There is a rather amusing story at the Financial Times tonight, “Credit card reforms ‘to cost banks billions’”.
Let’s look at the particulars. The story is based on a study by law firm Morrison & Forester which concluded that banks will suffer a world of hurt if they are forced to give up practices like universal default (jacking up your rates to default levels if you miss a payment from some other grantor but are current with them) and double cycle billing. The changes pending also require banks to be less punitive about late payment (you’d need to be a full 30 days late to get in trouble).
The Morrison & Forester study asserts that banks will lose $10 billion in interest annually, reduce credit lines by $931 billion, and put cards “out of the reach of 45 million customers.”
Now let us consider a few things:
1. Why, pray tell, is Morrison & Forester, a San Francisco law firm, the author of this pro-industry tale of woe? Why not one of the well-respected, brand name consulting firms (McKinsy, Bain, and BCG all have large financial institutions prictices) or one of the well regarded financial institutions boutiques, like Oliver Wyman? I cannot imagine that they have the ability to to anything more that regurgitate analyses provided by industry incumbents. Even if you were going to have a law firm rubber stamp this sort of PR effort, it might go over slightly better from a law firm known to be a financial regulatory heavyweight, like Sullivan & Cromwell or Arnold & Porter. One might hazard that the industry could not get anyone well known for banking expertise to put its name on a self-serving report like this (note I am not saying M&F knows nothing about banks; pretty much every big firm has something of a banking practice. But they are a pretty odd choice for a report aspiring to be seen as authoritative).
2. That $931 billion estimate is way too precise.
3. I am willing to accept that the industry will make less when these ruses are removed. The whole point of them is to extract more dough from customers. But how much more are the credit card issuers making due to the tremendous drop in funding costs and further subsidies-in-waiting thanks to the Fed’s plan to buy asset backed paper, including securitized credit cards? The authorities have made it clear that they intend to throw their weight behind making credit cheaper to consumer via lowering funding costs. How big an offset is that to the $10 billion loss in fees and default charges that the industry is crying about? I suspect the value of the subsidy is considerably greater than what the government wants to take back via tougher regulations.
I’d like to see a proper tally of how much credit cared companies have slashed credit already. Seems that these rule changes merely give them cover for what they had set in motion already. In particularly, newbie bank American Express has been cutting credit limits right, left, and center. We mentioned that they are dropping two corporate credit line products aimed at the small business market; we’ve been told of people with eight figure net worths, pristine credit ratings and payment histories having their credit lines cut by half. A reader sent his letter to Amex to us (he stressed in his note that he pays off his balance in full every month, and since Amex charge much higher merchant fees than Visa and MasterCard, plus an annual fee, “pay in full” customers are far more attractive to them than they are to Visa and MasterCard):
I am writing to tell you about my sincere disappointment with my recent service from American Express. I have been an American Express card member since 2003. I put almost everything on my Amex. I charged and paid-off $91,000 dollars on my card in 2007, it was an especially big year because I got married. So far in 2008 I have charged and paid off $75,000 or so on the card, I got a new job this year and relocated… This is an average of about $7,000 per month in charges and payments over the past 2 years I would think this would make me at least a decent card holder.
On December 12, 2008 the credit limit on 2 of my American Express Cards was cut from a total of $50,000 (way more than I needed, since I rarely carry a balance) to $3,200 (way too low, especially in December), this is a 95% cut and about 1/3 of my average monthly charges / payments over the prior 2 years.
I was informed by email of the cuts the day they took place. A day later I was within $50 dollars of my new credit limit. Good thing I check my email, because I still have not received the paper letter, and would certainly have gone over the limit before I received it….
When I called customer service I was told that this credit limit cut was due to an elevated debt/credit ratio reported on my credit report. I believe this is due to a few 0% teaser rate cards that I had near full balance, and I actually recently paid them all off since the teaser rates are up at the end of the year. I was using these 0% things quite often, and I guess it is hurting my score. But I have never had a late payment with Amex, or any other creditor. However, I feel all of this is beside the point.
I think it is unacceptable that I was not contacted before this 95% reduction in my credit limit. There was no attempt to “underwrite” my account, no request for income or financial information, nothing… I was quite upset and decided to call customer service to see what I could do about it.
I called customer service and told them that this limit was too low and that even though I pay the card off every month, I would not be able to use my card the way I normally do. I told them I would be glad to supply whatever underwriting information they needed so my account could be re-evaluated and my limit increased to a level that was at least above my average monthly spending.
No luck, I was told that there was nothing that could be done, and that the account would be reevaluated in a few months, and that if my debt to credit ratio was better I may be able to get an increased limit. I spoke with a supervisor and told them that I would be forced to stop using my Amex as my primary card if I only had a $3,200 limit. They did not seem to care either, and told me that there was nothing that could be done….
I guess the same “model” that was convinced a needed a $50K limit last year is now convinced that I am a “high risk” customer. Oddly enough, my personal financial situation has improved over the 5 years that I have been a card holder. American Express would not know this since they have never requested any financials from me. It is hilarious to me that big financial institutions are making the same mistakes that got them into this mess only in the other direction… Apparently they still think the credit report knows all…
I understand that these are different times and that the economic situation is forcing business to change… etc. But, I do not think these types of actions toward long standing good customers are intelligent or warranted. I think that when we come out of the other side of this “credit crunch” environment American Express will have lost a lot of customers and a lot of revenue. It has certainly lost my respect, will lose my business.
If anyone at American Express who cares about my business sees this letter please feel free to contact me, and convince me to remain a card holder.
The key point is buried in the letter. American Express (and one presumes other card issuers) is so operationally rigid that they will consider ONLY credit bureau information. Having suffered two major credit bureau screw-ups, I hold them in very low esteem (one was all three bureaus literally mingling another person’s info with mine, the very fact that the report showed two Social Security #s should have been a tipoff to them, the other was a complete screw up by Citibank that they bent over backwards to correct, Citi could not have been more diligent, but in each case it took more than a year to get the record corrected, and in the first case, it took a nastygram from my lawyer to get them to take action),
While I can see that some customers may be too small to warrant the cost of verification of income, the one above was a pretty healthy spender. At a minimum, you could come up with review processes that most customer would decide was to much fuss (“your income would need to be at least X, and we need three years of tax returns, and a current pay stub”) but would at least leave them feeling they hadn’t been treated so badly. Note the letter writer also felt he had been treated badly by the customer service rep. Just having them be super apologetic would have been smarter.
American Express has spent a small fortune on brand image. Wonder how much they are going to tarnish it with crudely-implemented credit reductions.
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Attacking one’s customer base is generally considered a bad idea, but AE seems to have adopted this strategy. Somebody in the company must be frightened.
American Express might have disappeared last month if the government hadn’t bailed them out.
I cut my amex up and canceled the account which I payed in full every time I had ever had a charge on it as soon as I got the bill. My reason is simple if they are getting a bailout they are on my boycott list. GE, is right there with them along with a host of others including any bank that is sucking on that teat. Screw these clowns.
I’ve been paying mine late just to mess with their heads lately. I’ve been a cardholder over 25 years. If they cut me off, their loss.
I had the same experience with Amex. Completely irrational. I say let ’em burn. I’ve already taken my business elsewhere.
When my dear mother witnesses some recent atrocity by Big Biz, she’ll frequently say “Why that’s against the rules! They can’t do that.”
But she grew up in an era when a company (even a US one) was built on the model of a single nation providing the bulk of its revenue. If you broke the rules, you lost your finite customer base.
Today, international companies have no loyalty because they are diffuse monstrosities capable of securing cash flow from all manner of global resources.
Executives hide behind lawyers in hidden strongholds, cackling with glee because they pushed Grandma into universal default. They have no connection with their customers. They seek only temporary gains. Their methods are acts of violence no different than had they clubbed the old woman on the head. And If caught in the light they then seek refuge behind the very rules they break!
As many have noted, we are part of a predatory capitalist state which eats its own.
Justice is being influenced by the Credit card reps (our politicians).
When people pick up baseball bats and club the architects of these anarchic methods in the streets, we’ll be closer to equilibrium.
Agree with Anonymous 10:54 .
By the way, I had my Amex credit limit cut and the way I found out was that my card was declined. I used to use the card all the time. Now it sits there in my wallet but I use Mastercard and Discover.
Discover has a better rebate this month anyway.
AE deserves to die!
Funny how history repeats itself. I live in Asia and AE did the same thing to me during the Asian financial crisis despite the fact that I have no personal debt and substantial personal networth. They dropped my credit line by 90% without telling me and only within a month after I paid my membership dues. I said to hell with them, canceled the card and never bothered with them again. It doesn’t bother me a bit to live without an AE card but they have lost a customer forever. People, i.e. senior management of AE, often forgets but when you look at the core value propositions of a credit card, it is a commodity product!
So they want to start a revolution.. ok
The illusion here, it seems to me, is that there _is_ a ‘review process’ utilized in making account decisons. It has been my view for years that this is not the case. The amount of credit extended has little or nothing to do with the customer’s actual financials. Witness the statement by the large volume Amex card holder that Amex _never_ solicited his financials.
Card issuers don’t care about you or us for the simple reason that they do not extend credit to us based upon anything in our actuals. They extend credit based upon a) their ability to secure capital, and b) their ability to securitize _and sell_ recievables. Card issurers, you see, are exactly what mortgage brokers became, fee-generation shops. Yes, yes: if too many card holders got behind or defaulted, the issuers got stuck with the loss, just like mortgage brokers had buyback provisions. The key in securitization, then, was to cushion expected losses in the securities to the point where the _securities_ absorbed the loss, nothing kicked back to card issuers. In that sense, then, the issuers DON’T CARE what kind of credit risk a card user is because said isolated risk is bundled and shipped out. What card issuers have really cared about for a very long time is _raising_ credit limits to boost throughput so they could pinch off more dough from the financial system. Yes, the _financial system_, which was the real customer for card issuers. We card holders are just hazel stumps to be coppiced and sold as wands for the magicians of finance.
But now, the REAL customers for card issuers are broke, the financialy system’s big players. And that is a problem for already securitized debt, but that debt has been sold on. So the real problem for card issuers _now_ is that THEY will be stuck with defaults going forward because they can no longer securitize their stink-bricks and onsell them. So it is imperative for the card issurers that they slash their exposure by slashing existing credit sources. Piddly little borrowers like myself who rarely even put four digits on a card are still low exposure potential profit centers. But high volume outfits, or small businesses with five and six figure rollover limits are major risk centers. Now, the latter would, in principle, be potential profit centers if their financials were good for a downturn. But you see, card issuers _don’t do_ financial assessment, and really aren’t interested in the profit potential of individual customers because their profit model is onselling the hooked fish to the financial markets.
Everybody get it now?
What I would _love_ to see is a card holders strike. Pay everything a month late. Then pay off in full, and mail ’em the plastic in pieces. Boy would _that_ pluck their fat goosy tochuses. I offer that concept to all and sundry: Let’s pick a ‘name’ and name a day.
Richard Kline said-
“So the real problem for card issuers _now_ is that THEY will be stuck with defaults going forward because they can no longer securitize their stink-bricks and onsell them”
I’m curious Richard, who is “They”???
Buy off the “They” and trash the companies. These companies are lethal weapons, no different than errant tanks wandering about a city shooting pedestrians.
Buy, or imprison the executives, terminate the companies that engaged in such practices. End of story.
If you give me crap about the ‘big picture’ and how loans will suffer.
I can tell you, I see no evidence anyone ever cared!
So, they’re going to cut our limit to the bare minimum.
Good for us: We’ll learn to save and become true tightwads.
(Some years later)
You want us to…what?…Consume?
What are you talking about exactly?
Having been with AMEXCO for many years, I’ve had good and bad experiences with them.
My credit limit is around 25k, I also pay the full bill monthly (though I don’t charge anything like this guy does) and my line has not been cut.
I think AMEXCO wasn’t just being arbitrary, that they did do some sort of review, including probably getting this guy’s credit report and FICO score. As he mentioned, he was carrying full balances on a number of other cards. Maybe AMEXCO thought he was getting set up to max out his credit and default?
In any case, talking to AMEXCO customer service is a frustration and waste of time. It’s always good to talk to one of them, then ask to talk to the Supervisor. Take names, dates and times down. When they reject you and tell you nothing can be done (as they almost surely will), hang up and then call Executive Complaints at (800) 297-6196. They will almost always fix the problem while promising to reign in the customer disservice folks (although they never seem to do so).
And in case that phone# doesn’t work any longer, call HQ and ask for the Executive Complaints office.
Clearly this is a scare tactic by the banks to keep many of their predatory practices going forward.
Then when they do cut credit lines, because they are insolvent, or close to it, they can blame the government!
The banks are holding America hostage through the Treasury, the Fed and Congress. We need an FDR bank holiday ASAP to sort the whole mess out.
And when they do cut your limit to $200 above your current spending, they damage your credit rating further, leading to the possibility of other credit card companies doing the same. Every time you close an account it also damages your credit rating. What a racket.
We’ve had the same experience with AmEx, high 6-figure income, no issues, suddenly decreasing limits although we were nowhere near them. They were apologetic, however. Maybe they sent the be nice memo around just before I called. I don’t know if I’m cancelling yet, but I’ll certainly be going from a Platinum to a Green card, the extra fees are NOT worth it.
My experiences with AmEx were abysmal — they lost my business years ago.
AMEX also picks up a little money by raping your privacy by default. Try reading their policy, if you manage to find it.
The billions AMEX spent on advertising to build brand image were billions not spent on other things, such as the salaries of people who know how to do credit evaluations. Computers did them instead, at much lower cost.
Computers work well when the future is just like the past; they do a terrible job when the future is unpredictable. Humans that can do credit evaluations are pretty well extinct, driven out during the Great Moderation, which promised that the future would always be like the past.
Businesses are gambling that normality will return tomorrow, that the future will suddenly become just like the day before yesterday, and that the day before yesterday’s business practices will start working again. If only they can survive until tomorrow. Sauve qui peut!
Is the gamble a good one? The best bet is to invest as though it’s not, because if it is we’ll all be fine, ha, ha.
Sargon TM
I used to work for a large american company that frequently paid for marketable reseach (as we called it) to further our public policy objectives. Normally, we used the standard aray of consulting firms but (if things were really sensitive) we’d get a law firm to do the work. The reason was that correspondence between ourselves and the researchers would be “legal in confidence” and so undiscoverable to future litigators. You should always take any piece of marketable research with a pinch of salt, but doubly so when a law firm is involved.
Savage,
That is a VERY important point, and completely escaped me, thanks!
I downgraded from Platinum to Green two months ago. They sent new green cards. I never activated them and kept using my Platinum card (to see if they would catch on) They haven’t. AMEX’s security is so bad, they don’t even know what card I’m using, nor do they care, as long as the money keeps rolling in.
I’m done with these people and I’m cancelling my accounts.
I’m jealous of these executives. Wouldn’t it be great if we could all get paid for suggesting and implementing really bad ideas.
I agree with the person above who pointed out that there is some degree of collusion by the banks to squeeze credit down and then beg the gov’t for help b/c no one is spending. We got the same letter from Amex and subsequently shut down our account. We also received a letter from Citibank raising our rates. Same issue, perfect payment record, etc., and we shut them down too. To be honest, it is nice not thinking about credit cards, debit makes things so easy and we have plenty of miles saved for about two years worth of trips so I can enjoy staying on their books without helping encourage their conduct.
I have heard all sorts of stories of banks cutting credit lines (on credit cards) even to people with impeccable credit and who pay on time. As though this is symptomatic of aberrant behavior. I have a bunch of cards (and although I haven’t had my lines cut) some I have never used some my usage is no more than 10% of credit line and all are paid in full. And I have done that for the better part of 2 decades. In this environment it is really stupid of the banks not to cut my lines. They are not making any money extending me the credit and if I were to start borrowing on my cards it would be symptomatic that my financial condition had changed and I was no longer the good credit risk that they had extended credit to for all these years.
BOA has also been cutting lines and doing so to solid long term customers while also not providing rationale — my case: from 25 to 6k.
Reasonable complaints about idiotic automated business practices aside (which are legitimate, IMHO), the credit companies have good reason to reduce their credit exposure ASAP. The next wave of defaults is likely to be in credit cards and other personal loans, and with the incoming administration it’s probably going to get much more difficult collect on outstanding debts which are in default. If the current trends in RE lending “reform” carry over into the CC world, look for people to be defaulting right and left with no recourse for the banks. Add in new rules, oversight, and regulations, and you’re likely to see banks scrambling to get out of the CC business entirely, and just fondly remember the days when it was profitable and useful before the government stepped in.
That being said, I’ve been using CC’s as a buffer for almost all of my spending, so I’ll definitely need to be careful about the limit thing and make sure I have some backup cards (for as long as they remain viable). Thanks for the heads-up that the process has begun.
My ex boss had a bad amex experience and I have never used them since. We had a lot of travel expenses and business expenses. The Amex promised no preset spending limit but by the second month of use his charge for a business expense lunch entertaining clients was “denied” because he had reached a limit when there was supposed to be none. He was so embarrased at having the card declined that he cancelled the card. I probably would have done the same.
It is false advertising to say no pre-set spending limit when they set a limit on the fly.
They have been calling my present boss to get a card and I told them I have had a bad experience and would not ever use them again.
Suck on that Amex. I was not impressed.
“And when they do cut your limit to $200 above your current spending, they damage your credit rating further, leading to the possibility of other credit card companies doing the same. Every time you close an account it also damages your credit rating. What a racket.”
The good news about these bs practices is that they will probably spell the death of FICO. With arbitrary opt outs, paydown programs, changes in limits, delinquincies, defaults, foreclosures and bankruptcies Fair Isaac probably won’t be worth the paper he’s written on in another year or so.
CathyG
I had the identical experience. No late payments for 8 years, charging around $6k/mo reapeatedly.
Credit line cut from $28K to $3K.
I’m sticking with Amex for now, just for the generous rebate policy on BlueCash, but as soon as that is inevitably removed, I’ll stop using them.
According to Harvard Law Professor Elizabeth Warren, the credit card companies are misleading consumers and making up their own rules. “These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print,” Warren tells FRONTLINE.
Full artical,
http://www.pbs.org/wgbh/pages/frontline/shows/credit/etc/synopsis.html
Skippy.
For thoses that dont know, people that pay on time are known as dead beats and are not the prime money makers to the credit industry.
Skippy,
Why don’t you just pull a MOWA on them? (Max Out, Walk Away. They’ve already robbed out children and grandchildren with the TARP. Get some back for your kids’ education fund.
Vinny Golberg
Minor related anecdote: I just recently applied for a Driver’s Edge Platinum Mastercard with Citibank and, for the first time in my life, I had to send in three documents after the initial application (from memory): a choice between my most recent pay stub or a letter from my employer; and two of the three residence confirmation items: “an attestation from a Commissioner of Oaths or a Guarantor in Canada confirming they have viewed valid government issued ID”, a cleared bank cheque within the past 30 days, or a bank statement from the past 30 days.
Thankfully it wasn’t too difficult to get my hands on the items, but this is entirely new to me for a credit card application. When I contacted applications customer service for advice, the lady on the other end of the phone seemed rather surprised this was requested of me as well and indicated it may be a new procedure. It makes me wonder if all the credit card issuers are tightening their standards? And are the tightened standards extended to new applicant as well?
And from Yves’ point: Is this merely to discourage applicants or those who wish to restore or extend their credit limits?
I run a small business and I depend on my credit line to get inventory. CITI and JP Morgan Chase sent me a wad of flyers and the user agreement. I read it and I’m so depressed I could just slit my wrists. The problem with consumer confidence is that the gov’t looks at us to be confident in these banks and depend on us to continue to use debt as a way to live. You know what happened when I paid off a bigger amount on my CC? They reduced my credit line. I hope all these big companies that got bailout money for credit and lending go into bankruptcy and some end up in prison. I hope they go straight into the abyss of poverty. They need to tumble so that we can go back to what life in America was, you go to a community bank for a CC or a home loan and they stay your banker. they dont bundle it and resell it to the point where they forget there’s a family behind these debts. I’m learning the hard way but now I will actively work hard to pay off these credit cards and live debt free. The backlash of their greed is that (I hope) we all stay away from them