According to Credit Karma’s CEO, Ken Lin, 2009 has been a momentous year for credit issues – and I have to agree with him. Suddenly, frugality became cool, overspending was out, and consumers put more emphasis on savings and paying down their outstanding debt. Creditors hiked interest rates on credit cards, slashed credit limits, and raised minimum payments. As a result, legislators stepped in with the CARD Act and enacted new rules to govern credit card companies and supposedly protect consumers. Consumers became more diligent in shopping around for the best credit card deals, rather than accepting negative changes to their credit lines and home buyers were encouraged to take advantage of a $8000 first-time home buyer tax credit, even in the midst of a damaged housing market. Yeah, it was a momentous year.
The Top 10 consumer credit events for 2009:
1. Credit card companies charge for not using credit cards regularly, even if you carry a balance. In January, Chase began charging $10 a month to 400,000 customers who have large balances but little account activity.
2. Credit card companies change minimum payments at anytime with minimal notice. Chase increased the minimum payment from 2 percent to 5 percent for cardholders with large balances
3. Credit card interest rates generally increased for all major card issuers and even doubled or tripled for consumers who pay their bills on time. Citi sent some cardholders letters notifying them that the variable APR for purchases on Advantage Citicard’s would increase, in some cases to a 29.99%. The hike on interest rates has prompted Senate Banking Committee chairman Chris Dodd to step in and propose an immediate interest rate freeze on the estimated 700 million credit cards in circulation. No word yet on when it when or if it will happen.
4. Rewards programs are less rewarding. Citi’s Thank You Rewards program added a $39 fee for all tickets redeemed through its CitiMiles program. American Express’ Delta Sky Miles dropped its “Always Double Miles” program. Though many rewards cards are available, they’re getting harder to find.
6. Creditors add annual fees to existing credit cards. In October, Bank of America announced it would start charging cardholders who pay in full each month an annual fee of $29 to $99 a year. Citigroup started charging annual fees to card holders who don’t put more than a specific amount on their cards, typically $2,400 a year.
7. Credit cards came under greater scrutiny. In May, President Obama signed new credit card legislation into law. In August, the first phase of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act went into effect giving credit card users the choice to opt out of interest rate changes and other changes in their credit card agreements. In addition, creditors now have to provide consumers with 45 days’ warning of changes to their credit card accounts. The remainder of the legislation is scheduled to take effect in February 2010, but there’s already a push by legislators to move the deadline to December 2009 due to continued bad behavior by creditors. Congress is currently considering the addition of a Consumer Financial Protection Agency despite the existence of the Federal Trade Commission which already does the same thing!
8. Good credit and credit scores become essential. Many employers now check credit reports prior to offering a job applicant employment. In previous years when a credit score of 690 was considered good, consumers now need above 760 to get the best interest rates.
9. Consumers learn to be frugal and focus on savings. Debit card spending exceeded credit card spending for the first time ever in Q1 2009 according to MarketResearch.com. According to Credit Karma’s data, credit card debt nationwide decreased by 4% from June to September
10. Companies offer free online tools and resources as consumers learn to become more financially savvy. Credit Karma launched its Credit Report Card, which breaks down the contents of a consumers credit report and how it translates into a credit score.
But what did consumers really learn from all the turmoil this year and will it have a lasting impact on their financial behavior for the future? I was able to ask a few questions to Credit Karma’s CEO, Ken Lin. His company offers FREE credit scores to consumers. If you would like to get your credit score for FREE – check them out.
An interview with Ken Lin, CEO of Credit Karma
Ron: As the economy stabilizes, what consumer finance behaviors will be more apparent?
Ken: Two major themes are materializing as a result of the recent economic turmoil.
The first theme involves the consumer’s migration away from credit products. As an economy, we spent above our means, had multiple years with negative savings rates, and built enormous debt loads. I think many consumers are recognizing the problem and are finally pulling back. In fact, debit cards have now surpassed credit usage for the first time in history.
The second theme appears to be a re-alignment of credit risk and a movement back to fundamentals. Lenders have raised lending requirements and consumers are adjusting their behavior accordingly. Moving forward, consumers will have to focus on their debt management and credit if they want to be part of the new lending standards.
Ron: Will we see similar frugality or will consumers go back to charging more than they can afford?
Ken: Bankers and consumers tend to have short memories. But with all of the regulatory changes and the near collapse of our whole financial system, I suspect it will take many years of economic prosperity before we go back to the days of lax lending standards and abundance of credit liquidity.
Ron: What additional credit changes will take place in 2010?
Ken: The changes consumers will notice most will come from the CARD Act. The new legislation has several provisions meant to protect consumers. The most notable include requiring co-signers or documentation of employment for those under 21, the banning of universal default, and restrictions on when credit card companies can raise your rates.
The unfortunate downside of this legislation is that credit card companies may raise interest rates increase fees, and lower credit limits to compensate for the changes. In addition, it may make credit cards much harder to obtain for consumers with fair credit and likely more expensive for those with great credit.
Ron: What can consumers do to raise their credit score after changes have been made to their available credit?
Ken: Consumers with poor or fair credit may not have many options in this new credit environment. Most banks simply won’t want their business or if they do, there will be a high price for access to the credit. The good news is that most consumers can raise their credit score 50-100 within just a few months if they pay their bills on time.
Ron: What new credit legislation should consumers be aware of to protect themselves? Are there any drawbacks to these types of legislation?
Ken: There is the current CARD Act. Prior to that there was bankruptcy reform. The problems with any legislation are the loopholes and unintended consequences. For example, I don’t believe it was Congress’ intention to increase fees and interest rates with the CARD Act but that is the reaction by the financial services.
Thanks Ken, I appreciate you taking the time to inform us about these changes to the credit scene.