Tuesday, May 19, 2009

Are all of my credit cards about to go the way of the Dodo bird?!

I agree that the credit card companies have a lot of horrendous practices. They always have, and maybe things are somewhat worse now, or so we think, but having said that, the simple fact is that many of us have learned to adapt to the mine field of crazy rules and even exploit and "game" the system to our own advantage. Although "reform" sounds great, my big worry now is that not only will I get hit with the unexpected consequences of "reform", but a lot of the marginal borrowers who actually need credit cards to finance short-term expenses (e.g., back to school, vacation, holiday gifts, auto and home repairs, etc.) may get hit very badly by reductions in credit and they are the exact people who need credit and help the worst. An article in The New York Times by Andrew Martin entitled "Credit Card Industry Aims to Profit From Sterling Payers" hinted at some of the downside we can expect from credit card "reform." The simple fact is that if the credit card companies are forced to give up fees and a chunk of interest, they will have no choice but to recoup those losses elsewhere which means three things: 1) less credit extended to marginal borrowers, 2) more marginal borrowers will get no credit, and 3) us squeaky clean "deadbeats" (industry term for those of us that the companies are not earning fees and interest from) will suddenly have to make up the difference with new fees and reduced credit.

I had serious income problems from 2002 to 2005 and managed to run up a real mountain of credit card debt. I finally filed for bankruptcy in the summer of 2005 and my debts (but not my back taxes) were discharged in late 2005. I didn't like all the fees for secured credit cards, so I waited and six months later started to get "real" credit card offers. I got three new unsecured credit cards by the end of 2006, with no annual fees (one has a fee, but they waive it each time I whine and threaten to close the account.) One even has 2% cashback on all purchases, with no minimum or limit. The credit limits are reasonable, but certainly not as high as before my bankruptcy. Overall, I am quite happy with what I have, especially considering the bankruptcy.

Now, with "reform" in the wind, my main concern is that the new rules put in place by Congress could hurt me even though I am not a big risk to anyone and have done no wrong in the past three and a half years. In particular, I feel that there is a strong possibility that:

  1. My credit limits could be dramatically reduced.
  2. Annual feels could return.
  3. My 2% cashback could be slashed or even eliminated.
  4. Grace periods could be shortened or even eliminated.
  5. "Float" (charges after the statement cutoff date that are not due until the next statement due date) could be reduced or even eliminated.
  6. As I am a freelance software developer and have not worked in the past six months, they might decide to cut my credit much further or even totally.
  7. I may not be able to get new cards due to bankruptcy less than five years ago and unsteady income.

In all honesty, it would not take very many new "restrictions" to convince me to completely swear off credit cards and revert to a combination of cash and debit cards. Granted, debit cards have some disadvantages (no credit, no float, no easy way to dispute a charge before it is paid), but they are almost as good as credit cards for many purchases, provided you have the cash.

So, for me, I could accept that my credit cards could become "extinct", but I shudder to think about all of the marginal but nominal credit card holders who can least afford further restrictions on their credit. For me, cash is a trivial alternative and does not prevent me from spending, but for a lot of people the lack of credit would be a dead-stop for a lot of discretionary or even necessary expenses, especially for households "living paycheck to paycheck." It could well mean a 1% to 7% cut from GDP. Sure, we may be "better" off being less dependent on credit, but wouldn't it be a lot easier to run commercials and ads and train people to be more careful with their cards so that they can avoid the minefields in the first place?

Yes, there have been abuses and yes those abuses should be addressed, but the remedy should not be more onerous than the original problem.

The good news is that there may be a silver lining: new, company sponsored credit cards or hybrid debit cards might appear to fill the gap left by people who are either abandoned by or who abandon the bank-sponsored credit cards. Airlines, hotels, retailers, electronics companies, Internet companies, etc. may be able to subsidize the overhead of credit cards when conceptualized as loyalty cards designed to drive revenue rather than simple to collect fees as is done by the banks. In fact, after six months of no new credit card offers, I just received one the other day: from JCPenny (issued by GE Money Bank) -- and it is "Pre-Qualified" (but not pre-approved??).

So, in short, the banks are on thin ice. Sure, they can in fact make our lives more difficult, but there is a threshold beyond which they will suffer a lot more than us. Banks and other traditional credit card issuers may become the Dodo birds if non-banks ever figure out how to mimic banks closely enough to make banks completely unattractive to consumers and businesses.

So, subtle message to my own credit card companies: Be nice to me! Really nice to me.

-- Jack Krupansky


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