Who Gets the Credit This Christmas?
By Mark Lilien, Consultant, Retail Technology Group (www.retailtechnologygroup.com)
Thirty-five million Americans make the minimum payment on their credit card debt each month. Certainly, Christmas is the key time for increasing that debt.
In January 2003, the Office of the Controller of the Currency issued Bulletin 2003-1, which told all national banks to review their minimum credit card payment requirements. Years ago, the minimum was five percent a month. Over time, it declined to one percent for many loans. Bulletin 2003-1 allowed banks to take a reasonable time to raise their payment minimums. Well, that time is now up – so, before Christmas, major credit card issuers like Citi, MBNA, and Bank of America will raise their minimums.
In some cases, the new minimum will be up to four times the old minimum (four percent instead of one percent). In many cases, it will double (four percent instead of two percent). Even if retailers extend zero percent financing, the minimum payment increase (if the card plan is issued by a national bank) will be mandated by the OCC.
Perhaps the banks will wait until after the new bankruptcy law starts in October. So the “stretched” shoppers will not realize they need to declare bankruptcy until the new law is in effect. The new law reduces the proportion of people allowed to completely discharge their debt, so the squeeze will be maximized.
Adding to the squeeze: short-term interest rates are higher this year than a year ago (the prime is 6.5 percent, 44 percent higher than a year ago), and many credit cards have variable rates.
A Katrina side note: the victims will also be subject to the new bankruptcy law, even though it’s unlikely they can use the remaining few days before it starts to file bankruptcy paperwork. Or will FEMA fly in several thousand bankruptcy lawyers in the next couple of weeks?
Combine the credit minimum tightening, bankruptcy tightening, short-term interest rate rise, and the expected peak prices for heating oil and gasoline. The effect on Christmas shopping will be huge, because the Christmas season is very short, and many of those 35 million people will be in shock.
Moderator’s Comment: How will raising the minimum payment on credit card debt impact consumers? What can retailers
do about the financial issues raised by the article? –
Mark Lilien – Moderator
Those stores with their own credit cards can make hay by offering low or no interest payments, so those consumers determined to pay on credit will use those cards instead of national cards. Other than that, it’s going to be all about value (hopefully) and price.
Over the long haul, it’ll be healthy if people can pay down their debt and get back on their feet again. But of course it will still be a simple matter to just take out another credit card and run that one up to pay the other one. I’ve had a couple tough periods in my life where I did just that, and came out fine. I know others who were less lucky. So, net-net, I don’t think this will make much difference since it is still so easy to get credit cards. And, sorry to say that my reading of our long-term economy is pretty scary, and I wouldn’t be surprised to see double-digit inflation again within a few years, and with adjustable rate credit cards carrying big balances, it’ll really hit the fan then. (Just in time to blame it all on Bush’s successor.)
To me it’s like saying if you raise the price of cigarettes, people will smoke less. Or if you raise the price of liquor, people will drink less. Spend-a-holics will always find a way to get money for shopping. Christmas will be big like it always is. I’m sure we will hear a lot of excuses from poorly run companies looking to put the blame on something other than themselves.
But spend-a-holics will not be detoured. Most likely they will simply get a home equity loan to lower their monthly payments or just get a new credit card with a new bank and stop paying on the old ones. Credit card issuers seem to play a game of roulette when they issue cards to those minimum payment types. They have to expect a high default rate and just hope to make up for it through higher interest rates charged.
All that raising the minimum credit payment accomplishes is is to p-o users when the statements are received. People will still shop and buy. It’s in our genes! So, too, are fee-enhancement gimmicks in the genes of credit card issuers.
What can/should retailers do about this? Concentrate on running their basic businesses without service flaws or out-of-stocks this Christmas.
Isn’t it crazy that it really hasn’t been on the news much? I even emailed your article to friends because I really believe they don’t know about it! This doesn’t just affect irresponsible people that want to claim bankruptcy. This is going to affect people who went back to school to get their masters and got a 0% credit card to pay off the loans… or unfortunate couples with medical bills, etc. It was a system that sucked even responsible adults into getting credit, at 0% how could one resist! I think it is bittersweet, it is time to “buck up” per se, and pay the bills to lower the debt and this is going to give Americans a kick in the rear to do it. At the same time, it is hitting in the heart of the 4th quarter, and gives consumers yet another reason not to spend an extra 100 bucks at the Holidays. That really adds up. IF they are responsible, then that’s how they will handle it. If they are not responsible, the other comments people have voiced are true… it’s a vicious cycle.
Here’s another vote for “no net change.” The 35 million consumers who make the minimum payment each month fall into one of two camps. One group is financially savvy enough to know that this is a bad deal, but they can’t afford to do anything about it because they are using the credit to make ends meet on necessities. They will continue to do so out of need.
The second group either does not know or does not care about the dangers of (relatively) high interest rates and minimum payments. They are the “shop-a-holics” referenced by another commentator, and they will continue to do so out of greed.
This will be great for individual financial responsibility, and was a long time in coming. However, the “triple witching hour” confluence of Bulletin 2003-1, the new bankruptcy law, and Katrina/rising gas prices could hardly have been foreseen. Christmas sales rarely, if ever, encounter such powerful negative influences simultaneously. Additionally, the resale housing market is weakening, which is responsible for freeing up so many discretionary dollars and freeing room for purchases on so many credit cards.
But Christmas plans and promises have been made, and we’ll do whatever we can to make them happen. A good barometer for Christmas sales this year (if not other years) will be Halloween sales. As the second-largest annual party-sales event – behind only New Year’s Eve – Halloween claims significant dollars that might otherwise be spent elsewhere (or saved). Reading this barometer will be difficult, however, if we look only at sales. If Halloween sales are unexpectedly low, only polls will be able to determine if it was due to higher gas prices, etc., or conserving for Christmas. It’s interesting that such diametrically opposed annual events would be tied together in this way.
Christmas supermarket sales will not suffer, though, despite negative financial influences. Historically, during recessions and other periods of downturning sales, food purchases are the first to decline and the first to recover. After we adjust our budgets, foods sales always return to previous levels.
When is our government going to step in and stop the loan sharking that causes so much of this trouble in the first place? Buy Here/Pay Here, High Interest Credit Cards, Check Cashing, Payday Loans, and rental housing all are preying on people who have financial problems. Many people are just one small disaster away from the quicksand of financial predators. Whatever happened to the 18% interest cap Reagan imposed after the Carter years? I think that was a part of getting the economy turned back around then. I think we need that again.
Spend, Spend, Spend!!!!!!!!!!!!!!!!
The Land of Plenty, and the richest ‘Country in the world’ always extends itself during the Holidays, in all product areas. Karen hit it on the nail, Retailers with their own cards will gain the most, for they will let the consumer spend more with special incentives and services. Not sure if the supermarkets extend themselves like specialty and department retailers, though. Hmmmmmmmmmmm.