The balances on American consumers’ credit cards fell at a 9.7% annual rate in February, the fastest rate of decline since late 1976, the Federal Reserve reported Tuesday.

Total outstanding consumer credit, including both revolving and nonrevolving credit, fell at a 3.5% annual rate, or $7.5 billion, to a seasonally adjusted $2.56 trillion, the Fed said.

Credit has declined in five of the past seven months. Prior to that, credit had declined in only one month in the previous 15 years.

The figures do not include mortgages or any loans backed by real estate.

The balances on American consumers’ credit cards fell at a 9.7% annual rate in February, the fastest rate of decline since late 1976, the Federal Reserve reported Tuesday.

Total outstanding consumer credit, including both revolving and nonrevolving credit, fell at a 3.5% annual rate, or $7.5 billion, to a seasonally adjusted $2.56 trillion, the Fed said.
Credit has declined in five of the past seven months. Prior to that, credit had declined in only one month in the previous 15 years.

The figures do not include mortgages or any loans backed by real estate.

Consumer borrowing plunged in February by more than analysts expected as Americans cut back their use of credit cards by a record amount.

The Federal Reserve said Tuesday that consumer borrowing dropped at an annual rate of $7.48 billion in February, or 3.5 percent, from January. Wall Street economists expected borrowing to slide by only $1 billion, according to a survey by Thomson Reuters.

The decline was led by a record drop in borrowing on credit and charge cards, which fell at an annual rate of $7.8 billion, or 9.7 percent. That is the sharpest drop in dollar terms since federal records began in 1968, and the steepest percentage fall since 1978.

The report shows consumers reluctant to ramp up spending as employers shed millions of jobs and the economy is mired in a recession.

MasterCard and other credit card companies do not obtain revenue and profits from interest rates and fees charged to cardholders. The company does not issue credit cards, extend credit to cardholders or set interest rates.

As an international franchisor, MasterCard earns an initial franchise fee when it signs up a bank or other financial institution, authorizing it to offer its branded cards. These financial institutions are MasterCard’s customers.

Most of MasterCard’s revenue comes from fees it obtains from the banks for processing transactions and handling other payment-related services, and from charges that vary according to the dollar volume of activity from its branded cards. The more Mexican consumers who use a MasterCard issued by a bank in Mexico, for example, the more money MasterCard collects from the bank.

Citicorp, for example, is a franchisee of MasterCard and issues Citi MasterCards to consumers, establishes credit limits, sets interest rates and fees, and collects money from cardholders related to purchases, cash advances, interest, penalties and so.

MasterCard also tracks international consumer behavior and buying trends and provides consulting and advisory services.

In Latin America and the Caribbean, MasterCard has issued 115 million cards with the MasterCard brand and 126 million debit cards with the Maestro brand.

During the fourth quarter of 2008, MasterCard cardholders in the region carried out 635 million cash and purchase transactions, excluding Maestro cards.

The economy is affecting everyone. As people loose their jobs or face paycuts or even loosing their home, everyone is being frugal these days.

The use of credit cards is so prevalent in our society that it is almost unthinkable to see a drop in their use. We ourselves use credit cards to pay for everything. Of course, we always pay off our bills each month. Even our spending has come down significantly as we face uncertain future in regards to our jobs and when the economy will recover significantly enough for us to be comfortable in upping our spending again.

Given this situation and general public’s fear of the future, it comes as no surprise that credit card use has dropped 8%. What is surprising is that it only dropped 8%. I guess some of it is offset by the fact that people have lost income and are using the credit cards as temporary income.

The average annual interest rates for most of the popular credit card types went up again for the fourth straight week.

This applies to all the popular types of credit cards like low-interest credit cards, balance transfer credit cards and cash back credit cards.

For low-interest credit cards, the average APR jumped up from 11.59% to 11.62%. Low Interest credit cards are offered to people with strong credit history.

For balance transfer credit cards, the average APR jumped from 13.12% to 13.15%. Balance transfer credit cards are usually used by people who are paying higher interest rates on credit balances and want to lower their monthly payments.

For cash back credit cards, the average APR jumped from 13.75% to 13.82%. Cash back credit cards are one of the most popular types of credit cards where the rewards are in from of a cash back.

Credit card companies can get away with much more than you’d think. A ”fixed-rate” credit account only means that it doesn’t fluctuate according to an index, such as the Federal Reserve’s prime rate. It does not guarantee that your interest rate will remain the same in perpetuity.

Generally, when your interest rate is hiked, you receive an ”opt-out” notice, which gives you a 15-day advance notice of the change and the option to close the account and pay off your balance at your old rate. However, the 15-day rule doesn’t apply if the rate hike is due to a delinquency.

Many consumers prefer to keep their cards after getting rate-jacked for fear that closing an old account, which adds longevity to credit history, may hurt their credit score. This may be true, to some extent, if you don’t have many other credit cards or just started using credit. However, paid, closed accounts stay on your credit report for up to 11 years, depending on the reporting bureau (Equifax, seven to 11 years; Experian, 10; TransUnion, five).

Our advice: If you feel that the credit card company is being unfair, close the account in protest. If you really need the extra credit line, apply for another card that will give you better terms.

The average interest rate for most credit cards went up last week. This applies to all the popular types of credit cards like low-interest credit cards, balance transfer credit cards and cash back credit cards.

For low-interest credit cards, the average APR jumped up from 11.43% to 11.52%. Low Interest credit cards are offered to people with strong credit history.

For balance transfer credit cards, the average APR jumped from 12.93% to 13.05%. Balance transfer credit cards are usually used by people who are paying higher interest rates on credit balances and want to lower their monthly payments.

For cash back credit cards, the average APR jumped from 13.64% to 13.67%. Cash back credit cards are one of the most popular types of credit cards where the rewards are in from of a cash back.

If you’ve sworn off credit cards as a way to control your spending, think twice before cutting up your plastic for good. With major credit card companies shutting down dormant accounts, your credit score could take a big hit if one of your high-limit and long-term credit cards gets terminated.

Most companies review an account that’s been inactive for more than a year — meaning no charges or transfers during that time. The reason? It costs companies just to manage an account, even an inactive one.

With credit card companies like American Express (AXP Quote - Cramer on AXP - Stock Picks), Citibank (C Quote - Cramer on C - Stock Picks) and Chase (JPM Quote - Cramer on JPM - Stock Picks) all looking to cut costs, they’re choosing to either impose a maintenance fee or simply close the account down, sometimes with no advance notice. “We think it is unfair, but understandable in this market,” notes Linda Sherry, director of national priorities at Consumer Action, a national nonprofit consumer education and advocacy organization. “We recommend that consumers who are saving a card for a rainy day should use the card several times per year, and pay the balance back in full that month.”

Keeping your card (or cards) active provides more than just a backup in the event of unforeseen expenses; it also adds positive information to your credit history. And your credit history is the first place a lending officer looks when you apply for a loan. A good credit score will help you land the best rates on loans, while a low credit score will block you from all but the most expensive ones.

Your credit score is based on a number of factors, including your ratio of debt to available credit, and the length of your credit history. Having a high limit account closed would lower the amount of your available credit, potentially pushing your overall debt-to-credit ratio above 30%. Carrying debt beyond that 30% threshold can knock down your credit score by up to 100 points or more. The impact on your score could be even larger if the inactive card is one of your older accounts — about 15% of your credit score is based on the length of your credit history. (Find out more on how credit card debt can hurt your credit score.)

So if you’ve stashed some cards away, try to break it out every now and then for small purchases. If your card was recently cancelled, try contacting the company to see if they’ll reopen the account. If they won’t, consider applying for a new card in order to keep your debt-to-credit ratio at a healthy level. Or, better yet, pay down your existing accounts to reduce your debt. For the latest credit card offers, head to BankingMyWay’s credit card section.

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ABOUT the most lucrative area in lending these days is the credit cards business. Despite everything the banks, the main issuers of credit cards, say there is room for rates to be lower – considerably lower.

Last week, the Association of Banks announced a reduction in credit card interest rates of between one and 1.5 percentage points with interest rates ranging from 13.5% to 17% per year depending on the type of credit. This is in addition to other charges such as late payment and annual fees.

This largely follows recent cuts in Bank Negara’s overnight policy rate (OPR – an indicator of the rate at which the central bank will offer funds to the money market), by one percentage point to 2.5% per annum.

Thus, the interest-rate cuts on credit card outstanding balances are not much more than should be the case to reflect the fall in overall interest rates.

Merchants who accept credit cards give up as much as 2% to 3% of the charge to the issuer. This will be shared between the credit card issuer, for example a commercial bank, and the credit card franchisee such as Visa or MasterCard.

Let’s assume the issuer gets 1.5% of the transaction amount. If the user opts to finance his purchase, the credit card issuer, mostly a bank, charges an interest rate of up to 17% a year on the outstanding balance.

This is three times the average lending rate of commercial banks of 5.86% per annum for December last year! And this does not yet reflect the interest-rate reduction.

While the cost of funds to banks is not easily established, they are now likely to be around 2.5% a year. That gives a margin of up to 14.5% per annum (17-2.5). Add to this 1.5% as commission from the merchant and this goes up to a very nice 16%.

Overall bad debts are low at around 2% of outstanding debt for the banking industry even now. If we assume bad debts for credit card loans at three times this, or 6% of credit card debt, the net margin will be 10% (16-6) for credit card operations, a huge margin for what is essentially a lending operation.

With credit card debt outstanding as at end of last year of RM22.8bil, that means a profit to banks which issue credit cards of some RM2.28bil a year.

The maximum lending rate for credit cards should be about five percentage points extra instead of the 10 extra they get now for the additional risk they take or a maximum lending rate of 12% (17-5). In fact, that’s what some credit card companies offer.

For those who live on credit from these cards, it’s well to remember that interest rates are inordinately high. It’s better to take a term loan and settle the outstanding amount and remember not to run up the tab again.

As for the banks’ argument that credit card rates should be high to discourage spending, we would like to say that such an assertion is just too ridiculous to merit comment.

Credit card issuers must set rates that reflect the cost of funds and a reasonable profit. They must not profiteer at the expense of those uninitiated in the wily ways of the finance industry.

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CONSUMER groups have slammed banks for not immediately passing on the full Reserve Bank interest rate cut on their credit cards.

The Commonwealth and ANZ were reviewing their card rates yesterday, while Westpac and NAB will reduce rates on only some cards.

Nicole Rich, of the Consumer Action Law Centre, said there was no reason for the high rates on credit cards, the Herald Sun reports.

“Of course, credit card rates are higher than home loan rates to reflect a higher risk, but there is no excuse for rates to be as high as they are,” Ms Rich said.

“People are trying to pay down their debt as much as possible, but higher interest rates are making it hard for those who are really struggling.”

Christopher Zinn, of consumer advocate organisation Choice, agreed.
“The gap between the home loan rate and the credit card rate has probably never been wider, and that equals profit for the banks and the card companies,” he said.

“We would call on banks and non-banks to reduce rates, given that there is a record $46 billion currently outstanding on credit cards.”

He urged customers to shop around for a better deal and change to non-reward cards with interest rates of 11-12 per cent.

Westpac will reduce interest rates on Altitude, Altitude Business and 55-day credit cards by the full percentage point, effective next Thursday.

NAB will also lower interest rates on its reward cards (Qantas, Velocity and Mini) and commercial cards (Business Access, Business Card and Business Velocity) by one percentage point later this month.

A NAB spokeswoman said other credit cards were still being reviewed.

Though the big four banks have passed on the full cut to mortgage rates, they warn they may not do so in future.

The banks say high costs in wholesale markets will make it harder to fully pass on RBA cuts.

“We continue to look for ways to pass on savings to our customers, particularly during these economically turbulent times,” NAB retail banking general manager Lisa Gray said yesterday.

“It is important to acknowledge, however, these latest rate cuts have come at a time when our funding costs are at very high levels and we may not be in a position to pass on full rate cuts in the future.”

The new rules take effect in July of, are you ready for this, 2010! Here are highlights from the new federal rules on credit card firms.

• You must be allowed at least 21 days from the time your statement is mailed to make your payment before the date due.
• Payments over the minimum amount due must be applied to the highest interest rate balance on the account first or pro rata among the different balances at varying interest rates.
• Card companies must disclose interest rates charged on the account at the time of the opening of the account and specific rules that apply to increasing the disclosed rate(s). Among them, an increase in interest rate may only be applied for a late payment if the payment is received more than 30 days after the due date.
• One rule prohibits two-cycle billing, the practice of calculating interest rates based on the balance of the previous billing cycle and the current billing cycle. In the long run, cards that use two-cycle billing cost more in interest charges than cards with single-cycle billing.
• The rules also prohibit security deposits and fees for subprime credit cards that would amount to more than 50 percent of the credit limit in one 12-month period.

Whenever the rules are tweaked, everyone needs to be ready for unexpected consequences. I expect that tight credit will get even tighter under the new rules as lenders will be even more sensitive to lost fee and interest income.