The Credit Card Crisis (2)

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July 21, 2010 The Credit Card Crisis Name

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The Credit Card Crisis

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EXECUTIVE SUMMARY

There are several aspects within the credit card crisis that need to be addressed.Within this paper we will be discussing the problems and opportunities regarding the crisisand also discussing the Credit Card Reform Act of 2009-2010.In essence, the problems thatAmericans are facing due to the economic downfall are turning them to use to their credit

cards. This has brought up an issue with the economy because interest rates from creditcards are at an all-time high. Within the Credit Card Reform Act that President Obamaenforced there are many provisions available to correct some of the issues faced byconsumers. The provisions will also assist with consumers getting their debt consolidatedfaster and prevent people from getting into as much debt as they are now.This has becomea major issue within America and other places, because people are having troubledistinguishing between their needs and their wants. Consumers are spending money thatthey do not have on things that they do not really need. This is more than likely because of the Attribution theory.The attribution theory is a theory that proposes that consumers lookor the cause of particular consumption experiences when arriving at satisfaction judgments.There is also a domino effect that results in all of the debt that has been accrued. Now thatthe debts have increased it is getting harder for banks to lend money and refinancemortgages.

The Credit Card Reform Act, in which President Obama put in place, will help with theissues that are being faced presently. There will be more regulations and provisions put inorder for the credit card companies to follow. Also the statements for the consumers will beable to see exactly how much money they are spending in fees and interest rates on themoney they have spent on credit cards. This will help for people to pay their credit cards off faster, because they will not want to spend all of the money on fees.




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TABLE OF CONTENTS

Title Page««««««««««««««««««««««««««««««««««««««.pg 1

Executive Summary««««««««««««««««««««««««..«««««««pg 2

Table of Contents««««««««««««««««««««««««««««.«««««pg 3

Brief Introduction««««««««««««««««««««««...«««««««..««.pg

Segmentation info about the types of consumers affected by the issue«pg

How the issues affect the consumers«««««««««««««««««««.«..pg

Other internal and external influences in the lives of the consumers««.pg

CDM«««««««««««««««««««««««««««««««««««««.««..pg

How this report can be utilized by marketers«««««««««««««««..pg

Conclusion««««««««««««««««««««««««««««««««««««.pg

References/Citations««««««««««««««««««««««««««««««pg




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BRIEF INTRODUCTION

Most Americans receive anywhere from one to five credit card solicitations in themail each month, and often times individuals will receive one perday when including othersources such as email or telephone solicitations. This is number has grown throughout the

past few years with the economic downturn.Americans have gotten into the habit of throwing these new credit card offers in the garbage. In a recent article in Direct Magazine,it stated that on average Americans carry around six credit cards with them.Credit cardcompanies are losing a lot of money from the consumers with bad credit ratings and havetaken action to counteract these losses.They are charging tremendous amounts in fees tocover these costs, but they are still experiencing losses.This has led them to find new,untapped markets to sell their credit services.Primary targets have included people new tocredit cards, like the college undergraduate.College students often need credit cards foremergency situations because most are moving out on their own and financially and needthe extra financial boost. Studies have shown that the first credit card a consumer owns isthe one they will keep the longest. ³Geff Rapp, a senior managing partner at Group GDirect, Arminster, PA, and a former senior manager for Fleet Bank's credit card division,estimates between 20% and 25% keep and still use their first card.´ (The Direct Magazine)

This quote demonstrates the amount of people not only keeping their first credit card, butalso then people who continue to use them throughout the years becoming valuable lifelongcustomers.According to the Federal Reserve, the total outstanding credit card debt carriedby Americans reached a record high of $951 billion in 2008. This number is projected toclimb higher during the next few years. Overall, this is a vicious economic circle and isoccurring every day when Americans are being faced with the economic hardships such aslayoffs.When Americans are not able to pay the minimum amounts on their credit cards,they are hit with higher penalties and higher interest rates making it harder for Americansto pay off their credit card balances. Another thing that triggers these rising credit carddebts is the nation¶s urgency to encourage Americans to continue spending in order to keepthe economy rolling and to potentially get the economy back in order.But the problem stillexists and Americans are going deeper and deeper in debt.

Upon reading the harsh aspects of the credit card crisis, the researcher examinedways that people are staying away from debt and ways that people are helping.Theresearchers then found the Credit Card Reform Act of 2009-2010. This is said to be one of the best things that Obama has done for consumers in this country.The new Act of 2009-2010 is said to more easily allow consumers to avoid some of the major issues with creditcards.The Credit Card Reform Act is designed to hold credit card companies to higherstandards. These standards are designed, in turn, to protect consumers from gettingthemselves into excessive trouble with credit card debt. (The Credit Card Reform Act 2010)The Act makes the credit card companies keep their interest rates fair by prohibiting creditcard companies from raising rates in the first year and putting strict rules in place on rateincreases. This Act also makes it easier for Americans to pay down their debts. It alsorequires credit card companies to be transparent in regards to exactly what interest rates

and fees they are charging consumers.Now, the minimum age for acquiring a credit card isthe age 21, which is beneficial because many younger consumers experience financialtrouble due to excessive credit card use. After all of the rules and regulations are put intoplace it will be easier for people to look into debt consolidation plans and debt settlementoptions to east their financial struggles.

SEGMENTATION INFO ABOUT THE TYPES OF CONSUMERS AFFECTED BY THE ISSUE




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It seems that everyone these days has at least one credit card. In fact, Americanconsumers own over 609 million credit cards collectively (³Card ownership´). But which U.S.consumers are most affected by the credit card crisis? It is necessary to take a closer lookat which consumers are excessively using credit cards.

Ethnic subcultures

The subcultures of different racial groups in the U.S. seem to play a meaningful rolein credit card ownership and usage.Cultural groups within the United States hold differentbeliefs and this impacts their views on credit card usage and spending.Approximately 65%of Asian-Americans own at least two credit cards and only 19% of Asian-Americans reporthaving no credit card at all. At least 35% of African-American consumers report having atleast two credit cards and of those 51% admit to not making timely payments. A 2004survey shows that of those with credit cards, 84% of African-American households carriedcredit card debt compared with 54% of white households. Also, 90% of African-Americanfamilies earning household income between $10,000 and $24,999 had credit card debt.Atleast 44% of Hispanic consumers living in the United States own at least two credit cards,but this group is less likely to use their credit cards evidenced by the fact that 58% of credit

card holders have not used their cards in the past 30 days and 31% of Hispanic consumersprefer to pay only in cash. (³Demographics´) These statistics show that African Americanconsumers are more likely to hold a credit card than other ethnic groups and to makeuntimely payments which could be punished with higher interest rates or penaltyfees.African Americans with a low income are also more likely to be affected by the creditcard crisis.Credit card debt is also extensive in white households, but not as much inHispanic or Asian-American households.

Age

The demographic of age, which can differ greatly due to commonly held beliefs in thegenerational subcultures,also greatly impacts credit card spending habits. Even though the

elderly population holds the most credit cards with 80% of the over 65 group having used acredit card in the past year, they tend to have much higher credit scores and hold lowerbalances than younger consumers.This group is more financially savvy and less likely toburden themselves with high balances and pay their accounts late.Younger members of thepopulation under the age of 35 tend to view credit much less seriously. Only 2% of undergraduate students have no credit history and over 84% of undergraduates in 2009hold credit cards, a number up by 11% in 2004.This group is being extensively targeted bycredit card companies who are wishing to snag customers early and hold onto them forlife.Over half of college undergraduates had more than four credit cards in 2008 and thisnumber is also on the rise. With so many credit card offers being targeted towards collegestudents, it is not wonder that they are the demographic group holding the most cards withthe highest levels of spending. (³Demographics´) These statistics show that the youngersegment of the population is more likely being affected by the credit card crisis than the

older generations.

HOW THE ISSUES AFFECT THE CONSUMERS




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These issues affect consumers by putting Americans deeper and deeper into debt.However, the Credit Card Reform Act of 2009-2010 is going to help out. Some provisions of the Act will make a substantial difference for credit card companies and consumers battlingdebt issues. The first provision requires credit card issuers to give a minimum of a 45 daynotice to card holders before raising their interest rates or making other significant changesin the terms of their credit agreement. This provision went into effect August 2009 and it

allows consumers to cancel their credit cards before their interest rate increased therebygiving them a choice. The second provision sets forth thata credit card company mustinstitute a grace period of three weeks or 21 days after the statement is mailed untilpayment is required. This provision will alleviate any confusion a customer has and/or helpout the consumers by extending their payment due date. The third provision raisedlimitations on circumstances under which credit card companies can raise their interestrates.Because rising interest rates have made debt repayment almost impossible forconsumers, this allows consumers to have debt that is much more manageable andpotentially allow payoff in a shorter time. By not allowing excessive rate increases undercertain circumstances, monthly payments also are reduced which can alleviate financialburden on someone in financial distress.The fourth provision establishes regular practicesrelated to payment due date and processing. For example, credit card companies cannotchange due dates between billing cycles, leading to late fees and must accept payments

received by 5:00pm on the due date rather than a midday time. This will help cut down onthe fees in relation to late payments. The fifth provision eliminates fees for payments madeonline, by telephone, or by any other means.Most Americans are switching to online bill paydue to ease of transaction and consolidation in bill pay, meaning that consumers can pay alltheir bills online.The sixth provision is, like previously stated, to limit the solicitations andcredit card issuance to individuals under the age of 21. And finally the seventh provisionforbids the practice of declining value of credit card gift cards and hidden fees for cards notused within a period of time. Gift cards should now have a five year life span. Overall, theprovisions listed will truly help Americans with their credit card debts and allow them to getback on track and payoff their debt.

The figure below is an example of the new formats of the credit card statement. This

below show the minimum payment paid and how much you will be paying and alsoaddresses the fees associated with the statement.

The issues of the credit card crisis are hurting consumers because they are gettingdeeper into debt and making their lives more difficult.Without the Credit Reform Act,




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consumers would have virtually no chance of paying themselves out of debt with theincrease in interest rates, extensive fees, and unhelpful credit card companies. The Creditcard companies would have just continued to raise interest rates and other fees to makemore money back. Now with the reform in place perhaps Americans will be able to get outof debt faster.Another aspect to be mentioned is the ³domino effect´ that the crisis has onother things Americans use. In a recent article, it was mentioned that the banks also hurting

from all the debt incurred by American consumers and it is making it more difficult forbanks to loan money.The domino effect takes place when Americans are not being able toget financed, qualify for mortgages, and other loans.




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INTERNAL AND EXTERNAL INFLUENCES IN THE LIVES OF CONSUMERS AND CDM

Perception of Needs

The first step to decision making is need recognition.Needs have greatly changedover the years, but one thing has remained the same: the American culture is centered on

living the ³American dream´.The changing factor is the definition of the ³American dream´ to consumers today.Years ago, it included living in a nice little house with a white picketfence with a spouse, 2.5 children and dog and having enough money to live on comfortably.Now, it seems that cultural norm is having more and more, which generally translates intoliving beyond one¶s means.Wants have become needs in our society. With livings costs onthe rise for necessity items such as dairy and gasoline, consumers are leaning more andmore on credit cards to pay for necessities they believe they can not live without, and often,the luxuries they believe they need in their lives. Items previous generations would havethought as frivolous, such as expensive furniture and electronics, are being charged oncredit cards today to satisfy the increasing needs of today¶s society.In order to live up tothese high expectations, many Americans have resorted to credit card usage. (Chu)

Economic Influences

Currently, the state of the economy has greatly influenced everyday lives of American consumers and their decision making. With unemployment reaching over 10% inthe current year, Americans have had to rely on credit card usage to get through the toughtimes.(Labor Force Statistics from the Current Population Survey).Layoffs are happeningevery day and consumers do not know what to do. With the dependence on credit,Americans have not been putting away in savings accounts in case an emergency arose.Even though this credit card behavior can be detrimental to a person¶s financial health,many find it necessary in order to live.An article by Kathy Chu from USA Today indicatesthat people are foregoing paying on their mortgages and car notes in order to keep theircredit cards active because credit cards are becoming their only cash flow. Particularly areaswith weaker economic health, such as California, Florida, Arizona and Nevada, have seen

credit card usage skyrocket.(Chu) Needless to say, until the economy is in order, people willfeel the need to use credit cards to supplement decreasing incomes and increasing expensesfor items they feel are necessary for living.

Availability of Credit Card Offers

With information about consumers readily available to credit card companies,consumers find their email inboxes, mailboxes and phones swamped with credit cardoffers.On average, the American consumer gets at least one credit card offer daily, not tomention an overload of advertising via mediums such as television, radio, andmagazines.Credit Card companies have used many marketing techniques including 0%balance transfer offers, 0% APR for limited time periods, personalized credit cards designs,attractive rewards programs and other offers to lure the consumer in.At virtually every

department store, consumers have the option to pay later by opening a credit card. Whatthey do not realize is that these store cards come with a big price: astronomically highinterest rates. With the ease and availability of opening a new credit card account, it is nowonder that so many U.S. consumers have multiple cards and an average household creditcard debt of over $15,000.00. (³Card ownership´)

Accessibility of information




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The research stage of the decision making process is greatly helped for consumersseeking a credit card. Due to the Truth in Lending Act of 1968, lenders are required to tellconsumers what the cost of credit is they are using, which includes disclosing interest rates,finance charges and any fees that would associated with the account. (FDIC) This givesconsumer¶s considerable information in selecting which credit card best suits their needs.Also, websites such as creditcards.com exist that give consumers the ability to search for

the best credit card offer.

HOW THIS REPORT CAN BE UTILIZED BY MARKETERS




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Marketers can utilize this report in many different ways. Within the paper there havebeen many aspects discussed in order to help and maintain these debt issues in America.When marketers are looking into these aspects they will need to know the new reform actpassed in order to keep up with the laws and regulations on Credit Card issuance.Marketersof credit card companies need to be aware of the new regulation and be able to

communicate those to consumers. Direct mailing are key here in relating the proper interestrate, fee, due date, and financial charge information to existing customers and potentialcustomers. Because the new act also prohibits issuance to individuals under the age of 21, itis important that marketers comply with that rule and adjust mailing lists and databases toexclude those individuals not meeting age requirements.

Presently, with all of the regulations previously discussed the market for credit cardsfrom the credit card companies is very intense and companies are fighting to gain marketshare. The intensity of the market can be attributed in part to the fact that the market isbecoming saturated by credit card offers and many creditworthy consumers already havecards. Marketers can work to gain new accounts byluring customers away from thecompetition. In order to do this, many companies are offering low introductory rates fortransfer balances, developing co-branded cards, and building exceptional card value by

offering consumers something in return for using their services. Another option would be tocreate new markets. Credit card companies have already gained acceptance by certainsegments, including the college-age young adults, the elderly, and certain ethnic groups.Marketers gain work to gain acceptance by groups that are more apprehensive to acceptcredit cards, such as the Hispanic population in the United States.




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CONCLUSION

Overall, the credit card crisis has made a footprint in the lives of consumers. Alongwith contributing factors like the present economy and ease of obtaining credit, consumersare ruining their financial health by relying on a little plastic card for daily cash flow topurchase items, which may or may not be necessity items. Even though the government

has developed the Credit Reform Act to help consumers get a handle on their situation, it isnot clear whether American consumers will be on the path to a debt-free future or willcontinue to live beyond their means through the use of credit. What is certain is that withan event as influential in the lives of consumers as the credit card crisis, Marketers mustadjust techniques in order to appeal to today¶s consumer and to meet requirements of newfederal legislation.



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The Credit Card Crisis (2)