Complain about a product or service

Consumers Ditching Their Credit Cards

By Martin H. Bosworth
ConsumerAffairs.com

April 19, 2006

• Credit Card Companies Fear "Perfect Storm" • GAO Finds Credit Card Statements Could Be Customized • Consumers Ditching Their Credit Cards • Minimum Credit Card Payments Going Up, But How Much? • Higher Minimum Credit Card Payments Add to Consumer Queasiness

Like an abused spouse who finally makes the decision to leave, consumers are ridding themselves of the credit cards that have sapped their finances for years. The trend is driven by a combination of exploding gas prices, increasing interest rates, new laws on minimum credit card payments, and the tough new bankruptcy law.

Rather than resigning themselves to being in debt for life, many cardholders are paying their bills faster and closing down their accounts.

The first-quarter earnings reports from financial titans Citigroup and J.P. Morgan Chase reflect the changing state of the market. Both corporations reported lower losses as a result of fewer bankruptcy filings, but both also reported decreases in outstanding loan balances from U.S. consumer cards.

Citigroup issued its report on April 17th, with high gains in the international market and a 19 percent increase in U.S. net income, due to lower credit costs from the sharp decrease in bankruptcy filings. However, the company reported noticeable declines in "traditional credit products" in the U.S. market, due to "increased payment rates."

J.P. Morgan Chase claimed first-quarter net income of $3.1 billion, as compared to $2.3 billion for the first quarter of 2005. The company's Card Services division reported a net income increase of $379 million, and a 38 percent decrease in credit losses, which Chase credited to the decrease in bankruptcy filings and card balance "charge-offs" after the new laws took effect in October 2005.

But the company also reported a 5.6 percent decline in its loan balances, due to "narrower loan spreads" as cardholders paid off more and more of their debt.

The acceleration in credit balance payments is at least partially due to a mandate from the Office of the Comptroller of the Currency that banks double the mandatory minimum payment on credit card balances, in order to push consumers to pay off their debt. The new rules were phased in through the end of 2005.

The Golden Egg

Between the higher minimum payments and the draconian new bankruptcy legislation rammed through Congress by the financial services industry in 2005, the outlook for the credit card debtor seemed dire indeed.

But legions of irate MBNA cardholders, fed up with the company's exorbitant interest rates, paid off their cards in such high numbers that the company's profits dropped by 94 percent in a single quarter, leading to its buyout by Bank of America.

While there may not be quite as dramatic a turn of events for the other financial giants, the results are clear: As there is less and less money for consumers to spend, and as prices for everyday needs continue to increase, they are pulling themselves out of debt as fast as they can.

Mike J., a market analyst from Alexandria, VA, looked at his credit card balance one day and realized he was getting nowhere by making the minimum payment.

"I thought, 'God, I'm paying $200 a month just on meeting my minimums. How much better off would I be if I paid this off, once and for all?'"

$200 a month better, as it turns out. Mike got a loan from his company and paid his entire card debt off in full.

Rates on the Rise

The Federal Reserve has signaled it may slow or halt its recent series of interest rate increases. But this hasn't stopped credit card rates from jumping far past the current "benchmark" lending rate.

The average annual percentage rate (APR) on a basic credit card is 13.8 percent now, according to a survey by IndexCreditCards.com, a card comparison and ratings Web site. Cards targeted at college students and "rewards" cards had even higher rate jumps, to 16 and 15 percent, respectively.

More and more credit card issuers are switching from fixed-rate offers to variable rates, often making the change without informing the cardholders in any way.

"[M]any credit card issuers have decided on increases beyond what the Fed has instituted," said Justin McHenry, the site's research director. "We've seen several issuers re-do their rate structures, including increases to fixed-rate credit cards and significant bumps in tiered-pricing rates."

Christine Brucker, a marketing coordinator and single mother from Columbus, OH, is paying off her card debts after "years of barely scraping by."

"I hate the idea that by the time you factor in interest rates, you are paying more for [something] that it is actually worth," she said. "Sometimes, by the time you have paid off the debt, you don't even have the thing anymore."

With all the different factors in play, many people are paying their cards off simply because they're tired of being in debt and want, as one cardholder put it, "a fresh start after the mistakes of [our] youth."

Report Your Experience
If you've had a bad experience -- or a good one -- with a consumer product or service, we'd like to hear about it. All complaints are reviewed by class action attorneys and are considered for publication on our site. Knowledge is power! Help spread the word. File your consumer report now.

Back to the top |