If they pay $1,000 in rent, they can say $500. (Years ago we asked for a copy of the lease to verify this number.) And finally, we don’t ask how much of a credit line the consumer is looking for. The banker can’t even put that amount into the system. There isn’t any place on the application for that information. We simply put unverified information into a mindless computer and the computer gets the person’s credit score and grants them the biggest line that score and income (ha!) qualifies for.

There is a whole lot more where that came from. You can read the rest of the blog entry here (link).

If you didn't catch professor Levitin's piece earlier this morning, you can read it here (link). Read more...

The Credit Card Industry's Business Model Encourages Irresponsible Lending

Today's blog entry is a bit different. Adam Levitin, a law professor at Georgetown University Law Center, and contributor at the Credit Slips blog, has given me permission to publish an op-ed piece that he recently penned (thanks, professor Levitin). Professor Levitin, who writes with a consumer-advocate slant, slams the credit-card industry's business model, arguing that it encourages irresponsible lending. Indeed, it's a model that needs to be fixed, he says.

By Adam J. Levitin

As every sector of the American economy lines up to sit on Congress' lap to ask for an early Christmas present, things aren't looking so good for American consumers. The visions dancing in their heads are not of sugar plums, but of unemployment, debt and foreclosures. They're wondering how they are going to pay for Christmas presents.

Now we learn that Treasury Secretary Henry Paulson wants to save Christmas, by using taxpayer funds to bolster the credit card market. But before we shower taxpayer dollars indiscriminately at every down-at-heel, ragamuffin credit card lender, we should take a hard look at how they got themselves into so much trouble. Just throwing money at the credit card industry without requiring a systemic change in how it does business is merely asking for a repeat of the crisis.

The card industry's business model is the heart of the problem, and needs to change. Just as with subprime mortgages, the credit card business model creates a perverse incentive to lend indiscriminately and ignore delinquencies. Card issuers make money on every credit card transaction, regardless of whether the consumer ultimately pays a finance charge. The issuer receives around 2 percent of every transaction in a fee paid by the merchant (and passed on to all consumers in the form of higher prices). This fee is called the interchange fee. Card issuers will collect about $48 billion in interchange fees this year.

Because interchange is based on transaction volume, it creates an incentive for banks to issue as many cards as possible, regardless of the creditworthiness of the borrower. By creating a huge revenue stream unrelated to credit risk, interchange encourages card issuers to engage in reckless lending – and virtually every credit card loan is a “liar loan” with no income verification.

Banks have compounded this problem by shifting much of the loan risk to investors through securitization. When card issuers securitize credit card debt, they transform the credit card debt into a pool of assets used to pay off bonds. If the pool turns out not to be large enough, the bond investors take the loss. But if there's a surplus, it goes to the card issuer.

While card issuers sell off most of the default risk, they keep any upside that comes from inflating their fees and rates. This is a heads I win, tails you lose situation and leads the banks to increase fees and interest rates on securitized debt. If the higher fees and rates cause more defaults, it is investors who bear the loss. If the higher fees result in more income, however, it is the card issuer, not the investors, who benefit.

In order to ensnare consumers in these fees, the card companies employ an ingenious system of billing tricks and traps. The hallmark of credit card pricing is obfuscation through disclosure. Card issuers have created enormously complex pricing structures, with multiple interest rates and fees. On top of this Byzantine structure, issuers then layer a filigree of abusive and deceptive billing practices, buried in reams of fine print.

Making the total cost of using a card utterly inscrutable allows issuers to play a game of three-card monte. Card issuers distract consumers from the total price of credit cards by emphasizing teaser interest rates and rewards programs. Meanwhile, issuers raise the back-end fees that consumers inevitably underestimate. Since the 1990s, over-limit fees have gone up more than 115 percent and late fees more than 160 percent. The rise of these fees has a 99 percent correlation with the growth of securitization. Because credit card pricing is opaque, the market cannot function efficiently, and consumers inevitably misuse credit cards to their detriment.

The tricks and traps in the fine print alone cost consumers more than $12 billion last year, and this is only a fraction of the pain inflicted by the one-two punch of interchange fees and abusive interest rates.

Most consumers spend responsibly and live within their means, but the banks have devised a system to encourage reckless overspending – and enrich themselves in the process. But it turns out the maze of tricks and traps even fooled the banks. As delinquencies rise, they are looking for a handout. Whether or not they get it, we need to learn something from this crisis and fix the credit card business model, or we'll all be in line for some special lumps of coal in a Christmas future.

Professor Levitin specializes in bankruptcy and commercial law. He's also a regular contributor at Credit Slips, a blog that focuses on credit and bankruptcy Read more...

10 Credit Questions and Answers at CreditMattersBlog.com (December 1, 2008)

As I have said before, I can see how my readers find CreditMattersBlog.com. I don't collect any personal information, but I can see search terms that people use to find the site. This information is like the center of Lifesavers candies. Or doughnut holes. Rather than letting them fall by the wayside, I figure that I should put these search queries to good use.

Here are the rules: I will edit search queries for syntax purposes. Otherwise, I will leave them alone. I'll also phrase queries in the form of a question whenever possible. By request, these Q&As are published whenever I have received 10 questions (through Google and other searches).


Q: Should I roll large credit-card debt into my mortgage?

A: Unless there are some very serious reasons for doing so, I would never advocate someone taking unsecured debt (like credit-card debt) and rolling it into a mortgage (secured debt). Never. If someone is going to take a bath on the debt, you're better off letting someone else take the fall. That's a cold business decision, of course, but it's generally the best advice you'll receive. Don't roll your credit card debt into your mortgage (where the debt, meanwhile, will accrue interest for years and years).
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Q: American Express raising interest rates -- can you opt out?

A: Unfortunately, American Express is not allowing customers to opt out of its recently-announced interest-rate hike. Like Nordstrom, which recently said that it was hiking rates on its customers (and not providing an opt-out procedure), American Express is giving you two options. Pay your account in full and close the account, or keep the card open and accept the new rate.
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Q: I feel overwhelmed by the bank teller position.

A: I have someone you should talk with. He's a real sweetheart. Here you go (story link).
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Q: Max out Citibank credit card before they pull the credit limit?

A: Oh, boy. Unless you have a crystal ball, you can't be sure that your card will actually suffer a credit-limit decrease. What's more, if you max out your card, in an effort to preserve your limit, you're just hurting yourself. Indeed, you're doing the very thing that you're worried about. If the card company lowers your limit (to right above your balance), you'll be maxed out. If you don't have a balance, then you're just hurting your own credit score by maxing the card out.

Honestly, I can't think of a single, logical reason to max out your credit card. Plus, there is no telling what your other creditors might do in response to you maxing out your Citi card. You could get a lot more than you bargained for with a "strategy" like this.
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Q: If you opt out of a credit card APR increase does it hurt your credit?

A: In a vacuum, no. But what so often occurs with these opt-out procedures is that you are forced to close your credit card account immediately (though Citibank's recent hikes provide for a rather liberal opt-out procedure). If your account is closed, several things happen. You lose access to your credit limit and your utilization ratios are impacted. Indeed, if you have few card options, and you use your cards quite a bit, it's a safe bet that you will have to deal with utilization issues. That's why customers should think long and hard before making their opt-out decision.
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Q: What happens if a creditor lowers your credit limit but does not notify you?

A: If you are looking for a notification ahead of the credit-limit decrease, don't hold your breath. Card companies shoot first and then go from there. Hence, after you have received your credit-limit decrease, you'll get a letter in the mail notifying you of the move. Let this serve as a reminder to shoppers during this holiday season. Always check your credit limits (online or over the phone) before you head out to do some shopping. You don't want to go over your credit limit and you don't want to be embarrassed at the checkout counter.
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Q: Does it mean I am denied when the credit application says 7-10 business days?

A: Absolutely not. That's a pretty standard response. More card companies are reviewing credit card applications manually these days, so getting a 7-10 day response is quite common. Now, I am not saying that you'll always be approved when you get this response, I'm just saying that it doesn't portend a denial when you get that notification.

Hang tight. Best of luck.
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Q: Now that WaMu is owned by Chase, is WaMu still using double-cycle billing?

A: Unfortunately, Washington Mutual is still using two-cycle billing. Indeed, Wamu is one of the few card companies that still use this pathetic billing practice. Chase abandoned the two-cycle billing practice in 2007. It's a safe bet that Chase will kill the practice at Wamu when it eventually takes day-to-day control of Wamu's credit-card unit. For now, though, customers will have to endure the practice for a little bit longer. You can read about two-cycle billing here (link).
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Q: Credit grantor closed a zero-balance account for delinquency -- when credit report is clear.

A: If that happens, be sure to call the card company and explain the discrepancy. These closures are often generated by computers. Talk with a human and explain the situation. There is a good chance that you'll be able to get the account reopened.
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Q: Why, when I applied online for the Macy's credit card, didn't Macy's give me an instant decision?

A: My answer comes from a source who knows this particular credit department well. The only card a person can apply for online is the Macy's store card. Typically, if you do get approved online, you'll be given a token $100-$200 limit. If you don't get an instant approval, that usually means the customer is declined, according to my source. Indeed, some 90% of the time, a deferred decision typically results in a decline. The other 10% won't get an instant approval because of a fraud alert or an inability to identify the person.

READER ALERT: For more credit questions and answers, the entire 10 Credit Questions & Answers index can be found here (link). Read more...

Interest Rate Increase: To Opt Out or Not To Opt Out -- That Is The Question

If you recently received a letter from your credit-card company telling you that your interest rates are moving higher, you likely also received an opt-out notice as well. Indeed, my recent Citibank letter, which detailed my change in terms, also provided me with an opportunity to opt out of the proposed interest-rate increase. My knee-jerk reaction was to take the letter -- and the increase -- personally. But that would be a mistake. The decision to opt out should be a business decision, not an emotional decision that is tied to "sticking it to the Man."

Before we get started, though, a quick heads up. If you haven't received a recent rate-hike notice from Citibank (link here), does that mean you're safe? Not necessarily. CreditMattersBlog.com has learned that "change in terms" letters are being sent in waves. They're being staggered. If you haven't received a rate-hike letter, it could just be a matter of time.

Meanwhile, I'm sure we're all a bit disturbed by the recent rate hikes -- especially when many of us haven't done anything to deserve them. It's natural to feel hurt. It's natural to feel as though you've been slighted by the credit-card company. And it's natural to think you're going to opt-out of these increases and show the credit-company what you think of these increases. But I'm telling you, there is no place for that kind of thinking when it comes to figuring out what you should do in the face of an interest-rate increase.

Instead, you should tackle the decision in a logical and business-like manner. There really shouldn't be a personal, emotional feeling attached to the decision. It should be a business decision that is well thought out.

These are the kinds of questions you should ask yourself:

1. If I opt out, what will my credit portfolio look like afterward (link to my card portfolio)?

2. If I close my account, will I have enough available credit (with my other cards) to meet my needs?

3. If I don't opt out, can I handle the new interest rate -- and the amount of interest that will accumulate under my new terms?

4. If I do opt out, and this is my oldest credit card -- by a mile -- what impact will the closure have down the road (link to story about closed cards)?

5. If I do opt out, what will happen to my utilization ratio (link to story explaining utilization)?

6. If I do opt out, will my utilization ratio get hammered because I don't have any other credit cards that could absorb my increased spending on those cards?

7. If I opt out, why am I opting out?

8. Am I opting out to prove a point?

9. Am I opting out because I don't do business with card companies that increase my interest rates for no good reason?

10. Do I understand that companies raise interest rates for business purposes (link to story about it always being business) -- and not for personal reasons?

11. If I pay in full each month, would an interest rate increase have an impact on me?

12. If I'm still reading this list, does that mean I love CreditMattersBlog.com?

Hey, I just had to throw in that last one. We can all use a good laugh.

My point is that interest-rate increases impact people in different ways. And the opt-out decision impacts people in different ways. One size does not fit all. Your decision to opt out of terms -- and close your account -- affects different things. For some, utilization ratios will be affected. For others, they'll have fewer credit-card options. Still others may be opting out of their oldest credit cards.

If you're concerned about your charging ability, credit history, and your credit score, then you need to make reasonable, measured decisions when it comes to your credit cards.

The knee-jerk reaction is often not the most intelligent one.

Get your pencil out, put your thinking caps on, and figure out if it makes sense to opt out of interest-rate increases.

After you've done that, then you can make your decision.

Related Articles:

Change of Terms in Your Credit Card Agreement -- How Do You Reject The New Terms?

Citibank To Raise Interest Rates On CreditMattersBlog.com

Sign Of The Times: Nordstrom Bank To Lift Interest Rates On Its Credit and Store Cards

Citibank Tells Cardholders To Take A Hike

Citibank To Raise Interest Rates On Its Plastic

Read more...

Heads Up: American Express Flexible Payment Option Suspensions -- On My Radar Screen

My subscription to Site Meter has been a real boon to CreditMattersBlog.com. Not only can I monitor my traffic statistics, I can also monitor search queries. I'm already using these search queries for my 10-Credit-Questions-and-Answers column (link here). I'm also using my search queries to alert my readers to things that my search-query results are pulling up. I call these "heads up" alerts. Last month I did a heads-up alert on Macy's and Citibank, which turned out to be quite accurate (story link here).

During the past several days, I have noticed a big spike in American Express flexible payment search queries. In particular, I have seen search queries that make me think that American Express is suspending and canceling the option for a large number of customers. For those of you who don't know, American Express charge cards are supposed to be paid in full each month. However, American Express has a flexible payment option for larger purchases that customers make. It allows customers to pay for these purchases over time (just like a credit card). However, American Express doesn't like customers to leave balances for long periods of time. In other words, if you do set aside some of your bigger purchases, and allocate them into your flexible payment option, American Express wants you to pay these purchases off sooner rather than later.

Anyhow, I'm giving people a heads up because some people might be planning on utilizing this option in the near future. If American Express kills the option before a customer can take advantage of this feature, customers will have to look elsewhere to park balances.

If American Express is killing this option for a lot of its customers, I am not surprised in the least. American Express has seen a spike in charge-off data and delinquencies. It makes perfect sense that American Express would not want a bunch of receivables (loans outstanding) sitting on its charge cards at this juncture.

That's it from here, folks. Have a great weekend.

Related Articles:

Heads Up: Macy's and Citibank Closures and Credit Limit Reductions On My Radar Screen

Read more...

How The Credit Card Securitization Process Works

If you've ever wondered how the credit-card securitization process works, you're in luck. Paddy Hirsch, a senior editor at Marketplace, does an excellent job -- in a video -- of explaining how the credit-card securitization process takes place. Most people have heard about securitization, but most people don't know how it works. If you have a murky understanding of the securitization process, then this video is for you. Hat tip: Mary Pilon, the Wall Street Journal.


Paddy Hirsch Explains The Securitization Process Read more...

Cartoon Of The Day -- Coupons and Discounts, Oh My

Given that today is Black Friday (the busiest shopping day of the year), I thought today's cartoon would be just perfect. Granted, our little cartoon doesn't depict a shopper trying to save a dollar at the store, but it'll do. Gave me a nice little chuckle.

In the meantime, folks, stay safe out there. There was a fatality this morning at a Walmart store in Nassau County (NY), when an employee was trampled to death by a senseless crowd (story here). And during the last hour or so, two people were shot at a Toys R Us store in Palm Desert, CA (story here). Just another reason why I do so much of my shopping online.

In the meantime, here is today's cartoon. Hat tip: Bob Wang.

Jim Toomey, November 28, 2008

Related Articles:

See More Cartoons of The Day Here (link)

Read more...