Credit Card Lenders Are Doing Fine, Thank You
Credit card spending by US consumers may be on the rise as Visa and MasterCard posted sharp profit increases for the first quarter of 2012, according to a Moneyrates.com report dated May 11, 2012. Visa reported increased profit of 30% over the same period last year with net income for the quarter of $1.3 billion. MasterCard reported a 21.2% increase in the first quarter with revenue of $1.76 billion, including a profit of $681 million, its highest quarterly rise in six years. Both reports exceeded Wall Street expectations.
For those of my bankruptcy clients whose credit card monthly interest charges regularly exceed 30%, the report claims that Visa and MasterCard make money, not from exorbitant interest rates, but rather from the transaction fee paid by the cardholder and retailer each time a card is used.
Analysts were expecting lower profits from both card processors because: (1) The growth in debit card use has slowed—Visa reported debit card use grew by only 4%, the slowest rate recorded in a year; and (2) the Federal Reserve estimated in February that credit card charges declined by $5 billion in January and February of 2012, even as consumers increased overall spending by nearly 3%. It appears that the card companies benefited from international customers whose transactions grew their revenue by 17%.
Debit Card Growth Declines Raising Greater Focus on Credit Card Use
The reported decline in debit card use—the 4% increase reported by Visa compared to its 12% increase in credit card use—could be the result of a trend among card lenders to deemphasize debit card spending. Previously, reward programs were offered by banks for debit card use that improved profits for Visa and MasterCard, the companies that process most debit card transactions.
But, when the federal government legislated a cap on swipe fees that banks are allowed to charge merchants for debit card transactions, thereby reducing aggregate income by an estimated $20 billion a year, many banks shifted their promotional emphasis to credit cards. For instance, Visa increased the amount it gives credit card issuers to promote its products and use its services. In October it will increase the minimum credit card purchase amount (from $25 to $50 in October) that doesn’t require a signature or personal identification number.
Bankruptcy’s Impact on Unpaid Card Balances
Because consumer unsecured debt is comprised in large part of unpaid credit card balances, I never feel too empathetic when commercial lenders lament the hit they take when credit card loan balances are discharged in bankruptcy. According to a Dow Jones Newswires report dated April 16, 2012 (see, http://www.foxbusiness.com/news/2012/04/16/loan-write-offs-edge-up-for-some-card-issuers-but-outlook-remains-strong/), American Express, Bank of America and other large credit card lenders are doing just fine, thank you. They reported borrower payment habits improved in March although loan write-offs edged up for some issuers. Moreover, delinquencies–or the number of borrowers late on their loan payments–continued to decline despite expectation that credit performance will weaken in 2012 as some lenders relax their standards in the pursuit of greater loan balances.
American Express, the largest credit card-issuer by spending, reported its delinquency rate for US card loans fell to 1.3% in March from 1.4% in February while the percentage of loans considered to be uncollectable remained at 2.4%.
Bank of America also saw an improvement in March with delinquency rates dropping over the February to March period 3.6% from 3.75%. Citigroup reported declines in both delinquency and net charge-off rates while Capital One and J.P. Morgan Chase saw net charge-offs edge up only slightly.
If you received slightly fewer direct-mail credit card solicitations of late, you benefitted from an apparent trend. A total of only 282 million offers were mailed in February, up 6% from January but down 25% from 2011 as lenders reined-in this, perhaps the most irritating of credit card marketing ploys. According to Andrew Davidson, senior vice president with Mintel Comperemedia, a market research firm, “some issuers are cooling off following a sustained period of aggressive growth.”
Perhaps as a response to recent congressional efforts to limit card lender charges to retailer, we’ve noticed at Hurlbett & Olmstead that minimum settlement offers from credit lenders to our bankruptcy and non-bankruptcy clients have steadily increased during the past 18 to 20 months from an average of approximately 30-35% to 50-60%, now. Though we are still able to obtain occasional settlements significantly below 50%, the days of regular 20% settlements appear to be in the rear-view mirror.
– Bob Hurlbett
About Hurlbett & Olmstead
Since 1994, we’ve helped thousands of people in Santa Barbara, Ventura, Paso Robles, Santa Maria and San Luis Obispo regain financial peace in their lives. These people now experience a life free from the stress and worry that comes from watching unpaid bills mount, answering calls from arrogant debt collectors, receiving a lawsuit from a process server, finding an empty spot where a car has been repossessed, missing money from a garnished paycheck, or knowing that their house will soon be sold at foreclosure.
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