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The Credit Card Crisis

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] ]CUTIV] 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 crisis
and also discussing the Credit Card Reform Act of 2009-2010.In essence, the problems that
Americans 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 credit
cards are at an all-time high. Within the Credit Card Reform Act that President Obama
enforced there are many provisions available to correct some of the issues faced by
consumers. The provisions will also assist with consumers getting their debt consolidated
faster and prevent people from getting into as much debt as they are now.This has become
a major issue within America and other places, because people are having trouble
distinguishing between their needs and their wants. Consumers are spending money that
they 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 look
or 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 that
the debts have increased it is getting harder for banks to lend money and refinance
mortgages.

The Credit Card Reform Act, in which President Obama put in place, will help with the
issues that are being faced presently. There will be more regulations and provisions put in
order for the credit card companies to follow. Also the statements for the consumers will be
able to see exactly how much money they are spending in fees and interest rates on the
money 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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TABL] OF CONT]NTS

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

]xecutive 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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BRI]F INTRODUCTION

Most Americans receive anywhere from one to five credit card solicitations in the
mail each month, and often times individuals will receive one perday when including other
sources 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 card
companies are losing a lot of money from the consumers with bad credit ratings and have
taken action to counteract these losses.They are charging tremendous amounts in fees to
cover 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 to
credit cards, like the college undergraduate.College students often need credit cards for
emergency situations because most are moving out on their own and financially and need
the extra financial boost. Studies have shown that the first credit card a consumer owns is
the one they will keep the longest. ³Geff Rapp, a senior managing partner at Group G
Direct, 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, but
also then people who continue to use them throughout the years becoming valuable lifelong
customers.According to the Federal Reserve, the total outstanding credit card debt carried
by Americans reached a record high of $951 billion in 2008. This number is projected to
climb higher during the next few years. Overall, this is a vicious economic circle and is
occurring every day when Americans are being faced with the economic hardships such as
layoffs.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 Americans
to pay off their credit card balances. Another thing that triggers these rising credit card
debts is the nation¶s urgency to encourage Americans to continue spending in order to keep
the economy rolling and to potentially get the economy back in order.But the problem still
exists and Americans are going deeper and deeper in debt.

Upon reading the harsh aspects of the credit card crisis, the researcher examined
ways that people are staying away from debt and ways that people are helping.The
researchers 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 credit
cards.The Credit Card Reform Act is designed to hold credit card companies to higher
standards. These standards are designed, in turn, to protect consumers from getting
themselves 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 credit
card companies from raising rates in the first year and putting strict rules in place on rate
increases. This Act also makes it easier for Americans to pay down their debts. It also
requires 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 is
the age 21, which is beneficial because many younger consumers experience financial
trouble due to excessive credit card use. After all of the rules and regulations are put into
place it will be easier for people to look into debt consolidation plans and debt settlement
options to east their financial struggles.

S]GM]NTATION INFO ABOUT TH] TYP]S OF CONSUM]RS AFF]CT]D BY TH] ISSU]




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It seems that everyone these days has at least one credit card. In fact, American
consumers 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 look
at which consumers are excessively using credit cards.

]thnic subcultures

The subcultures of different racial groups in the U.S. seem to play a meaningful role
in credit card ownership and usage.Cultural groups within the United States hold different
beliefs 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 report
having no credit card at all. At least 35% of African-American consumers report having at
least two credit cards and of those 51% admit to not making timely payments. A 2004
survey shows that of those with credit cards, 84% of African-American households carried
credit card debt compared with 54% of white households. Also, 90% of African-American
families earning household income between $10,000 and $24,999 had credit card debt.At
least 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 consumers
prefer to pay only in cash. (³Demographics´) These statistics show that African American
consumers are more likely to hold a credit card than other ethnic groups and to make
untimely payments which could be punished with higher interest rates or penalty
fees.African Americans with a low income are also more likely to be affected by the credit
card crisis.Credit card debt is also extensive in white households, but not as much in
Hispanic or Asian-American households.

Age

The demographic of age, which can differ greatly due to commonly held beliefs in the
generational subcultures,also greatly impacts credit card spending habits. ]ven though the
elderly population holds the most credit cards with 80% of the over 65 group having used a
credit card in the past year, they tend to have much higher credit scores and hold lower
balances than younger consumers.This group is more financially savvy and less likely to
burden themselves with high balances and pay their accounts late.Younger members of the
population 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 2009
hold credit cards, a number up by 11% in 2004.This group is being extensively targeted by
credit card companies who are wishing to snag customers early and hold onto them for
life.Over half of college undergraduates had more than four credit cards in 2008 and this
number is also on the rise. With so many credit card offers being targeted towards college
students, it is not wonder that they are the demographic group holding the most cards with
the highest levels of spending. (³Demographics´) These statistics show that the younger
segment of the population is more likely being affected by the credit card crisis than the
older generations.

HOW TH] ISSU]S AFF]CT TH] CONSUM]RS




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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 battling
debt issues. The first provision requires credit card issuers to give a minimum of a 45 day
notice to card holders before raising their interest rates or making other significant changes
in 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 thereby
giving them a choice. The second provision sets forth thata credit card company must
institute a grace period of three weeks or 21 days after the statement is mailed until
payment is required. This provision will alleviate any confusion a customer has and/or help
out the consumers by extending their payment due date. The third provision raised
limitations on circumstances under which credit card companies can raise their interest
rates.Because rising interest rates have made debt repayment almost impossible for
consumers, this allows consumers to have debt that is much more manageable and
potentially allow payoff in a shorter time. By not allowing excessive rate increases under
certain circumstances, monthly payments also are reduced which can alleviate financial
burden on someone in financial distress.The fourth provision establishes regular practices
related to payment due date and processing. For example, credit card companies cannot
change 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 on
the fees in relation to late payments. The fifth provision eliminates fees for payments made
online, by telephone, or by any other means.Most Americans are switching to online bill pay
due to ease of transaction and consolidation in bill pay, meaning that consumers can pay all
their bills online.The sixth provision is, like previously stated, to limit the solicitations and
credit card issuance to individuals under the age of 21. And finally the seventh provision
forbids the practice of declining value of credit card gift cards and hidden fees for cards not
used within a period of time. Gift cards should now have a five year life span. Overall, the
provisions listed will truly help Americans with their credit card debts and allow them to get
back 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 also
addresses the fees associated with the statement.

The issues of the credit card crisis are hurting consumers because they are getting
deeper 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 the
increase in interest rates, extensive fees, and unhelpful credit card companies. The Credit
card companies would have just continued to raise interest rates and other fees to make
more money back. Now with the reform in place perhaps Americans will be able to get out
of debt faster.Another aspect to be mentioned is the ³domino effect´ that the crisis has on
other 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 for
banks to loan money.The domino effect takes place when Americans are not being able to
get financed, qualify for mortgages, and other loans.




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INT]RNAL AND ] T]RNAL INFLU]NC]S IN TH] LIV]S OF CONSUM]RS AND CDM

Perception of Needs

The first step to decision making is need recognition.Needs have greatly changed
over 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 picket
fence 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 into
living beyond one¶s means.Wants have become needs in our society. With livings costs on
the rise for necessity items such as dairy and gasoline, consumers are leaning more and
more 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 have
thought as frivolous, such as expensive furniture and electronics, are being charged on
credit cards today to satisfy the increasing needs of today¶s society.In order to live up to
these high expectations, many Americans have resorted to credit card usage. (Chu)

]conomic Influences

Currently, the state of the economy has greatly influenced everyday lives of
American consumers and their decision making. With unemployment reaching over 10% in
the current year, Americans have had to rely on credit card usage to get through the tough
times.(_


   
Layoffs are happening
every 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.
]ven 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 indicates
that people are foregoing paying on their mortgages and car notes in order to keep their
credit cards active because credit cards are becoming their only cash flow. Particularly areas
with 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 will
feel the need to use credit cards to supplement decreasing incomes and increasing expenses
for 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 card
offers.On average, the American consumer gets at least one credit card offer daily, not to
mention an overload of advertising via mediums such as television, radio, and
magazines.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. What
they do not realize is that these store cards come with a big price: astronomically high
interest rates. With the ease and availability of opening a new credit card account, it is no
wonder that so many U.S. consumers have multiple cards and an average household credit
card 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 consumers
seeking a credit card. Due to the Truth in Lending Act of 1968, lenders are required to tell
consumers 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 gives
consumer¶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 R]PORT CAN B] UTILIZ]D BY MARK]T]RS




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Marketers can utilize this report in many different ways. Within the paper there have
been 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 act
passed in order to keep up with the laws and regulations on Credit Card issuance.Marketers
of 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 interest
rate, fee, due date, and financial charge information to existing customers and potential
customers. Because the new act also prohibits issuance to individuals under the age of 21, it
is important that marketers comply with that rule and adjust mailing lists and databases to
exclude those individuals not meeting age requirements.

Presently, with all of the regulations previously discussed the market for credit cards
from the credit card companies is very intense and companies are fighting to gain market
share. The intensity of the market can be attributed in part to the fact that the market is
becoming saturated by credit card offers and many creditworthy consumers already have
cards. Marketers can work to gain new accounts byluring customers away from the
competition. In order to do this, many companies are offering low introductory rates for
transfer balances, developing co-branded cards, and building exceptional card value by
offering consumers something in return for using their services. Another option would be to
create new markets. Credit card companies have already gained acceptance by certain
segments, 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 accept
credit 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. Along
with contributing factors like the present economy and ease of obtaining credit, consumers
are ruining their financial health by relying on a little plastic card for daily cash flow to
purchase items, which may or may not be necessity items. ]ven though the government
has developed the Credit Reform Act to help consumers get a handle on their situation, it is
not clear whether American consumers will be on the path to a debt-free future or will
continue to live beyond their means through the use of credit. What is certain is that with
an event as influential in the lives of consumers as the credit card crisis, Marketers must
adjust techniques in order to appeal to today¶s consumer and to meet requirements of new
federal legislation.




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R]F]R]NC]S/CITATIONS

Boorstein , Jonathan."Credit Card Crisis."˜

   
 1 Dec 1998.Web. 20 Jul 2010.
<http://directmag.com/mag/marketing_credit_card_crisis/>.

Chu, Kathy."More Americans Using Credit Cards to Stay Afloat."  28 Feb 2008:
n.pag.Web. 20 Jul 2010.<http://www.usatoday.com/money/perfi/credit/2008-02-
28-credit-cards_N.htm>.

"Credit CARD Act of 2009." Law Brain, 9 July 2010.Web. 20 Jul 2010.
<http://lawbrain.com/wiki/Credit_CARD_Act_of_2009>.

"Credit Card Reform Act 2010 ± What It Means For You." ˜
. Burden Free
Inc., 25 Nov 2009.Web. 20 Jul 2010.<http://www.burdenfreeinc.com/blog/2009/
11/credit_card_reform_act_2010_wh.html>.

"Credit card statistics, industry facts, debt statistics ." !

. Credit Cards.com,
n.d. Web. 20 Jul 2010.<http://www.creditcards.com/credit-card-news/credit-card-
industry-facts-personal-debt-statistics-1276.php#Demographics>.

"Credit card statistics, industry facts, debt statistics." ˜  

. Credit Cards.com,
n.d. Web. 20 Jul 2010.<http://www.creditcards.com/credit-card-news/credit-card-
industry-facts-personal-debt-statistics-1276.php#Demographics>.

"Current Population Survey."_



   
.
United States Department of Labor, 04 June 2010.Web. 20 Jul 2010.
<http://www.bls.gov/bls/unemployment.htm>.

" FDIC Law, Regulations, Related Acts ." ˜ . FDIC, 03 Dec 2009. Web. 20 Jul 2010.
<http://www.fdic.gov/regulations/laws/rules/6500-200.html>.

Huffington, Arianna. "The Credit Card Debt Crisis: The Next ]conomic Domino." "
 
 24 Feb 2009.Web. 20 Jul 2010.<http://www.huffingtonpost.com/arianna-
huffington/the-credit-card-debt-cris_b_169657.html>.