Credit Check: The Good, the Bad and the Ugly - For What It's Worth - Comcast.net Finance

It's that time again. Time for the latest in our semi-regular series on one of the most ubiquitous, loved, loathed and misunderstood personal-finance tools: credit cards.

So what has changed in the industry since we broke down the long-awaited rules and regulations that President Obama signed into law last month? And how might the ever-changing credit-card landscape impact your family budget? The answer is a mixture of good, bad and downright ugly. Read on to learn more.

The Good

A common theme among struggling Americans ever since the government started doling out multi-billion-dollar checks to the likes of AIG, Citigroup and GM last fall has been, "When do I get my bailout?" Aside from half-hearted stimulus in the form of marginally lower payroll taxes and credits for home buyers and car buyers, there has been little in the way of a personal bailout.

But that may be about to change. And surprisingly, it's the much-maligned big players in the credit-card industry who are the ones said to be extending a bit of a helping hand.

According to David Streitfeld's article in the New York Times, card issuers are taking the drastic and drastically out-of-character step of reaching out to consumers to offer balance reductions. That's right, I said balance reductions.

Though card companies have long offered rate reductions and modified payment terms to struggling consumers, such olive branches typically only were extended if you asked for them. The two-fold change reported in the Times is that banks are slashing once-untouchable balances (to as much as 50 cents on the dollar in one example Streitfeld cites) and doing so proactively.

The catch-22: The consumers likely to receive such an offer are those most likely to be in dire straits to begin with. Ask yourself... if you're out of work and struggling to survive financially, does scrounging together $2,500 to pay your reduced card balance sound any more likely than pulling together the full $5,000?

The card companies' motives for attempting to broker peace with some consumers aren't necessarily noble. This isn't charity, and that's rather transparent. Streitfeld notes that collection firms are paying less than ever to buy up delinquent accounts from banks (around 5 cents on the dollar as opposed to the historical norm of roughly 15 cents). The new card regulations that loom ominously on the horizon for the industry are another motivating factor.

That said, this story certainly qualifies as good news. In an environment where every penny counts, American families can't go wrong with lower bills.

The Bad

Recent data show that the saving habits of Americans have changed considerably as the recession drags on. The abysmal, negative savings rate that helped contribute to the onset of the downturn has reversed rather nicely. The latest figures showed a savings rate of 5.7 percent in April, a 14-year high.

But this doesn't mean we're not spending at all. And a large share of our expenditures continue to come from credit-card transactions. Which makes the headline of a recent Associated Press piece all the more worrisome: "Weak Security Enables Credit Card Hacks."

Even if you're taking all of the necessary and recommended steps to keep your accounts secure (establishing secure passwords, shredding account statements, avoiding online phishing scams), your sensitive personal financial data are available to hackers in some form or other every time you initiate a credit-card transaction. And the vulnerability of the payment-processing networks that handle each and every swipe is staggering.

According to Jordan Robertson's AP Impact report:

"More than 70 retailers and payment processors have disclosed breaches since 2006, involving tens of millions of credit and debit card numbers, according to the Privacy Rights Clearinghouse. Meanwhile, many others likely have been breached and didn't detect it. Even the companies that had the payment industry's top rating for computer security, a seal of approval known as PCI compliance, have fallen victim to huge heists."

Think your transactions are safe because you rarely pay via credit card at craft fairs or mom-and-pop stores? Think again. In his article, Robertson dispenses this interesting (and alarming) tidbit: Retailers that process fewer than 6 million card transactions each year aren't even required to audit their security practices. So more than 99 percent of all merchants are left on their own with your precious account info.

Halting all credit-card purchases would be impractical and downright silly. But be mindful that the purchase process doesn't necessarily end when you swipe. Continue taking common-sense preemptive account-security steps, and consider the potential benefits of proactively monitoring the news and your credit report so that you can spot and eliminate any breaches before an inconvenience snowballs into financial ruin.

The Ugly

News yesterday that credit-card defaults reached record highs in May came as little surprise to industry watchers. Card defaults typically mirror the unemployment rate, and although the pace of job losses has slowed, it certainly hasn't yet reversed and turned positive.

But insiders and average Americans alike may be shocked by the staggering heights to which the credit-card damage has climbed.

According to the just-released figures, Bank of America, the largest U.S. bank, saw its "chargeoff" rate -- the share of accounts it doesn't expect will ever be paid back -- reach 12.5 percent last month, more than 2 percentage points above the 10.47 percent level seen in April. A mind-boggling one in eight BofA cardholders will not be paying back their balance owed... ever.

Other banks, including American Express, Citigroup, Capital One and J.P. Morgan Chase, didn't fare nearly as poorly in May. But the fact that their default rates in the range of 8.36 percent to 10.5 percent are seen as good news is a clear indication of just how bad things have become.

Yesterday's data also included a second fleeting nugget of so-called good news: For the third consecutive month, credit-card delinquencies actually fell. But hold the celebratory champagne. Experts say the improvement in this figure is actually just a seasonal statistical anomaly tied to income-tax refund checks. A Reuters report offers this shower of rain on the proverbial parade:

" 'I find it hard to believe that it is really a trend. You need to see stabilization in unemployment before you see anything else,' said Chris Brendler, an analyst at Stifel Nicolaus. 'It is too early to see some kind of improvement.' "

What's next for credit cards? Will the new rules on the horizon truly offer additional protection for struggling American consumers? Will card issuers load up on money-making tactics before the rules take effect? Tell us what you think.

Message Edited by Anthony_Catalano on 06-16-2009 04:26 PM