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When it comes to credit cards, the good news only goes so far

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Washington Post Staff Writer
Wednesday, February 23, 2011; 10:25 PM

TransUnion, one of the major credit bureaus, issued what on the surface should have been welcome news about the delinquency rate of credit users.

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The ratio of bank card borrowers 90 days or more late paying their bills fell by more than 32 percent in the fourth quarter of 2010 compared with a year earlier.

Wonderful. People were paying down their debts.

But here's what got me concerned. Thirty-three states showed an increase in average credit card borrower debt from the previous quarter, according to TransUnion's quarterly analysis of trends in the credit card industry. The largest increases occurred in the District of Columbia, Iowa and Mississippi. The national average credit card borrower debt was $4,965.

In the same report, TransUnion said that the number of new credit cards issued increased by 19.1 percent. That's significant growth despite a still very weak economy. The fourth quarter of 2010 is the second consecutive quarter that such originations increased since the recession began in late 2007. TransUnion says the increases occurred across the board.

Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit, said the company doesn't expect to see a huge jump in average credit card balances over the next couple of quarters because a lot of people are still unemployed or, thankfully, saving again. But, he noted, the potential growth in credit usage is a positive factor.

"Increases in consumer confidence indicate that consumers may now be demonstrating a more optimistic view of their financial outlook - possibly willing to expand their credit card use," Becker said.

There it is, folks. Are we are headed back to business as usual, putting more credit in the hands of more people? Wasn't it consumer overconfidence that led so many people to become so deep in debt in the first place? People thought they could handle credit. Turns out they couldn't.

Bankrate.com just released a poll that found just 52 percent of Americans have more money in emergency savings than in credit card debt. Nearly one in four survey respondents has greater credit card debt than emergency savings. People ages 30 to 49 are most likely to have more credit card debt than savings.

Let's put all this information in context. This week (Feb. 22 to be exact) marks the first anniversary since many provisions of the Credit Card Accountability, Responsibility and Disclosure Act (also known as the Credit CARD Act) took effect. The new law prevents companies from pushing people over their credit limits. Issuers also can't charge interest on the fees or raise interest rates on existing balances. There are limits on what companies can charge in late fees.

Looking back, the newly established Consumer Financial Protection Bureau pulled together three studies to see how the CARD Act has fared in the last year. The bureau, being set up by Elizabeth Warren, surveyed the nine largest card issuers, who together represent approximately 90 percent of the credit card marketplace. The issuers were asked about their current card practices and future plans. The Office of the Comptroller of the Currency looked at changes in the pricing practices of card issuers. Finally, the bureau commissioned a survey of cardholders.

Here are some of the findings:

l Over-limit charges have virtually disappeared in the credit card industry. That's because issuers are prohibited from charging an over-limit fee unless the cardholder opts in to permit the issuer to process a transaction that puts them over their limit. The number of accounts charged an over-limit fee dropped from 12 percent per year to about 1 percent.

l Interest rate hikes on existing accounts have significantly been reduced. Before the CARD Act, approximately 15 percent of accounts saw interest rate hikes over the course of a year. Currently that number is under 2 percent.

l Late fees have dropped, falling from $901 million in January 2010 to $427 million in November 2010, the latest month for which data are available. The number of accounts assessed at least one late fee declined by almost 30 percent. The average late fee declined from $35 to $23. Only one of the nine issuers currently has a practice of periodically reviewing the interest rate on existing accounts and raising interest rates for new purchases.

Sure, the findings are promising. But all these consumer protections will be for naught if consumers return to their old ways of paying down debt only to run it up again. Heavy credit use was and never will be a good thing for individuals or our country.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Questions are welcomed, but because of the volume of mail, personal responses may not be possible.



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