Subprime Credit Cards Are Still Profitable, So They Aren't Going Away

With the country in a deep recession, and a new law that has many banks concerned about the profitability of their credit card products, you might be thinking that subprime credit cards are on their way out. To the contrary: it seems that subprime cards are performing relatively well for certain banks, thank you very much.

Consumers who have a limited credit history or no credit profile at all, and those who have bad credit, may be glad to know that subprime cards are still profitable for banks, so they aren't going to die out any time soon.

Here's a clip from a recent Wall Street Journal article:

"...British bank HSBC Holdings PLC, which has a large portfolio of U.S. credit-card customers, now generates better results with its subprime credit-card businesses than the portfolio that includes more-creditworthy customers, North America Chief Executive Brendan McDonagh said in a conference call Monday.

HSBC's subprime credit-card customers generally have lower credit limits than prime customers, averaging less than $500, and are defaulting at a lower-than-expected rate. The reason: For many of those borrowers, a credit card is their only form of noncash payment.

About a quarter of HSBC's $41 billion credit-card portfolio is considered subprime, and the delinquency rate on that is 10%, a 21% increase over last year. But because of higher interest rates charged to these borrowers, HSBC says that business is profitable.

One reason prime delinquencies are up is rising unemployment. When these borrowers lose their jobs they typically focus on making their mortgage payments and, because they tend to have multiple credit cards, they are more likely to let some of them default..."

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The Credit Card Accountability Responsibility and Disclosure Act of 2009

Perhaps you've noticed that you are not receiving loads of credit card offers in the mail anymore. Remember how many you used to get during the credit boom years? Tons. Back then, you may have asked yourself, "how are banks able to make money with credit cards by offering credit to just about anybody? Aren't the bad apples who pay late or default going to cost the banks millions, if not billions?" Good question.

American banks were able to make massive profits from all types of consumers -- including the subprime borrowers -- because they were free to reprice cards whenever they wanted. Even so called fixed-rate cards could be repriced, with little warning. That new credit card customer who turned out to be irresponsible with his finance, as evidenced by late or missing payments, did not phase the banks. As soon as Joe Spendthrift started paying late, or not at all, the banks were free to simply jack up his interest rates to usurious levels, and charge him late fees, over-the-limit fees, telephone payments fees, etc. It was a good time for the banks. They made billions.

Enter the newly enacted Credit Card Accountability Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act of 2009.)

Because banks can no longer reprice credit cards the way they used to, they've had to ditch those tried and profitable models that worked just fine during the boom years, and figure out how to make money within the limits of the new law. Fees and fee traps have been reigned in. Disclosures and terms will have to be easy to access and understand. No more retroactive rate increases.

The credit card banks are also working within the context of the worst recession since the Great Depression. Moreover, since the market for credit card receivables dried up during the early part of the credit crisis, banks won't be able to sell credit-card debt to investors as easily as they used to; not even close.

What can you expect? Most items in the Card Act will go into effect in February 2010. Here's what consumers can expect between now and February, and beyond:

• Lower credit limits.
  
  
• Tighter lending standards (i.e. harder to get an application approved)
  
  
• More expensive pricing (i.e. higher APRs)
  
  
• Less generous rewards programs, with some programs charging a fee for participation
  
  
• More manual reviewing of credit card applications, and fewer instant-approval cards
  
  
• Documentation requirements: you may have to provide copies of recent paystubs to prove that you are really earning what you declare on your credit card application.
  

Are we returning to the days when everyone paid a 19.99% annual percentage rate with an annual fee to boot? I doubt it. But terms and conditions won't be favorable until the economy returns to prosperity and banks have had time to figure out how to make strong profits while conforming to the new credit card regulations.

For more on the Credit CARD Act of 2009, visit this page and this page.

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One More Reason to Read Those Credit Card Terms and Conditions Carefully

We've all heard horror stories about it, and we all dread it. I'm talking about fine print. Many of us fail to read it, or even give it a cursory glance before we sign, or agree to something. I'll tell a story of how fine print can trip a person up, and end up costing them more than they expected.

A little over a year ago, my husband opened a credit account with Bank of America. He received the card in the mail, activated it, and began to use it. I advised him to read the terms and conditions carefully, but with the bravado that's so typical of him, he said that "he didn't have time for fine print". I shrugged, and went about my business, hoping that he wouldn't go too crazy with the credit card, and that we'd be able to pay the balance each month.

Oh, how wrong I was.

We managed to pay the balance for about six months, then he bit off more than he could chew by requesting a cash advance on the card. He found an incredible deal on a classic car that needed restoring, and the owner wanted $2500 for the vehicle. He got the cash, but not before I again told him that he should review the terms on the credit card agreement that referred to the interest rate charged on cash advances (If I recall correctly, the rate was 32%. Steep!). He was in such a rush to get the car that technicalities like that weren't important to him. They soon would become important, however.

The next month we couldn't afford to pay the entire balance, of course. The total owed on the card was $3,100, and after we paid all the necessary bills like rent, car insurance, water, phone, and utilities, we could barely manage to pay the minimum of $150. As times got rougher, we couldn't even bear to pay the minimum. After about five more months of not paying at all, the account went into default and collection efforts were started. My husband received several "courtesy notices" reminding him of the money he owed, and he foolishly continued to disregard them. Then, the efforts got decidedly less friendly.

My husband checked his online banking statement one morning, and he was more than $1,000 overdrawn. He'd written five other checks the week previously, but they didn't add up to what he'd had in the account, which was almost $4,000. Here's a breakdown of what the bounced checks were supposed to pay for.

• Car insurance. He lost coverage that month, and had to borrow money from his parents to get it reinstated.-The phone bill. Our house was without phone and internet service for a week, until he was able to pay the bill, plus the returned check fee, in cash.
• Our electricity bill. Luckily I was able to call and get an extension, to avoid having the lights cut off.
• The water bill. As with the electric company, I was able to negotiate a payment arrangement to avoid losing the water service.
• The trash collection bill. As that was the smallest bill of the lot, my husband was able to go to the hauling company's local office and pay in cash.

He called the customer service number for Bank of America, and after waiting ten minutes to speak to a representative, he found out why the account was so seriously in the red. Since he hadn't read the fine print on the credit card agreement, he hadn't known that his Bank of America card was linked to his Bank of America checking account- and that after the account went into default, the credit card company could go in and drain his bank account to pay the bill. He was angry and shocked, but it was really his mistake because he didn't bother to read the terms and conditions that went with the card.

After alternately pleading, feigning ignorance, and arguing with the Bank of America credit card customer service rep, he finally negotiated a deal where he'd be partially reimbursed for the money taken out of his checking account. He ended up losing $2,500- the amount of the cash advance he'd gotten. He was still irritated about that, but as I quite rightly pointed out, losing $2,500 is a lot better than losing nearly $4,000. I told him to let that whole experience serve as a lesson and a warning, which, thankfully, he has. He's much more diligent now about reading the fine print on everything.

Always, always read the terms and conditions on any credit card you're about to sign up for. The credit card companies LOVE it when people don't read the fine print, because that means they can slap them with all kinds of late fees, higher interest rates, and other miscellaneous charges. It may not be exactly fair, but it's perfectly legal.

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Free Money from American Express & Costco

Yes, that's right: American Express and Costco have decided to give you $25 for free. So, what's the catch you ask? Here it is: all you have to do is signup for the True Earnings® Card from Costco and American Express and, once your account is established, you will get a statement credit of $25 after you make your first purchase.

This is a pretty exciting offer, especially considering that this credit card is already one of the best rewards cards we've ever encountered. Here are some other great benefits:

• Earn cash back virtually everywhere you go - 3% for gasoline, 3% for restaurants, 2% for travel, 1% everywhere else, including Costco
  
  
• No Annual Fee with your paid Costco Membership
  
  
• The TrueEarnings Card serves as both your American Express Credit Card and your Costco Membership Card
  
  
• No Limit on the Cash Back earned

This card is tied with the Discover Open Road card as the best consumer gas rewards credit card.

This offer special statement credit offer won't last forever, so if you are planning on getting this card, try not to procrastinate.

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Twice The Victim of Fraud, In As Many Weeks

When it comes to my credit and debit cards, I'm very paranoid. I check my accounts daily; I scan for any charges I didn't make (I love Internet banking.) I've never been a victim of credit card fraud, until recently.

Last month, I noticed a charge on my Chase debit card for flowers which I never ordered. The charge was over $100 and the purchase was made at an online florist in Europe. As soon as I noticed the charge, I got on the phone with Chase to report it. I assumed that this type of claim was routine for a big bank like Chase; I also assumed that the process would be efficient and hassle-free. I was disappointed to learn that Chase would need to email me a claim form which I would have to fill out and fax back to Chase. Thankfully, the claim form was one page and it only took me a minute to complete, but I was still disappointed. Why was I being forced to use an inefficient technology that was hot back in the 1980's to make this claim? Why didn't Chase have a secure webpage I could visit to file my claim online?

Chase needed my signature on the form and that's why I needed to fax it. OK, I can understand that. Form completed, I scanned the document then fired up my fax software (Symantec's Winfax 10.0) and initiated the send. At the end of the send, Winfax indicated that the fax was successful, but it also returned an "unable to communicate with modem" error. I'd seen this error many times before and it never caused any problems, so I ignored it.

According to the instructions on the claim form, Chase would credit me the full amount of the disputed charge as soon as they received my signed claim form. Two business days passed and I still did not see a credit for the disputed amount in my account. I called Chase to ask them why they hadn't credited my account. They told me that they hadn't received my fax. I became irate at this point and demanded to speak to a supervisor. After waiting a few minutes, a supervisor came onto the line and told me that he had investigated my situation. He said that Chase had received my fax, but the portion of the document that contained the signature line was not transmitted, so the claim was not processed. Assuming that the error was their fault, I gave this guy a bit of a hard time, demanding that they process my claim immediately. He assured me that the problem was at my end and asked me to resend the fax. After taking a deep breath, I acquiesced.

I sent the fax two more times, and Winfax returned the same communication error despite simultaneously indicating that the fax was sent successfully. OK, so the problem could be my good old reliable Winfax 10.0. I really like Winfax, and you know how it is when you're in love: the object of your affection can't do wrong.

I conducted a quick Yahoo! search for "send fax free" and found FaxZero.com. Never used it before; never heard of it. FaxZero is free, intuitive and fast. The site is supported by ads. You can use the site to send and receive, though there are some restrictions if you choose not to pay anything. A few hours after I used FaxZero to send my claim form, I saw a credit in my Chase account for the disputed amount.

OK, so Chase wasn't at fault. It was stupid Winfax. The software had all the latest updates installed. Symantec wanted me to pay money to upgrade to a newer version of Winfax to get rid of this problem. No way, José. The software should not be telling me that a fax was sent successfully when in fact it wasn't. I deserved a free upgrade, but I wasn't going to get one. Bye-bye Winfax.

How was my account compromised? I have no idea. I use my debit card in both the online and offline worlds. Needless to say, I've modified the way I use my cards. Chase mailed me a new debit card within 3 business days of my initial phone call about the crime.

Two Weeks Later, My Chase Credit Card Is Compromised!

OK, so a little less than two weeks later, I get a call from Chase. They are calling to let me know that they detected a suspicious authorization on my Chase credit card. The charge was for less than $4, and the transaction was never captured.

Authorizing is when a merchant uses a credit card machine or software to tell your bank to set aside a certain amount against your account for a purchase. The merchant can then "capture" the charge later in the day in a batch process. Capturing is when the merchant tells the bank to process the authorized amount and complete the transaction. A merchant can authorize first then capture later, or the merchant can opt to do both at the same time. The merchant gets paid in step 3 of the credit card purchase process, when the transaction is "settled."

The 3 step process is all about security.

The folks at Chase have software that calculates the likelihood that a charge is legit, based on a cardholder's location, spending habits and other criteria. Red flags went up for this particular charge so Chase called me to ask if the charge was made by me. It was not. The Chase rep explained that criminals will often authorize a small amount first before attempting to rip off an account for a much larger amount.

The Chase rep told me that my credit card account number was no longer valid, and that I should destroy my credit card right away. A new card would be shipped to me within 5 business days. I explained to the rep that I had some important payments to make and I really wanted to use this particular Chase credit card (I'm in the middle of a 0% intro APR deal with this card, but I didn't tell that to the Chase rep.) She understood and offered to rush my replacement card to me; I would receive it within 2 days. I asked if I would be charged for the rush delivery and she said no, so -- a real no-brainer here -- I accepted the offer. Replacement card was delivered 2 days later, as promised.

Banks tend to be very cheap about things, so I was impressed that I was able to get my card in a hurry without being charged extra for the shipping upgrade. Kudos to Chase. I would expect the same from American Express, as they tend to go the extra mile to make sure that their customers are satisfied. I've read and heard good things about Discover as well, though I can't comment on the company since I've never had a Discover credit card account.

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So, Which Is The Best Gas Rewards Card Anyway?

If you look at our pages listing the best consumer gas rewards credit card and the best business gas rewards card, you will notice that we list a Chase and an American Express card for business, while on the consumer side we list a Discover card together with an American Express card. We do this because, for each category, these cards are tied for first place.

Reason for the tie on the business card side: American Express is a highly reputable bank which offers truly excellent customer service. The TrueEarnings® Business Card from Costco and American Express offers a generous 5% cash back on automobile gas purchases. However, with the Amex TrueEarnings card, you claim your earned rewards annually, which some cardholders find restrictive. Here's a snippet from the TrueEarnings terms and conditions:

"...Rebate is awarded annually in the form of an in-store coupon redeemable for cash or merchandise at any U.S. Costco Warehouse..."

With the Chase Business Rebate Card, you get 3% cash back on gas purchases, which is great. As a bonus, you can claim your rebate whenever you want. Once you've accumulated enough points, you can log onto Chase's rebate center website and browse their catalog. Among the items you can get with your rebate dollars is a statement credit, and a statement credit is as good as cash.


On the consumer side: The Discover® Open Road Card offers a 5% Cashback Bonus on gas and auto maintenance purchases. But there's a catch. From the terms and conditions:

"...Earn unlimited cash rewards on all purchases. Earn a full 5% Cashback Bonus on your first $100 in combined gas and auto maintenance purchases each billing period - up to $1,200 annually. In addition, earn a full 1% unlimited Cashback Bonus on all other purchases after your total annual purchases exceed $3,000; other purchases that are part of your first $1,500 earn .25% and other purchases that are part of your second $1,500 earn .50%. Combined gas and auto maintenance purchases in excess of $100 each billing period earn Cashback Bonus at the same rate as other purchases..."

We all know how pricey gas is these days. Getting 5% cashback on the first $100 in gas purchases each month is nice, but for folks who do a lot of driving, this may be a significant buzzkill.


With The TrueEarnings® Credit Card from Costco and American Express, which is a "personal" or "consumer" credit card, you get 3% cash back on gasoline purchases. You can also transfer a credit card balance at 1.99% intro APR for 6 months, and pay no balance transfer transaction fee.

With all other credit card categories in this site, there's a clear winner, and that' why we list only one card on these pages. As for the best consumer and business gas rewards credit card, we'll let you decide between the finalists.

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H.R. 5244: The Credit Cardholders' Bill of Rights Act of 2008

I had just about given up on Congress when they enacted the Bankruptcy Abuse Prevention and Consumer Protection Act back in the spring of 2005 [1][2][3]. The bill gave the banks what they wanted, and made it harder for those in financial dire straits to declare bankruptcy, even poor folks who got into trouble due to high medical bills. The new law makes it more difficult for deadbeats to get away with not paying their bills -- and I have no problem with that -- but it also punishes those who deserve the kind of help that only bankruptcy can provide.

Now it seems that Congress is on its way back to representing the people instead of focusing on doing whatever the Corporate America-controlled lobbyists want.

Last week, the House Financial Services Committee passed by a vote of 39-27 the "Credit Cardholders' Bill of Rights Act" (H.R. 5244.) If this bill is passed into law, things like double-cycle billing and universal default will become illegal. This bill still has a long way to go before becoming law, but it's a very good start. The bill was introduced by Democrat Representative Carolyn Maloney of New York on February 7^TH, 2008, and still must go through debate, a vote in the House, a vote in the Senate and finally a signature by the President. Godspeed.

Don't get me wrong. I love credit cards, especially 0% cards that also feature generous cash back rewards. If this bill becomes law, much needed checks would be put into place to keep the credit-card banks from abusing their considerable power, and consumers would be able to spend with their plastic, secure in the knowledge that the credit-card playing field is reasonable and fair. Nothing wrong with that. That's the American way.

I wouldn't be surprised if passing H.R. 5244 into law boosted consumer spending; more spending is something the U.S. economy needs right now and for many months ahead[1][2]. In my humble opinion, I don't think the recent stimulus payments will do much to ward of a recession. I think most folks used the bulk of that money to pay down debt and/or shore up their savings. If we must endure a recession, let's hope that it's short and shallow. Amen.

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