It seems that Bank of America has already reneged on the October 6th promise it made to stop raising the interest rates on the credit cards of its existing customer base.  Just a week after making this pledge, BofA announced that it would begin introducing annual membership fees, ranging from $29 to $99, to select customers next year.  Combined, these two announcements result in a net win of zero for consumers, and in an unethical bait and switch play on the part of Bank of America.  Why?  Because, according to regulation, interest rates and annual membership fees fall under the same umbrella.  They are both considered finance charges.

While BofA postured as if was taking a step towards consumer protection in making the announcement that it would stop raising rates, the introduction of new annual fees to existing credit card accounts will still result in increased finance charges for account holders, even if those finance charges are referred to and assessed by another name.  For insight, consider that the addition of an annual fee of $50, on a credit card account with $500 balance and a ten percent interest rate, would double the overall yearly finance charges associated with that card.

Certain economic factors, like unemployment and credit card default rates are intertwined.  So it’s absolutely natural that in an economic climate where experts are predicting a ten plus percent unemployment rate before the end of the year, credit card companies will have to change the way they do business in order to remain safe and profitable.  As we all know, most issuers have been doing this by raising interest rates on both new and existing customers.

Wells Fargo has recently joined its peers in announcing that it too will raise the rates on the credit cards it offers.  According to Kevin Rhein, group head of card services at Wells Fargo, “this is something we’ve been contemplating for quite a period of time… We had just reached the point that we don’t think we can offer credit cards at the current pricing and keep credit flowing.”  Rhein’s announcement is interesting because it seems to suggest that Wells Fargo waited as long as it could before instituting these new rates.  He states that the impetus for this change was the bank’s recognition that the flow of credit was actually in danger, which is another way of saying that the profitability of Wells Fargo’s credit card department was at risk.  This, and the fact that the rate hikes are not scheduled to go into effect until November 30, one day before Congress’ new suggested enactment date for the CARD Act, suggests that Wells Fargo really has waited until the last minute before raising rates.

Recently, Bank of America announced that it would stop raising interest rates on the credit cards of its existing customer base.  This news comes ahead of the February 22nd deadline mandated in the Credit CARD Act, and is certainly a step in the right direction.  However, there is an issue that hasn’t been raised that would put this announcement into better perspective.  How much of Bank of America’s existing credit card portfolio does this news really affect?

Even after the bank has already re-priced millions of credit card customers into higher interest rates, the national media seems to be treating BofA’s announcement as a sign that the North Carolina-based bank is falling in line with the spirit of consumer rights—that it has ended the practice of raising rates in the midst of this credit crunch.  Unfortunately, it is not at all clear what this announcement actually implies given that the media has toed the company line, and has not asked the necessary questions to put this announcement into perspective.

Fair business practices and consumer rights in the credit card industry are being regulated by six different entities depending on the classification of the card issuer.  This fragmented system exists despite the fact that the rules regarding business practices and consumer rights laws are the same for all credit card issuers.

Imagine you discover a burglar in your house and call the police.  They arrive to make an arrest, but when they show up, they do nothing.  They tell you you’ve called the wrong police.  The police officers that arrived at your home only deal with criminals whose last name start with Q through S and this guy’s last name starts with a B.  Moreover, the officers who are in your home tell you they won’t call the officers who deal with bad guys with last names beginning in B because they’re in competition with each other.  Too bad too, because the guys who showed up are really good at prosecuting burglars but the guys you should have called are a little behind the times in that capacity.  And of course, because of the competition, the two different police departments don’t share information.

Last week, banking powerhouse JP Morgan Chase launched a charge card for small businesses. This is the first charge card to be offered by any major Visa/MasterCard issuer, as American Express locked up that marketplace a long time ago.

The new charge card is called Ink Bold, and, as with any charge card, monthly balances must be paid in full each billing period. Ink Bold most closely resembles the Gold Card from American Express OPEN. Let’s compare some typical features:

If you are like most Americans, you often use credit cards for your purchases.  Behind the scenes, when you swipe your credit or debit card through the machine, the merchant pays a small fee to their bank (i.e. interchange fee) for the ability to accept credit card transactions.  Let us be blunt about this: if the business wants your money, then they would be smart to pay these fees because cash transactions are becoming rarer with each passing day.  ‘Cash only’ businesses are becoming a thing of the past. 

The merchants themselves are becoming increasingly irate that they have to pay these fees to allow their customers to use credit cards and are now turning to the nation’s lawmakers for help.  Bills are already headed for Congress which would allow merchants to enter into collective bargaining with the banks and would make it easier for merchants to steer customers to other forms of payments and let them set minimum and maximum amounts for credit card purchases.

J.D. Power and Associates recently released the results of a customer satisfaction survey of credit card issuers in conjunction with their 2009 consumer satisfaction awards.   According to J.D. Power and Associates:  “The study measures customer satisfaction with credit cards by examining six key factors: interaction; fees and rates; billing and payment process; rewards; benefits and services; and problem resolution.”

In these categories, they found that Discover Card and American Express Credit Cards topped the list in nearly every category along with National City (except in the category of Problem Resolution where the sample size was too small).  American Express ultimately received the J.D. Power and Associates Award for Credit Card Satisfaction.  In some categories, these big three were rivaled by Wells Fargo.  U.S.  Bank also, notably, scored above average in Fees and scored an outstanding in Problem Resolution.  Target Visa, WaMu, GE Money, Credit One Bank, and First Premier Bank scored below average (2 out of 5) across nearly all categories.  Interestingly enough, Bank of America scored only average in all but two categories (Rewards and Problem Resolution) where it scored below average.

As Chair of the Congressional Oversight Panel, which has been charged with reviewing the current state of financial markets and the regulatory system, Harvard professor Elizabeth Warren has been quite vocal in her support of the administration’s proposal for a Consumer Financial Protection Agency (CFPA).  The CFPA would be the regulatory body that ensures that financial institutions provide clear and simple disclosures, which would ostensibly deter consumers from opting for risky and “exotic” financial products, and would be the eighth agency involved in consumer credit regulation.  While I agree that there has been little effectiveness in the regulatory system as far as consumer financial protection is concerned, this is no reason to create yet another agency.  The CFPA, which was actually conceived by professor Warren several years ago, would separate the regulation that provides consumer financial protection from the regulation that ensures the banks that serve these consumers are solvent, and do not introduce toxic products to the market.  If our hope is for a solid financial system, then it must be understood that these two areas of regulation go hand-in-hand.  Warren is right, “the credit market is broken,” but she herself proves that the CFPA won’t fix it. 

Warren lays out her arguments for the CFPA in two articles that appeared recently in Business Week and in The Baseline Scenario.  While she is spot on in her analysis of the nature of the problems that plague our financial system, her solutions do not address the problems that she identifies.  It’s true, traditional financial products cannot compete with “exotic” products whose terms seem attractive up front, but hide surprises and changes that are revealed only after the consumer has committed.  Further, the more complex these “exotic” financial products become, the less able consumers are to make comparisons.  Right now our financial system lacks a level-playing field, transparent in its operation, which encourages competition, and also engenders product innovation. 

Last year, for the first time, spending on VISA debit cards surpassed spending on VISA credit cards – not just by the total number of transactions, but also by the total number of dollars spent.   With the ubiquity of debit card use and given that there are certain misconceptions about fraud coverage on both debit and credit cards , we, at Wallet Blog, thought consumers should be offered a comparison centered around the level of protection and convenience both types of accounts provide to consumers who have been exposed to fraud.

According to the FTC, consumer liability for fraudulent debit and credit card charges is limited to $50.  VISA and MasterCard, who control 100 percent of the U.S. debit card market, as well as most of the major credit card networks, have gone beyond what the law requires, and mandated that all of their card issuers adhere to a zero percent liability rate for their customers, and that they grant immediate refunds on disputed charges.

According to the Federal Reserve, the credit card charge-off rate for the first quarter of 2009 jumped over 80% to a record 7.51% - meaning that the balance on roughly 1 out of every 13 credit cards is in default.  Additionally, in May, the number of bankruptcy filings reached 6,020 a day, which represents a 33% increase from a year earlier.  To address the concerns of the multitude of consumers facing these challenges, CardHub.com, the leading and most robust online credit card marketplace, today announced the addition of a Credit Card Debt Center to its site.  Launched in July 2008, Card Hub continues to revolutionize the consumer selection process for products and services in the personal finance space.

The Credit Card Debt Center includes two key features: Debt Help that provides consumers with customized debt management advice and Debt Education that offers an in depth understanding of the pros and cons of various debt solution options.  Highlights of these features include:

Because of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, the process of getting a credit card is going to drastically change for people under 21 years of age.  Starting on February of 2010, people under 21 will not be allowed to get a credit card without a co-signer or proof that they can repay their credit card debt.  At Wallet Blog we have already made it clear that this part of the credit card law is completely unfair and ridiculous as it singles out people under 21 years of age for special treatment, even though they are legally adults.  

No matter what politicians decide, credit history is going to continue being a critical factor in determining loan amounts and loan interest rates (as it should be).  However, since it is now harder for people under 21 to get credit cards, they will have less time to build up their credit history and will be at a disadvantage for anything that requires a credit check (like getting a loan or even renting an apartment).

Disagreements between merchants and banks concerning interchange fees for credit card purchases have prompted Democratic Senator Dick Durbin to introduce yet another piece of credit card legislation to the U.S. Senate floor.  The new legislation would create a panel of judges to help facilitate a settlement between the merchants and banks.  With four major credit card networks out there (MasterCard, VISA, Discover and American Express), and a wide variety of private label cards issued by large merchants, it’s hard to see why the government is being asked to step-in to settle this dispute. 

We’ve already seen the government step in to help regulate the credit card industry via the Credit CARD Act of 2009.  We support the CARD Act on the position that the legislation was needed to stop the deceptive practices being used in the industry, which prevented consumers from being able to accurately estimate the true costs of obtaining a credit card.  However, this does not mean that government regulation is needed in all aspects of the credit card business. 

President Obama has come out strongly in favor of overhauling the financial regulatory system by introducing another watchdog agency known as the Consumer Financial Protection Agency.  This agency will be set up to monitor the marketing of mortgages, credit cards and other loan products.  President Obama’s proposal is obviously a response to the dangerous and deceptive practices recently brought to light in these industries.

To be clear, we agree that there were deceptive practices in the lending industry.  The mortgage industry was allowed to operate rife with fraud. Mortgage agents would misrepresent borrowers on applications to get loans for which they otherwise would not have been approved.  The excesses of the credit card industry have been blatant enough to require the federal government to step in and protect consumers.  We acknowledge that the industries have been allowed to ride roughshod over consumer rights without anyone stepping up for the little guy.

A lot has already been written citing Alan Greenspan, ex-head of the Federal Reserve, as one of the people most accountable for the country’s current economic problems.  Reportage on the tech bubble, the housing bubble, the systemic risk of unregulated Credit Default Swaps (CDS), and the extremely relaxed underwriting standards to mortgages habitually mention Greenspan’s policies as a primary contributor to these problems.  The fact that the U.S. government has had to step in to fix the credit card industry suggests that regulators under Greenspan were asleep at the wheel.  As head regulator, the Federal Reserve was in a position to regulate the excesses of the credit card industry for years.  Now that disaster has struck, the Federal Reserve finally came up with a new set of rules in December 2008 which would take effect in July 2010, but obviously, their regulation has come too late, as the United States Congress and President have already had to step in and do their jobs for them.

For fifteen years, credit card regulators have had it in their power to prohibit the excesses of the credit card industry.  At any time, they could have put rules in place that would have prevented arbitrary interest hikes or the creation of additional fees without rhyme or reason.  Now, law will force credit card companies to change their practices, but the government wouldn’t have had to take this kind of action if credit card regulators had been doing their job over the last decade and a half.  America is now, in essence, forced to make laws to regulate the credit card industry because our regulators completely failed to do so.

Since the passage of last week’s credit card legislation, it seems that everyone has an opinion as to how consumers will be affected and how the “new credit cards” will compare to the old.  Previously, I provided my opinion on each of the main components of this new credit card legislation. Now let’s talk specifically about how different consumer segments will be affected.

First let me start by saying that credit card companies are perhaps the most sophisticated entities when it comes to consumer financial products.  They have and use a lot of data when making decisions, and therefore their response to the new legislation will not be uniform across consumer segments.  In addition, it is important to point out that we are going to go through a transition period, during which credit card companies will experiment with different structures.  Once everything has settled, here is my expectation of how the “new credit cards” will compare to the old (i.e. the ones from a year ago):