The economic downturn of the past year has clearly affected the manner in which American consumers use their credit cards. Compared to the summer of 1990, cardholders are charging less, carrying bigger balances and, in increasing numbers, delaying monthly payments.
The average cardholder now charges $2,110 per year as opposed to $2,256 last year. Average revolving balances have now reached $1,626 compared to last year's $1,489. 68% of cardholders now revolve (carry balances forward) compared to 65% in 1990. More than 5.8% of the nation's 100 million bank credit card accounts are more than thirty days late with monthly payments, representing an 18% increase over last year.
On the surface, the statistics look gloomy. Some major issuers point to the statistics, specifically delinquencies and bankruptcies, as the reason why credit card interest rates remain high in comparison to other loans. But a closer examination reveals more of a stagnant market than a troubled market.
While more consumers are struggling with card payments, or strangling with card debt, the losses are just about covered by the higher average balances. Furthermore, low wholesale interest rates have produced a very healthy spread between cost-of-funds and card interest rates.
For 1991, card issuers will collect an additional $25 per account in interest charges, due to higher balances. However, issuers will lose about $2 in income, per account, from the drop in card volume. Issuers will also lose an additional $24, per account, from bad debt. The $1 deficit, per account, is generously covered by lower cost-of-funds.
The latest statistics indicate the climb in delinquencies and bankruptcies is slowing. If general interest rates remain low for the remainder of this year card issuers will realize some very healthy profits.
For consumers, the data suggest card interest rates will continue to decline this year. Issuers reluctant to cut rates thus far, may be more inclined to do so in the months ahead. Furthermore, the increased competition in the marketplace cannot be ignored even by the largest bank credit card issuers.
The rising tide of bankruptcies has produced a growing marketplace for secured credit cards. Last year, 783,000 personal bankruptcy petitions were filed representing an 18% increase over 1989's figures.
The climb in personal bankruptcies has been attributed to poor personal financial management and to the sagging general economy. However, a financially catastrophic event such as job loss, divorce, health costs, or a business failure can force good personal Financial managers to file for personal bankruptcy, even in the best economic climate.
Generally, when you file for bankruptcy you will be unable to obtain credit for a number of years. Under current laws, credit bureaus will retain the bankruptcy information in your credit file for ten years. You will find it nearly impossible to obtain unsecured loans during this period and will face difficulty when applying for automobile or home loans. Credit card issuers will also deny you credit if you have filed bankruptcy.
Secured VISA and MASTERCARDs solve this dilemma. Secured credit cards require a deposit ($250 and up) to act as collateral. Interest rates and annual fees are generally higher than conventional, unsecured cards. In addition, most secured card issuers charge special one- time fees called "processing" or "application" fees. To offset the higher costs to the cardholder, some issuers pay interest on the deposit.
Secured card terms vary widely. See pages 10 and 11 for a brief rundown on the most popular, nationally available secured card programs. For a comprehensive discussion and list, order our special sixteen page Secured Card Report ($10 per copy).
Since secured card pricing differs so much, cost- to-the-consumer ranges from high to outrageous. Currently, the net cost to the typical secured cardholder varies from $64 a year to $180 a year, depending on the institution. First year costs are somewhat inflated because of the special fees. So, to make a fair comparison second year costs need to be considered.
The following chart calculates the two-year net costs. The chart assumes you deposit $750 and you maintain a minimum daily balance of $400. You also charge $100 in new purchases each month. If the card does not have a grace period or includes new purchases in the balance calculation, the effective average daily balance would be $500. Also for calculation purposes, it is assumed you make a $100 payment on the account due date and you charge $100 on the first day of the billing cycle.
The chart also assumes you are applying for one card. Several issuers charge another annual fee if applying for both VISA and MASTERCARD. Some also charge for additional (spouse) cards. The spouse card fee, can be a one-time fee or may add another annual fee to the account. These extra fees are not included below.
Secured card issuers are required by federal law to provide a disclosure of card terms. VISA and MASTERCARD also require full disclosure of all fees and deposit requirements, specific to secured cards.
There is no better way to build or rebuild your creditworthiness than with a secured VISA or MASTERCARD. However you do not have to be fleeced for the opportunity.
For the complete story on secured cards order our recently updated Secured Card Report ($10/copy).
