Bailout or no bailout? More FDIC insurance or not? As the markets gyrate back and forth, and banks and other financial institutions go under or get gobbled up, it’s been a volatile time, to say the least. With credit tightening and banks reluctant to lend money, what does this mean for your credit cards?
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When the Federal Reserve asked for comments on a proposed rule that would protect credit card customers from questionable lending practices regarding interest rates and payment cycles, over 56,000 outraged responses flooded in, most of them from card holders with horrendous personal stories and a variety of common but very troubling complaints.
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For years, credit card issuers such as Citi, Discover and Bank of America have touted single-use card numbers, or “virtual credit cards,” as a means of thwarting credit fraud. Generally speaking, the idea behind virtual card numbers is this: consumers download a piece of software to their computer that generates a new credit card number for each transaction, potentially allowing the creation of card numbers for specific merchants with set credit limits and expiration dates. These numbers can be used either online, over the phone or through the mail, but not anywhere a physical card is required.

Though their use is free, consumer adoption of the technology has been low, prompting American Express to drop the feature several years ago. The latest revelations about the limitations of virtual card numbers, as reported in this SD thread, are not likely to help spread their use, either.

The claims, in fact, are a bit unsettling.
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Is there a market for a service that allows you to pay your mortgage on your credit card? History so far says “no.” Last year, Amex introduced a program with American Home Mortgage and IndyMac that allowed cardmembers to put their mortgage payments on their Amex after paying a one-time fee of $395. However, American Home Mortgage is now bankrupt while IndyMac looks to be headed that way as well. Another company, CardIt LLC, introduced a service late last year that allowed mortgage payments to be charged for a fee of 2.49% plus $19.99 per transaction. That business also has already failed.

Now, another company is giving it a try, and its business model appears to be largely the same as CardIt’s, though it boasts access to a larger network of billers and lower transaction fees.
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You probably pay your credit card balances each month (if not, you should). But, have you checked your limits lately? There’s been a huge shakeup recently as card issuers are starting to feel the mounting pains of increasing delinquencies.

Traditionally, you could expect that as long as you kept paying your bills on time and maintained your account in good standing, your credit line would remain stable, if not increase. That’s beginning to change.

A lot of people are opening their statements and discovering their card limits have been slashed to a fraction of what they once were. The reasons may startle you.
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The Paypal plug-in, which lets users generate virtual credit card numbers for online purchases, has now been available for over half a year. To further encourage its adoption, Paypal is running a special promo: Simply spend at least $50 using the Paypal Plug-in by June 30 and you’ll get $10 back in your Paypal account.
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As expected, the Fed cut interest rates again on Tuesday, this time by a staggering 75 basis points, lowering the prime rate to 5.25%. One would think that such a massive move would result in a lot more dollars in the pockets of consumers. After all, over half of credit cards surveyed by the Fed are tied to the prime rate. (The real number of cards tied to the prime rate is probably even higher since the Fed’s survey underrepresents the number of cards issued by the larger banks.)

Unfortunately, when you do the math, the actual savings in credit card interest will not amount to much for most consumers. According to the latest Fed figures, total revolving consumer debt, which is basically credit card debt, was about $947.4 billion in January 2008. The latest census figures that I could find estimate the number of U.S. households in 2005 as 113.1 million. That puts the average credit card debt per household at roughly $8400. This number is inflated since the Fed numbers include credit card debt of households who pay off their balances in full every month. For the sake of argument, however, let’s use the $8400 number. Over the course of the year, the 0.75% cut will save that family roughly $60, or $5 a month. It’s something, but not exactly an earth-shattering number.

The bigger problem is that some issuers are choosing not to pass their savings along to the consumer, in light of the uncertainty in the credit market. For instance, CapOne recently elected to decouple interest rates on its cards for customers with good credit from the prime rate. Other issuers are making heavier use of tiered interest rates, where the margin you pay above prime can vary depending upon your application and credit history. In this way, they can better manage their interest rates, without outwardly revealing any changes.

Of course, the best way to insulate yourself from all of these changes is to pay your balance in full every month, which is what I hope that all regular readers would do anyway.

In the last quarter of 2007, the number of direct mail offers sent out by credit card issuers dropped 14% to 1.286 billion from nearly 1.502 billion in the same quarter of 2006, according to Mail Monitor, a direct mail monitoring service from Synovate.

Among issuers who sent out fewer mail offers were those focused primarily upon the subprime credit card market, such as Washington Mutual and HSBC, whose mailings decreased by 73% and 34%, respectively. Citi and Discover, issuers who were impacted by the subprime mortgage crisis, each also cut their mailings in half. These moves represent an effort to reduce exposure to further bad debt, according to Andrew Davidson, Vice President of Competitive Tracking Services for Synovate’s Financial Services Group.

In the meantime, other issuers have moved in to fill the void. Chase in particular has stepped up its direct mailings, increasing them by 62% in the latest quarter, so that now every one in four credit card mail offers sent out is by Chase. American Express, which also targets only prime customers, increased its mailings by 27%.

In addition, examination of direct mail offers show that issuers are tightening their terms. According to Davidson, 57% of households with incomes under $35,000 received an offer in Q4 2007, compared to 67% in Q4 2006. And despite the fact that the prime rate dropped by a point during the quarter, the single/go-to APR on variable rate offers increased to 13.96% versus 13.48% in Q4 2006.

U.S. Senators Barack Obama and Ron Wyden plan to introduce legislation next week that would create a national ranking system for credit cards. The proposed system would have scale of one star to five stars, with each card’s rating based upon how much risk the card poses to borrowers. For instance, credit cards that allow the issuing bank to raise the interest rate at any time for any reason would receive the lowest rating of one-star. The idea is to allow consumers a quick way to gauge the riskiness of a credit card offer without having to pore over the fine print.

The credit card rating system is part of Obama’s larger financial blueprint, which includes a credit card bill of rights that would ban unilateral changes to the credit card agreement, prohibit changes in interest rate on already inccurred debt and ban interest on late fees.

According to USA Today, Steve Case, former chairman of AOL, is backing a new type of credit card called the RevolutionCard. Designed to compete against the entrenched companies in payment systems, its features include:

• a line of credit
• the ability to store up to $15,000 on the card (loaded electronically from the user’s bank account)
• free online payments
• interest rates pegged to the card holder’s credit rating
• beefed up identify-theft protection:
  • PIN-based, with no name or account number on the card
  • Allows creation of temporary one-use PINs

In addition to these unique features, RevolutionCard intends to carve its niche by offering low fees to both consumers and merchants. For instance, merchants will only be charged 0.5% of the sales price per transaction processed. Consumers will save money with free online payments (similar to Paypal), no annual fee and interest rates based upon the customer’s current credit score.

Of course, ramping up card acceptance to critical mass will be a significant challenge, but currently the card does claim acceptance by about 100,000 merchants including Barnes & Noble. Its goal is to reach 7 million merchants in 3 years.

To find more information, see www.revolutionmoney.com. To apply for a card, see www.revolutioncard.com.