Monday, May 3, 2010

Another one bites the dust: credit card companies stealing your credit score

I'm sure many of you have heard of or been affected by the credit card companies slashing credit indiscriminately in order to clean up their balance sheets. In fact, they have been doing so in a rather coordinated way since 2007 when this financial mess hit the fans (see graph below). Of course, that's exactly what they should do, since it is we, the consumers, that are to blame for this mess and not the bankers and predatory lenders who specifically sought to sell mortgages to under-qualified borrowers at a time when home prices had reached such exorbitant price levels that qualified buyers were no longer interested. Three years have passed since we ventured into this mess until finally we have reached the blame-casting stage of this game. Unfortunately none of the political or "bankstah" rhetoric comes remotely close to helping solve the real problems that plagued--and continue to plague--the real economy (and the banks tangible balance sheets). I have recently been forced into a situation that permits me to speak knowingly from one perspective and therefore to showcase at least one very negative result (or side effect) of this crisis that will necessarily have long-term ramifications for this country, its economy, and most certainly its middle class.

On April 19th, 2010, I received a letter from Citibank, explaining that:
"a routine review of your account activity shows that you have not used your Citi Account for and extended period of time. We are sorry if this card has not met your needs. Due to prior inactivity, your account will be closed on May 13, 2010. Use of this card between now and the date listed will not enable us to revers this decision and your account will still be closed. We appreciate your business." blah blah blah.

Now, on the surface it seems pretty straight forward: you have been extended credit; you don't use that credit; when we extend credit to someone we have to take a hit on paper in terms of liabilities; therefore, since you haven't used your credit card we are going to remove the liability from our balance sheet.

Okay fine. But what they don't tell you is, A) I have had this account since 1999--yup, 11 years! B) I have never once had a late or missed payment in those 11 years. C) I have a credit rating of 790. D)Here's a crucial one--I tried to cancel this account 3 times (2001, 2003, 2004) with each attempt being met with incredible pitches aimed at keeping my business. Each time, the one that won me over was, "sir, you have been a customer with us for quite some time and you have an excellent credit history with us. If you cancel your account you will lose those years of credit history unless you have another card that you have had longer.

I did not, in fact, have any cards longer than this one. The truth was, this credit card is my Student Associates Bank Credit Card. It was my very first credit of any kind and it came with a measly $400 credit line. The selling point for the card was that every 6 months if the card was in good standing, the customer could request a credit line increase without a credit report being pulled. The automatic credit line increases were incremental, but perfect for a student starting out in the world with no credit to his/her name. Well 11 years later, I have worked that card up to a credit line of $7,600. I only use it when my next oldest credit card, an Amex card that gives me 5% cash back, isn't accepted. Well, during the past few years--which coincides with the financial chaos that has ensued--I haven't used my credit cards as much. Why? Well, because that was what we were instructed to do, by our President, by our media, and by the true head Chieftain, Dr. Common Sense.

Does that mean I don't care about this credit card? No, absolutely not. Does that mean I'm a credit risk, or that my credit score should take a 50-60 point hit because Citibank decides after all this time, that I no longer need the credit. Emphatically, No! One does not get a credit card for the singular and linear purpose that they want to max out the dang card and pay 31% interest. In fact, the credit card banks business model depends as much on the good credit risk customers as it does the bad credit risk customers. Those with higher risk profiles end up paying the company directly at such high rates that even if they default the Credit Card company still ends up making a profit on the whole (at 30% interest, it doesn't take long to earn a profit). On the other hand, those with extremely low risk profiles would become part of CC bank's other revenue stream, i.e. the merchants' fees that get paid as a right to accept the much easier to deal with credit cards of their customers. There is another angle on this (those who keep the card as an emergency or back up card), but it is tangential, so I will ignore it for now.

So, then, once again, it makes sense that the credit card company would want to remove individuals from the system that are not positively impacting their major revenue streams, especially when they have Uncle Sam breathing down their necks to raise the share price of their stock in order that they might sell it at inflated prices so that they can report back to the people that the "bailout" was actually an investment. In any case, as far as the Credit Card is concerned the formula works like this: remove liabilities from the deficit side of the balance sheet--regardless if its low risk and harmless to the actual business model long term--as it makes the bottom line appear much more healthy than it was before. In reality, what really just happened--at least in my case--is that they just pissed off a dormant but very happy customer of 11 years with an incredible credit history who never thought negatively towards the Citigroup/Citibank brand. How is that going to help the longer-term health of the company? I'll let you decide.

Now my real beef with this whole thing is that I never even got a warning. They never sent me an email or a letter explaining, if you do not start using your card we may be forced to retract the credit we have offered you. Furthermore, contrary to what they wrote in the letter, this wasn't an indiscriminate routine review. How do I know this? Well, for one my fiance, who has the same card, received the same letter the same day. (She too has a great credit history and score). My brother, who lives in an entirely different state, also received this same letter on the same day. Lastly, and this was what led me to write this post, from chat rooms and other blogosphere interactions I gather that a whole lot of people, specifically with very high credit scores received similar letters from many banks during the past several weeks.

The ultimate point of the post can be extrapolated from the graph below (click to enlarge):

As the graph from my favorite blog Calculated Risk shows, this trend has been well underway for a very long time and had just recently begun to subside. Looking at the chart, it appears that although low, we are at a point at which we might expect the trend to reverse. On the contrary, however, a whole new wave of credit has just been or is scheduled to be removed from the system that has yet to be reflected in the chart.

In the most recent Federal Reserve Report, the Chairman explains:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of
13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

The report goes on to imply likely stabilization. I don't buy in. Indeed, my knowledge of business and real-life experience tells me three very important things as a result of these actions: First, the banks are definitely not as healthy as they portend since they are kicking out their VIP's in order to mask their balance sheets. Secondly, the net result of this whole escapade is that a great deal of people who really need credit to get past this "bump in the road" or those who are doing alright but whom were potentially about to make a large and important purchase are going to be unable to navigate the waters for a long time as their bearings get messed with from the sidelines. I, for example am saving up for a home right now (and have been for 5 years). I'm just shy of a 20% down payment for the kind of home I'd like to buy. However, this reduction in available credit will affect not only my credit history, but also my debt to credit ratio, two crucial components to the rate that the banks will expect me to pay. This rate, in turn, could very potentially effect the available funds I might be able to procure. Lastly, with residential construction spending still at abysmal levels, and the termination of the Federal Home Buyers Tax Credit set to negatively impact demand for existing home inventory moving forward, now is not a good time to be chipping away at the credit scores of responsible borrowers; they are categorized as "responsible" for a reason. This "recovery" is going to need all the help it can get from the consumer. Yet, all consumers seem to be having the punch bowl taken away from them regardless of whether or not he or she has had too much to drink. Therefore, how can any kind of consumer spending recovery take hold? (for those that don't know, roughly 70% of US GDP since WWII comes from consumer spending).

Those concerned with inflation, although a very real concern that I plan to discuss in a later post, must also consider the alternative when so much spending power is being sucked out of the system so indiscriminately and "routinely." I realize that banking reform and the Consumer Credit Protection Act was enacted with good intentions, but just because the shoulder shove that put you on your a$$ was intended to be a love tap, it doesn't ensure that you're not bruised as a result. Intentions only matter to a point.

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