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.