Card Tricks

Americans are struggling with a very rocky economy while they are also holding almost $1 trillion in credit card debt. In most cases, those cards provide a little flexibility with the monthly bills. But an increasing number of people are defaulting because of the “tricks and traps” — soaring interest rates and hidden fees — in the credit card business.

Before more Americans get in so deep that they cannot dig out, Washington needs to change the way these companies do business to ensure that consumers are treated fairly.

The stories about deceptive practices are harrowing. At a recent news briefing in Washington, a Chicago man told about what happened when he charged a $12,000 home repair bill in 2000 on a card with an introductory interest rate of 4.25 percent. Despite his steady, on-time payments, the rate is now nearly 25 percent. And despite paying at least $15,360, he said that he had only paid off about $800 of his original debt.

The Federal Reserve is focused mainly on making it easier for consumers to understand credit card contracts — some go as high as 30 pages of nearly unreadable fine print. Clarity, however, is not enough. One bank contract stated baldly: “We reserve the right to change the terms at any time for any reason.”

Congress needs to address numerous unfair practices, including interest rates that skyrocket for no apparent reason and due dates that suddenly shift — forward — so that an unwary consumer pays late. Late fees are a big profit center in some banks. Some raise interest rates when consumers get close to their credit limits. In other cases, a late payment on one company’s card raises the rates on other cards in your wallet.

Americans deserve better. Senator Carl Levin, Democrat of Michigan, has been pushing hard for more consumer protections. Representative Carolyn Maloney, Democrat of New York, has put together an excellent first step with a cardholder’s bill of rights. It would require such reasonable changes as a ban on collection of interest on amounts already paid. It would require that cardholders get timely notices of changes in their rates and be able to cancel their cards if the rates suddenly skyrocket — and pay off the balances at the old rates.

The Struggling American Economy

I spent most of last week at a banking conference in Chicago. It was one of the better industry events I’ve attended in the past couple of years. The panel of speakers included representation from every sector of the financial services market, from a key analyst at Goldman Sachs to a former President’s chief economic advisor.

From the perspective of a casual observer, what’s going on in our economy is really interesting - we’re seeing unprecedented lending standards result in unprecedented charge-offs. No one knows how bad it’s going to get, but everyone I visited with over the course event agreed that the economy is going to get worse before it gets better.

So, how is this going to impact the average bank customer? Here are my best guesses on how the next couple of years are going to shape up for bank customers.

1. Mortgage underwriting standards are going to get more stringent

This isn’t a surprise. Expect it to become much more difficult to get into a home. Individuals with low debt-to-income ratios and credit scores over 740 will still have access to credit of all kinds, including mortgages, but those with less-than-perfect credit, no down payment, and high consumer debt are going to have a hard time getting into a traditional 30-year fixed mortgage at the best rates.

New trend: banks will begin to market savings accounts targeted to those that have been asked by their lenders to make a 10% down payment on The American Dream

2. Banks will continue to come up with creative savings account service bundles

Banks of all sizes are experiencing record losses and write-downs, and liquidity problems are running rampant. Banks need low-cost deposits more than ever.

Look for more checking/savings bundles like Bank of America’s “Keep the Change” and Wachovia’s “Way to Save.” Small banks are getting into the innovative savings game as well - check out this article at netbanker about a new product called “Smarty Pig” - it’s a savings account with a social networking element currently in beta at West Bank.

Also expect to see ‘creative positioning’ of existing bank products. Banks will create an offshoot of a traditional money market account or high-yield savings and call it a “risk-free CD” - a savings product that has a guaranteed rate of return but can be withdrawn at any time, without penalty.

3. Student loans will be the next victim of the sub-prime fallout

50 of the 2700 current student lenders have announced plans to discontinue their student lending programs. Expect rates on non-federal student loans to climb into the double digits.

4. Long-term CD rates will rise

The only piece of really good news I have is that the yield curve is positively sloping for the first time in a few years. Expect to see more CD specials locking in decent rates for 2-5 year money.

5. Household pricing will be next big thing in deposits

Banks are doing a lot more household (also called “relationship”) pricing. We’re going to see banks wave “buh-bye” to unprofitable accounts by dropping rates on expensive single-relationship account holders and high-touch customers with small balances.

Only a handful of the largest US Banks have the technology and analytics in place to do this today, but eventually most banks will set account interest rates and run specials on a customer-by-customer basis - much the same way airlines price airfare.

Parting Thoughts

The experts that addressed my group couldn’t tell us how long this “economic downturn” will last - we heard everything from 18 months to five years - but they did agree that deposits are going to see a lot of action as banks try to improve their cash positions. If the Fed would just be a bit more concerned about inflation and stop lowering target interest rates - it would be a great time to be a saver!

I Hate To Say "I Told You So..."

The problem the the US is facing has to do with consumer debt being too high.

People can't go on borrowing and borrowing and not saving anything, forever. Meanwhile a huge amount of wealth is being created in Asia. They are financing our debts, and what they are gaining is real power over us, to the extent that when they actually grow to be bigger than us, we are going to be second-world nations.

A second straight month of job losses all but ended the debate over whether the U.S. economy has slipped into recession. Now the question is how to get out.

"Turn out the lights. The party's over. We are in a recession," said Joseph Brusuelas, chief U.S. economist at IDEAglobal in New York.

Don't count on debt-laden households to spend their way back to growth. As for banks, they are preoccupied with cleaning up their balance sheets after seven months of credit turmoil, which means they are unlikely to throw open the cash spigots. The federal government is mired in debt as well.

All that adds up to a protracted period of deleveraging -- a fancy word for paring debt -- and perhaps an equally long period of subpar U.S. economic growth.

While most economists still believe that the economy will rebound in the second half of this year as U.S. Federal Reserve interest rate cuts and government tax rebates kick in, some are starting to push back the recovery date into 2009.

U.S. employers cut 63,000 jobs last month, according to Labor Department data released on Friday. That followed a loss of 22,000 jobs in January. December's job growth was only half as big as the government had earlier reported.

Economists even found bad news in the fact that the unemployment rate fell to 4.8 percent from 4.9 percent, noting that this was merely the result of a steep drop in the size of the work force because more people gave up looking for jobs.

Employment holds the key to the U.S. economy because jobs mean paychecks, paychecks mean consumer spending, and spending accounts for about 70 percent of the economy.

Consumers were already under strain from the slumping housing market and rising costs for food and energy. A report on Thursday showed that household net wealth fell for the first time in five years. The savings rate has hovered around zero for several months.

With credit market turmoil prompting banks to tighten lending standards, consumers have had a tougher time qualifying for cheap mortgages, auto loans and home equity lines.

That suggests households will cut spending.