Exceptional times often require exceptional measures to deal with events. No one doubts or questions the seriousness of our economy. Consumers are cutting spending and shedding debt whenever and wherever possible. The commercial market place is affected by this trend. What does this mean for consumers in return? What credit cards should they be considering? How can consumers pay down their debt?
Linda Sherry, the Director of National Priorities at Consumer Action, was very helpful in answering these and other questions.
Mike: Are you seeing one group of people more affected by the economy downturn than others?
Linda: I think everyone is hurting right now. Many people have retirement accounts and home values that have diminished considerably, all while dealing with tightening consumer credit. People are telling us that their credit limits are being cut, interest rates increased, and some customers with promotional rates are being hit with $120 annual fees unless they accept a higher interest rate. With the layoffs, many people are using credit cards to keep their family finances afloat.
Mike: Some financial advisors have suggested that openly discussing personal credit card debt is highly taboo. Have you found this to be true and could this be a stumbling block to recovery?
Linda: We hear from a lot of people who are burned by credit card companies. But I do notice that many of them aren't prone to mentioning the outstanding balance amounts that they are carrying. I am often shocked when people tell me they are carrying $10K, $20K, and even $30K on credit cards. How did the companies allow people to carry balances of this magnitude? Why would people want to have these balances on their backs?
With balances like these, you have to wonder if it's an addiction. Besides small business owners, who may legitimately use credit cards to build business and help cash flow, it's not hard to imagine that people who have been allowed to run up $30K in credit card debt feel a little shame. In addition, there may be problems of self-esteem, depression, and shop-a-holism that allowed the balances to grow so high. A group like Debtor's Anonymous can be helpful in these cases, if people can face up to the magnitude of the problem.
But personal responsibility goes only so far...the banks have a responsibility not to extend such enormous amounts of credit and not to suddenly change the terms to throw consumers into even a worse place financially with higher interest rates, fees, and punitive terms. Banks need to scrutinize new applicants for unsecured credit more closely. They really need to ensure that there is adequate income to repay unsecured debts.
Mike: It has been suggested that those with good credit scores will find good credit card deals and those with poor scores will not find cards available at all. Are you finding this true and if so what can folks do to improve their scores?
Linda: I think this is true. People with poor scores should avoid the products that target their demographic with high upfront fees and tiny lines of credit. Instead, look for a good secured card.
The best advice I can give people about improving their scores is pay your bills on time (or even early!), do not use over 40% of your lines of credit (the lower utilization the better), and check your credit report for errors or possible identity theft on a regular basis. Each year, always get free copies of your credit reports (from the 3 major credit bureaus) from AnnualCreditReport.com.
If you are already in default or charged off status on credit accounts, it is going to take super-human efforts and many years to improve your score. Don't go there in the first place.
Mike: What will happen with credit card fees and penalties in this credit crunch?
Linda: We are already seeing increases in rates and new monthly fees for card customers. Until the new Fed rules take effect in July 2010, I think we will continue to see blanket re-pricing for "economic conditions" as well as risk-based repricing on individual accounts.
Mike: Do higher interest, decreased rewards, and fewer offerings seem to be the trends? Do you see other trends?
Linda: One thing we are seeing is a new and "creative" fee such as the Chase monthly fee for people with low promotional rates.
Mike: Are there cards consumers should be looking to?
Linda: Dare I say that any card from the top six banks is pretty much the same as any other? Just make sure that the reason you pick a card has nothing to do with pretty pictures on the front and everything to do with what is in the fine print.
Getting a reward, such as a cash rebate, is useful, especially if paid in full every month. Let's just keep our fingers crossed that the companies don't take back the most robust rewards.
Mike: Do you have any other comments you'd like to make?
Linda: I'd like to see people help us in our efforts to get new laws passed in Congress to protect credit card users. Check out our Take Action Center. Not only do we have specific alerts you can write to your lawmakers about, but also we allow anyone to write anything they want to their lawmakers, local and state officials, and news outlets. All free, but of course, we accept donations if the spirit moves you! You can also sign up for email alerts.