Rising credit card balances: A double-edged sword?

Sure, it signifies growing economic strength and confidence … but what about the downside?

WPRAccording to the latest estimates, U.S. credit card balances are expected to hit $1 trillion by the end of 2016.

It’s a milestone of sorts.  After all, the last time Americans’ total credit card balances exceeded $1 trillion was in 2008, just before the onset of the “Great Recession” as the housing/financial crisis intensified.

Does this new peak herald the end of the frugal consumer spending habits which transpired in the wake of the recession?

Perhaps so … but a good deal of the explanation reflects on the financial institutions themselves, who began opening the spigot by relaxing restrictions on signing up subprime consumers.

They’ve also begun raising credit limit amounts.

All this is a change from before, when credit-tightening was the name of the game from 2009 onwards.

Part of what’s driving the new policies is the fact that credit cards represent one of the few bright spots in consumer finance at the moment.

To illustrate the point, large credit-card issuer Capital One reports a year-over-year gain of nearly 15% in the 1st quarter of 2016 compared to a year earlier.  Other major issuers — Citigroup, J.P. Morgan Chase and Discover Financial Services among them — also have experienced significant gains.

By contrast, other consumer lending activities are far less lucrative, because low interest rates make margins on traditional lending very low.

I wonder if the rush to ply subprime borrowers with new general-purpose credit cards is a smart long-term proposition, however. Nearly 11 million such cards were issued in 2015.  That’s ~25% higher than in 2014 and the highest number of such cards issued annually since 2007.

Couldn’t the next bout of economic turbulence put us right back into a bevy of defaults as before?  And aren’t we seeing hints of this already?

Here’s a clue:  defaults rates appear to be rising along with the issuing activity — including a steady uptick in each of the first four months of this year.

And let’s not forget automobile loans, either.  They’re up significantly as well — along with delinquency rates.

I think history can help guide us here — and with a lot more caution than was the case back in those halcyon days of 2007.  If there are problems, no one can say that we weren’t forewarned, based on recent history.

What are your thoughts?  Please share them for the benefit of other readers.

The Discover Card Discovers … Minnesota’s No Pushover

Discover cardAs someone who lived in the state of Minnesota for years, long ago I came to the understanding that many people there view themselves as the ethical if not intellectual “umbilical cord” for the nation.

And why not? Minnesota has long been the font of “good government” initiatives many other states have sought to emulate. It’s the state that routinely leads all others in voter turnout, not to mention being the springboard of reformist politicians such as Eugene McCarthy, Hubert Humphrey and Walter Mondale.

So I wasn’t surprised to read last week that Minnesota’s Attorney General Office has filed a lawsuit against the Discover card for “deceptive marketing” practices. Discover is accused of making “aggressive, misleading and deceptive” telemarketing contacts in an attempt to lure customers into signing up for additional services that they didn’t realize carried a charge.

According to the complaint, customers were ostensibly being informed of Discover’s well-known “cash-back rewards” program, but then were told of the fee-based services as if those were regular features of the card’s benefits.

“Discover’s telemarketers employ an array of deceptive tactics to elicit an affirmative response from the cardholder without the cardholder actually understanding that they are supposedly aggreeing to purchase an optional product for a monthly fee,” the lawsuit contends.

According to the suit, Discover allegedly enrolled “tens of thousands of Minnesotans and charged them millions of dollars for enrollment in the plans” which include a “payment protection plan” that allows unemployed or disabled customers to suspend making credit card payments without penalty, an identity theft protection plan that costs ~$13 per month, and a credit-score tracking service that bills at ~$8 per month.

I love the way Lori Swanson, Minnesota’s attorney general, put it. “People expect their credit card company to stop and prevent these fraudulent charges – not be the ones making them.”

Or course, it’s not surprising that credit card companies are attempting to sell customers on fee-based services; the lawsuit claims that Discover earned over $295 million on these optional products during 2009 alone.

But the fact is, consumers are paying for additional services they don’t really need, as much if not all of their risk exposure is covered by other laws on the books. Of course, Discover conveniently left out that bit of information in their sales pitch to consumers.

“The biggest credit card companies make huge amounts of money by getting their customers to sign up for add-ons that are useless,” says Edmund Mierzwinski, a consumer program director at the U.S. Public Interest Research Group.

The Minnesota lawsuit seeks to order Discover not only to cease its aggressive marketing of these services, but also to reimburse customers who signed up for services they no longer want.

Based on how earlier cases of a similar nature against Experian and Providian have turned out … my guess is that Minnesota is going to be successful.

Credit Card Reward Programs: Cut to the Chase

Chase Card Services has just announced the introduction of a new credit card rewards program. Dubbed Chase Sapphire, it’s aimed at the top 15% income-earning households in the U.S. The program offers the usual premium travel services, a variety of reward-level awards, reward points that never expire, a 24-hour access to a dedicated customer service team, and other perks.

What is Chase Card Services up to, introducing a new rewards program at this particular time? It seems like Sapphire Rewards is destined to deliver only mediocre results at best in the current toxic consumer environment.

But Chase is pressing forward, undaunted. In fact, it’s offering two program levels, including a “preferred” level that offers a bevy of additional goodies such as the ability to transfer reward points to various airline and hotel programs, free bonus points for high spenders, enhanced identity protection and so forth – all for a “low” added fee of $95 per year (waived the first year).

It all sounds so ordinary. But just as you might be thinking that this new rewards program has all the pizzazz of a cold mashed potato sandwich, look more closely. There’s something actually pretty unique being offered among the grab-bag of benefits.

What could be the best benefit of all is the 24-hour dedicated customer service team that comes along with the Sapphire program. What does this mean for customers? To quote the Chase press release, when a cardholder calls in, “a specially trained advisor picks up the phone – with no need to navigate a voice-response system.”

Well, well!

Maybe, just maybe, Chase has conducted focus groups and discovered how wildly unpopular telephone trees are with consumers. Those obnoxious trees may be the single most irritating aspect of customer account service.

Phone trees transform what would normally be a short, simple phone contact into a marathon event. Moreover, often the myriad account information, social security numbers, phone numbers or other data that have been so painstakingly voice e-n-u-n-c-i-a-t-e-d or punched into the phone keypad never make it to the customer rep who finally does come on the line … and who then proceeds to ask for the same information all over again.

And here’s another black mark: How many consumers end up having to yell into the telephone in order for the voice recognition system to do what it’s actually supposed to do – correctly recognize what the person is saying? It’s no wonder the decibel level of many phone calls escalates from “normal” to “screaming” within the span of mere seconds.

Seeing as how Chase is targeting only affluent households with its new Sapphire Rewards program, perhaps they’re willing to spend a few extra dollars on “real live” customer service, figuring the ROI will work itself out with this customer segment.

Certainly, for beleaguered consumers who are tired of doing battle with the annoying phone trees, the prospect of interacting with real customer service people must seem like nirvana.

Here’s an idea. Why don’t the folks at Chase Card Services try scrapping all of the reward benefits associated with the Sapphire program and leave just the 24/7 live customer service feature in place? And then use the savings to extend that courtesy to the rest of the Chase credit card customer base. That would be novel, wouldn’t it?

Besides, they might actually gain more customer loyalty in the bargain.