Måjðr Mïkê

Bank customers used to the perks of free checking accounts — unlimited check writing, online banking, debit card use and ATM access, to name a few — might have to recalibrate their expectations soon. That’s because overdraft fees, which banks use to subsidize the expense of free checking accounts, have been under fire by consumer advocacy groups. (A quick primer: You spend $8 on lunch at Burger King and pay with your debit card. But there’s only $5 in your checking account. The transaction is still approved, but the bank slaps you with a hefty overdraft fee for the privilege.)

There have already been some changes to the way banks must disclose overdraft fees on statements, but now there’s a bigger push to require institutions to obtain accountholders’ permission before charging them overdraft fees on debit card purchases and ATM withdrawals. President Obama’s proposed Consumer Financial Protection Agency would likely address overdraft fees in some way.

Checking accountThat spells trouble for banks already hurting from the financial crisis. The bulk of revenue in bank retail deposits comes from penalty fees; economic research firm Moebs Services estimates that banks will rake in a total of $38.5 billion in overdraft revenue this year. In fact, a 2008 FDIC study concludes that 74% of all service charges on deposit accounts come from overdraft and insufficient fund fees, which typically range between $35 to $40 per incident. But there’s a small amount of consumers who shoulder most of the fee load: According to a May report from consulting firm Oliver Wyman, 68% of those fees come from just 5% of banking customers (who pay, on average, $1,614 each year). Meanwhile, 74% of customers pay no overdraft fees at all.

But with banks expecting roadblacks to fee income, some experts predict that the free-checking model might be on its way out. Aaron Fine, author of the Oliver Wyman report, recently told banking industry trade publication American Banker, “The industry has to change pretty dramatically because a substantial amount of the revenue that paid for free checking is likely to go away. That business model is not sustainable.”

For now, there are still plenty of free checking options out there, and many experts expect them to remain in some format so that banks can compete for customers. But Probity Financial Services, a small company based in Austin, Texas, partnered with Missouri’s Kennet National Bank in April to offer an alternative to those consumers who are tired of paying hundreds of dollars in overdraft fees each year. For $19.95 a month, you can set up a Probity online checking account that never charges overdraft fees, transaction fees, minimum balance fees and offers free online bill pay and ATM/debit card usage.

“We’re like Netflix for your checking account — you pay a fixed monthly fee and use it all you want,” says Probity CEO Tim Smith.

For those consumers who spend more than $240 a year on overdraft fees, Probity’s checking account is a good solution. Each customer is assigned an overdraft limit (no more than $500) based on credit and banking history. If the customer makes a purchase for more than what’s in his account, Probity covers the excess. To keep the account in good standing, the customer must deposit funds into the account within 60 days, or it will be closed. “The lion’s share of accountholders do bring the account into positive balance,” says Smith. He adds that most customers use direct deposit and typically just need the protection until the next paycheck comes in.

Still, $240 a year to avoid overdraft fees? Unless you’re one of those 5% of customers who spend more than $1,500 each year on those fees, there are still plenty of cheaper options to prevent overdraft pain. (And if you are one of those 5%, can you let me know how the heck that happened?) Many banks allow you to link your checking account to your savings account to cover overdrafts. And there are plenty of ways now to keep tabs on your account balances with email and text alerts. Free checking may be teetering, but it’s not going to vanish overnight.

Posted by Ismat Sarah Mangla
July 2, 2009 11:56 am

As High Scores Vanish, Borrowers’ Luck Runs Out

As banks tighten their lending standards, one number is playing an increasingly critical role in determining the financial fortunes of consumers: the credit score.

Lenders use them to decide whether to extend credit and at what interest rate. As lenders demand higher scores, more Americans are having trouble getting loans.

Others aren’t getting loans at all because their scores have dropped. They may have lost their jobs and not kept up with credit card and mortgage payments, or in some cases card companies have taken adverse actions against them. Eager to mitigate risks, card issuers have closed accounts or slashed credit lines, leaving customers with less available credit. Customers who have used up much of their credit then are closer to maxed out, which further hurts their scores.

To add to their crisis, people who try to take matters in hand and pay to find out their credit scores discover that it can be difficult to learn the score that lenders actually use to evaluate them.

"Credit scores have taken on a new degree of importance," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, an industry group. "In the past it was a question of ‘What will your interest rate be?’, and now it’s ‘Will you even get a loan?’ "

As a result, credit is less available to both low-risk and high-risk consumers at a time when they — and the economy — need it the most.

"The consumer who desperately needs credit right now is in a very bad situation," said John Ulzheimer, president of consumer education for Credit.com. "The consumer who is remaining consistent, the market is passing them by . . . You have more cars sitting on car lots and you have houses with for sale signs."

Jane Graver is one of those desperate consumers. She once had a credit score of about 700, which before the credit crunch made her a desirable candidate for a loan. Most lenders use the FICO score, which runs on a scale of 300 to 850.

Faced with a divorce, serious illness and tough economy, Graver, a small-business owner, missed a few credit card payments and used up her home-equity line of credit. She was close to being maxed out. Last year, her score dropped to the mid-500s.

Now that lenders are demanding credit scores of 720 or higher, she is considered even more of a risk and cannot get a mortgage — or even find a landlord willing to rent her a home. Her house in Orange, N.J., sold at a price high enough to cover her mortgage and line of credit, but she is struggling with what to do next.

"It is difficult to cope," said the mother of two. "I am absolutely unable to get a mortgage."

As scores become increasingly important, they have also become increasingly perplexing. Consumers have free access to the credit reports used to determine their scores, but they have to pay to check them. With the heightened interest, many borrowers have been doing just that, buying their scores from a variety of Web sites, only to find out that they might be different from the ones lenders use, according to bank officials and consumer advocates.

"One of the things consumers have to understand about scores is that there are a number of different scores within the marketplace," said Norm Magnuson, vice president of public affairs at the Consumer Data Industry Association, a trade group.

The FICO score, which was developed by a company formerly known as Fair Isaac, is the dominant player in the industry. It is calculated based on the information contained in credit reports, which list a consumer’s debts and payment history. Three bureaus — TransUnion, Experian and Equifax — keep those credit reports.

However, to compete with the FICO score, the three bureaus united in 2006 to create VantageScore, which ranges from 501 to 990, which they sell to lenders.

Complicating matters is that Experian and TransUnion have developed their own scores, which the agencies call educational scores because they are intended to help consumers gauge their own creditworthiness. Lenders cannot even buy Experian’s score. They can buy TransUnion’s but tend to go with the FICO score instead.

On its Web site, FreeCreditReport.com, Experian gives people their Plus score if they pay $14.95 a month for a credit-monitoring service, which they can cancel after a seven-day trial period. They have to dig through the terms and conditions before getting to this disclosure: "The PLUS Score is not a so-called FICO score, and may differ for a variety of reasons."

TransUnion also offers a $14.95-a-month credit-monitoring service with a 30-day trial period on TrueCredit.com. That gives consumers access to the bureau’s scores. Like Experian, TransUnion discloses on its Web site that its score is not the same as a FICO score.

Equifax gives FICO scores to anyone who pays $14.95 a month for its credit-monitoring service.

Susan Henson, a spokeswoman for Experian, said the educational scores are still a good tool for consumers even if they are not what lenders use.

"The most important thing is they’re really measuring the same thing, which is that consumer’s level of risk, whether they are an extremely low-risk consumer or whether they are a high-risk consumer," she said.

But some consumer advocates say the educational scores are of little use and too expensive.

Ulzheimer likens them to faux designer bags. "It’s like selling a Gucci bag on the streets of New York," he said. It looks like the real thing, but it’s not.

"It exposes something two of the three bureaus don’t want people to know," he added. "They make a whole lot of money selling scores."

Indeed, the recession has been a boon for many of the Web sites that sell credit scores. Traffic on FreeCreditReport.com, for instance, grew 6 percent, to 6.6 million visitors, in March, according to ComScore, which tracks Web sites.

Sean Craig, a retail manager in Ashburn, was one Experian customer. When he first checked a few months ago, his Experian score was 720. Then American Express lowered his Blue Cash card limit to $5,900 from $11,300. His score dropped to 683, then to 681. When he called American Express to ask why his limit had been reduced, he was told he had too much debt and that his credit score was actually 570.

Craig assumed the Experian score was the one American Express used, but American Express was looking at his FICO score.

"I was shocked when I checked and it was 683. I was even more shocked when I saw it was 570," Craig said. "It’s driving me nuts. The whole thing seems utterly arbitrary."

Such big gaps between the educational scores and the FICO scores are not unusual.

"It’s a real problem," said Evan Hendricks, author of "Credit Scores and Credit Reports" and editor of Privacy Times. "People are trying to be good, intelligent, educated consumers. They want to see their score, their report. Then they get a ‘fake-o’ score, which is most likely inflated, while the lender is using the FICO score . . . People think they’re better off than they are."

Adding to the confusion is that even FICO scores can vary. That’s because the company regularly updates the formula it sells to credit bureaus. The lenders can choose to buy the new or an older version of the formula, and they sometimes settle on an older version if it is cheaper and easier. "The lenders using scores from an older version, they’re not using bad scores," said Craig Watts, a spokesman for FICO. "They’re still doing the job but not doing it quite as well as the newer version."

Watts recommends getting FICO scores at Equifax.com or myFICO.com.

Other credit score experts said a better gauge of a consumer’s financial health is the credit report. If they have paid bills on time, have no negative public records such as bankruptcies, and have used less than 30 percent of available credit, they probably have a good score, Magnuson said.

It’s clear that’s no longer the case for many Americans.

The average TransUnion credit score was 651 in the first quarter of this year, the same as it was the fourth quarter of 2008. But that was a six-point drop from the previous quarter. Experian reported a 5-point drop in the VantageScore, from 751 in the fourth quarter of 2007 to 746 in the fourth quarter of 2008.

Equifax, however, reported an increase in average scores from May 2008 to this past May, from 699.8 to 701.9, which officials attributed to three factors. First, credit card issuers are taking on fewer new customers so there aren’t as many inquiries on consumers’ credit reports. Many inquiries hurt scores. Consumers are holding on to cards they have had for a long time, which helps scores. Lastly, more Americans are saving and not using credit.

Lower scores leave people such as Graver in a precarious position. She is struggling to make her online specialty tea business, DuckyLife.com, a success. To do so, she might need a loan someday, and she probably won’t qualify. But her most immediate worry is a home. To Graver, having a lower credit score is "a nightmare."

I’ve "survived four life-threatening illnesses, six surgeries, divorce — and all as a single mom," she said. "Now I cannot find a place to live."

By Nancy Trejos
Washington Post Staff Writer
Sunday, June 21, 2009

June 30 (Bloomberg) — When Sharii Rey, a paralegal in Portland, Oregon, had her credit limit reduced by JPMorgan Chase & Co. earlier this month, she said it would hurt her 760 credit score. That’s not the bank’s problem, she was told. It’s FICO’s.

After Rey’s $42,500 credit line was cut to $12,000, her debt relative to available funds almost quadrupled. This so- called utilization rate is a large component of the FICO formula and a higher ratio can lower a score. Rey, 62, is concerned a new FICO score will squash her ability to borrow.

Congressman Luis Gutierrez, an Illinois Democrat, says the FICO formula, the most widely used by U.S. lenders, has flaws as banks decrease loans to consumers, regardless of individual risk profiles. At least 30 million Americans had their credit limits reduced arbitrarily during the second half of 2008, FICO estimates. In the first quarter, New York-based JPMorgan and Citigroup Inc. and Bank of America Corp. in Charlotte, North Carolina, slashed $320 billion from credit lines, according to a report by former Oppenheimer & Co. analyst Meredith Whitney.

“Reductions to a consumer’s line of credit based upon the lending institutions’ overall appetite for risk has little or no bearing on a consumer’s own risk of default,” said Gutierrez, chairman of the House Subcommittee on Financial Institutions and Consumer Credit.

An individual’s FICO score is based on factors that aren’t directly related to JPMorgan’s decision to lower a credit limit, said Paul Hartwick, a spokesman for the biggest U.S. bank by market value.

Scaled-Back Lending

Banks have scaled back lending during the deepest U.S. recession in five decades. The Federal Reserve’s quarterly survey of senior loan officers released May 4 showed about 65 percent of banks lowered credit limits on new or existing credit-card customers, compared with 45 percent in the January survey. Consumer credit, which includes credit card and auto loans, was $2.52 trillion in April, according to a Fed report released this month.

“The collapse of the economy raises serious questions about the credit industry’s reliance on credit scores,” said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group in Washington. “Are the scores as predictive as FICO swears they are?”

Scores based on models established by Minneapolis-based FICO, formerly known as Fair Isaac Corp., are used to gauge a consumer’s financial health. The scores, which range from 300 to 850, affect the ability to get credit cards, mortgages and insurance products, as well as the rates borrowers pay for them.

Founded in 1956

FICO was founded by Bill Fair, an engineer, and Earl Isaac, a mathematician, in 1956 and the FICO score is now used by 90 percent of the 100 largest U.S. banks. Mortgage lenders use the scores, which rank borrowers according to the likelihood of default in the next 24 months, in more than 75 percent of all residential mortgage originations, according to FICO.

“FICO scores have held up quite well in terms of predictive accuracy,” said FICO Chief Executive Officer Mark Greene, 54, a former economist at the Fed. “It’s not obvious to me that having the score change because of limit cuts is the wrong thing. The bank’s action may signal a riskier environment and the view that you are a riskier consumer.”

Mortgage-finance companies Fannie Mae and Freddie Mac use FICO scores when backing loans, which helps FICO keep its market dominance, said Ken Lin, chief executive officer and founder of San Francisco-based Credit Karma Inc., a Web site that offers free credit scores to consumers.

Fair’s Couch

Experian Group Ltd. in Dublin, Equifax Inc. of Atlanta and Chicago-based TransUnion LLC have their own versions of the FICO model that they sell to lenders. FICO relies on data from the companies to create its formulas.

The formula, which evaluates payment and credit history, utilization, new loans and types of credit in use, is updated every two to three years, said Ethan Dornhelm, who works with about 40 FICO scientists in San Rafael, California, about 30 minutes north of San Francisco. Fair’s leather tobacco-colored couch, where he used to lie in the 1970s while devising the model, is displayed in an office lobby.

The FICO 08 system, introduced in May 2007, refines previous models by limiting the effect of authorized users who artificially increase scores and separating chronic late payers from consumers who have isolated late payments, said Lisa Nelson, FICO’s vice president of global scoring. Borrowers who have higher utilization rates will receive fewer points, she said.

‘Fear for Enamel’

Rey, the paralegal, said she was counting on a credit “cushion” in case she was affected by the decline in the economy. She said she fears she won’t be able to buy a new home and car because her reduced FICO score will mean higher interest rates on the loans.

“I have been gritting my teeth so hard, I fear for the enamel,” Rey said.

Nationally, FICO score distribution has remained fairly stable with the median at about 720, according to a FICO study of Equifax data. Consumers are monitoring their spending habits more closely, said Tom Quinn, vice president of scoring at FICO.

Credit-limit cuts that didn’t follow customer actions such as late payments affected about 11 percent of consumers from April to October 2008, according to the FICO study. The median FICO score for this group was unchanged at 770, Quinn said.

Limits Running Down

“The emphasis on utilization rates when you’re not running up debt and instead limits are running down makes FICO scores much less reliable,” said Josh Frank, a senior researcher at the Center for Responsible Lending in Durham, North Carolina.

Ken Jett, a 42-year-old licensed mental-health counselor, keeps his 12 credit cards in his desk. He said he hasn’t used them since February because he’s concerned about his credit score that has already dropped to 683 from 720.

“My score is no longer a good glimpse of who I am, credit- wise, because it looks like my cards are maxed out and I’m a risky borrower,” said Jett, who’s based in St. Louis. “But nothing has changed in my credit-risk profile except for an arbitrary $25,000 limit cut.”

Job Losses

Gutierrez, the congressman, said he’s planning a subcommittee hearing on credit scores before the end of the year.

FICO’s first-quarter revenue from scoring operations fell 21 percent to $31.1 million from a year earlier, as fewer consumers applied for mortgages, auto loans and credit cards. Almost 550 FICO employees have lost their jobs since 2008 as earnings decreased, said Craig Watts, a company spokesman. The stock rose 5 cents to $15.46 at 4:01 p.m. in New York Stock Exchange composite trading. It has declined 8.3 percent year to date.

“Is FICO an accurate predictor of risk?” said Evan Hendricks, publisher of “Privacy Times,” a Washington-based newsletter and author of “Credit Scores & Credit Reports.” “It’s the worst system around, except for all the rest,” said Hendricks, taking a line from former U.K. Prime Minister Winston Churchill.

To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.
Last Updated: June 30, 2009 17:00 EDT

You probably already know how an inaccurate credit score can cause you problems — but what about your “identity score”?

Though most consumers aren’t familiar with this type of rating, it’s increasingly being used by everyone from car dealers and banks to utilities and wireless service providers. Much as a credit score attempts to put a number on how good someone is at paying their bills, an identity score measures the risk that a consumer isn’t who they say they are.

Companies that sell ID scores say their products serve as a weapon to combat that fraud by helping to predict the likelihood of identity theft, which by some estimates cost consumers and businesses $48 billion last year. Already, such scores are used before most credit-card transactions or loan applications are approved — and their use is expected to spread. Thanks to new regulations, most businesses will soon be required to use ID scores or some other type of methodology to confirm a customer’s identity.

But the growing use of identity scoring is raising some questions, too. Some privacy advocates say the expansion of efforts to compile incredibly detailed consumer dossiers is troubling. Others say the scope of identity theft has been exaggerated — in terms of losses to both businesses and consumers. And then there’s the issue of accuracy: If some of the data used to calculate a score are wrong — due to errors in one’s credit report, for example — the score will be wrong as well.

A bad identity score — justly or not — is likely to create a number of issues for consumers, ranging from the inconvenience of having to answer some annoying questions when applying for credit to having important purchases or bank transfers slowed or put on hold for a matter of days while thorough ID verification takes place.

Companies that calculate and sell these scores say they’re beneficial to businesses and consumers alike. As for privacy concerns, they say that consumers’ personal information is never sold or shared with third parties. Some also say identity scores measure identity risk much more accurately than credit scores measure credit risk.

“Credit scores and identity scores should not be viewed with the same lens,” says Thomas Oscherwitz, chief privacy officer at San Diego-based ID Analytics, one of the companies that provide identity scores. “They have different purposes and are calculated differently.” Heather Grover, senior director of product management at Experian’s fraud and identity solutions group, says that consumers can make sure their identity score is accurate by disputing any erroneous information in their credit reports.

While nowhere near as big as the market for credit scores, ID scoring is becoming a fast-growing field. Players include FICO, which offers its Falcon product for scoring credit-card transactions; Experian’s Precise ID, which is used to determine the fraud risk of new account applications; and ID Analytics’sID score, which is sold to companies directly and through partnerships with credit bureaus Equifax and TransUnion. It’s an industry estimated at $1 billion a year — just from the credit-card issuers alone, according to Brian Riley, research director at financial services research firm TowerGroup.

Thanks to federal regulations scheduled to take effect Aug. 1, that market is only expected to grow. This so-called Red Flags rule will require any business that conducts transactions or extends payment terms to consumers (such as lawyers, retailers or telecom outfits) to have a system in place to identify and resolve red flags that a transaction or application is fraudulent, says Oscherwitz of ID Analytics who helped draft the rules five years ago as a staffer at the Senate Judiciary Subcommittee on Terrorism, Technology and Homeland Security.

Identity scores are calculated based on how certain personal information, such as your name, Social Security number, address, birth date or phone number, is used in transactions or for credit applications. For instance, your score might be higher — signifying a higher risk — if you move around a lot. Other factors that can raise your score, according to companies that calculate them: changing your name (say, after getting married) or living in an apartment building, where many people share the same street address. Even using an out-of-state cellphone number when applying for a car loan can boost your score.

If a score is deemed too high, an account application or transaction gets flagged. As a result, the consumer may be asked seemingly random “challenge” questions. They’re meant to be questions that fraudsters are unlikely to be able to answer — but in some cases, they can tax the memory of the authentic consumer. You might be asked the house number where you lived seven years ago, for instance, or the color of the car you owned in college or the issuer of the mortgage on your first home. Further up the inconvenience scale, you might even be asked to visit a bank branch to show your personal identification or to fax information to prove your identity.

And then, of course, there’s the faulty information to contend with. David Szwak, a consumer credit attorney and partner at Bodenheimer Jones Szwak & Winchell in Shreveport, La., calls it the “garbage in – garbage out” problem. Some of the data used to calculate your identity score come from the “above the line” part of your credit report – which often contains errors.

“Almost every single report that I have seen has personal identification information that does not belong to that consumer,” says Szwak. “There are typographical errors, just plain old inaccurate addresses, multiple Social Security numbers on file.”

The result: Between 5% and 20% of applications for credit are flagged and less than 1% end up being fraudulent, says Andy Smith, a former vice president of business analytics at the fraud department of Capital One, the big credit-card issuer.

Smith says he often runs into such problems himself. “My last name is Smith, my father and brother’s names are David,” he explains. While trying to transfer a large amount of funds between trading accounts, he was unable to answer the questions correctly and was kicked out of the system for manual review. The transfer was delayed by three days.

While many consumers are likely to be unaware of the world of identity scores, some companies want to change that. ID Analytics, which says its ID Score is used by some of the biggest banks in the country, as well as major wireless service providers, is now making the score available to consumers at no charge through MyIDScore.com.

ID Analytics says consumers can use the score to assess their personal risk that their identity may have been stolen. But the company gets something out of it too: More information for its own database. In order to get the score, consumers must enter their name, address, phone number, date of birth. (Social Security numbers are by request, but providing it is optional.) The result is a three-digit number between 1 and 999 — lower is better — that assesses the level of risk that you’ve been a victim.

Mari Frank, a Laguna Niguel, Calif.-based attorney who specializes in privacy rights and identity theft, says consumers should be aware they’re sharing sensitive personal information in order to get their score, which the company can then use to improve its products, according to its privacy policy.

CEO Bruce Hansen says ID Analytics may use the information to improve its web site, but does not plan to use it in product development. The company also says consumers can opt out, though the instructions – which require sending an email – are buried in the privacy policy’s fine print. ID Analytics says it is working on adding an opt-out option next to the fill-in form within the next month.

And much like the use of credit scores and reports has expanded dramatically over the years, from lenders to insurers and even employers, the potential for identity authentication and scoring is unlimited. Smith, the former Capital One exec, is now building a similar model that predicts instances of insurance fraud. “Stopping fraud is not that hard,” he says. “Stopping it without dropping a whole bunch of inconvenience on your customers is the trick.”

Published June 19, 2009

For decades, the credit card has symbolized the American way of life, but this recession may force both the symbol and the reality to change.

Spooked by plunging home prices and mounting job losses, consumers have cut back on credit card use, pumping less cash into an economy that depends on their ability and willingness to spend.

Meanwhile, Congress, reacting to complaints about credit card marketing practices, has tightened the rules on penalties and fees – spurring bankers to warn that consumer credit will become more costly and difficult to obtain.

The credit card issue is part of a larger problem of how to ensure that the financial system supplies enough credit to keep the economy moving without providing so much that it overheats and collapses.

Industry critics say soaring debt helped cause this recession, which has now unleashed economic forces that will end the free-spending behavior symbolized by credit cards.

"As a society, we’ll never be able to go back to the way things were," said Robert Manning, a professor of consumer behavior at Rochester (N.Y.) Institute of Technology and author of the anti-debt manifesto, "Credit Card Nation."

But James Chessen, chief economist for the American Bankers Association, said consumers rely on credit cards to enhance their lifestyles and will want credit available when better times return.

"The fundamental desire to buy things today and pay interest for the privilege will remain part of the culture," Chessen said.

Daniel Ray, editor in chief of CreditCards.com, said credit cards began as exclusive perks in the 1960s and 1970s but evolved into mass-market products in the 1980s and beyond thanks to the use of credit scoring technologies.

Using credit scores, he said, banks could tailor rates and terms to an individual’s likelihood of making or missing payments. Cards became easy to obtain, even for people with low scores, because banks could align rates and penalties accordingly.

"They created a multitude of products for a multitude of needs," Ray said.

Federal Reserve figures chart the expansion of credit card use.

Each month the Fed surveys the total revolving debt carried by consumers, about 90 percent of which is charge card balances.

Fed figures show that in September 1988, consumers carried $177 billion in such revolving debt. By September 2008, that figure had risen more than five-fold to $977 billion.

Since October, however, the Fed survey shows that revolving debt has dropped for six months in a row.

"This hasn’t happened for decades," Ray said.
Will retreat end?

This credit retreat could prove temporary or permanent. But Ray said the recent congressional legislation was intended to curb the marketing practices that enabled banks to expand card ownership over the last two decades.

"Issuers developed cards that were cheap up front and expensive on the back end," he said. "You could get zero percent for the first year, but after that, if you tripped up, the low introductory rate became very high in a hurry."

The bill signed by President Obama May 22 will prohibit banks from raising rates on existing balances unless a cardholder falls more than 60 days behind on minimum payments – eliminating so-called hair-trigger delinquencies – and make other changes, including requiring 45 days’ notice before increasing interest rates.

The banking industry, which fought the changes, now warns that the bill will force issuers to restrict access to cards and raise the overall cost of borrowing.

"They affect the ability of credit card issuers to change their prices based on risk," said Chessen, with the Bankers Association, predicting that the law will mean "less credit extended, particularly to people who may not have perfect credit histories."

But critics say banks targeted vulnerable consumers and then profited when they missed payments or exceeded credit limits.

"There’s a lot of anger out there; people have felt so manipulated," said San Francisco debt expert Erica Sandberg, author of the family finance guide, "Expecting Money."

But the credit card situation is just a microcosm of the larger wave of debt that has swamped the economy in the past 20 years.
Huge household debt

The Federal Reserve Bank of San Francisco recently issued a report on total household debt – everything from mortgages to credit cards. It showed that consumers doubled their debt load over the last two decades. By 2007, the average household had $1.33 in obligations for every $1 in personal disposable income.

"For many U.S. households, current debt levels appear too high," the report said.

Manning, the credit industry critic, said now that the recession has thrown millions out of work, that burden has become more difficult to sustain.

We have more debt than at any other time in history and less income to pay it back," he said. "That’s really where we are right now."

E-mail Tom Abate at tabate@sfchronicle.com.
This article appeared on page L – 1 of the San Francisco Chronicle
Tom Abate, Chronicle Staff Writer
Sunday, May 31, 2009