The Purpose

When Capital One and any other credit card issuer encounters an account holder who falls 180 days delinquent, they are required by federal law to charge off the account as an uncollectible bad debt. This is written off as a loss, of which a portion is recovered by selling it to a debt collector.

Attorneys, debt buyers and collection agencies often purchase these accounts for pennies on the dollar and pursue collection activities against the debtor. There is no limit on how long they can pursue collection of the debt.

There is however a limit to how long they can pursue legal action against the debtor. The statute of limitations on a debt prevents a debtor from being sued over an old debt. A lender or their agent must pursue a judgment before the statute of limitations expires. This can vary considerably by state.

The AG’s office is specifically charging that Capital One extended what it claimed were credit offers to these debtors. However, it charged that many of these credit offers were for only $1. The catch was that the debtor had to transfer their old “expired” debt over to the new card, thereby re-aging the debt. Attorney General Darrell McGraw had harsh words for Capital One:

Capital One’s practice of offering nominal extension of credit, if and only if, the consumer agreed to pay off a debt too old to be sued on is tantamount to loan sharking.

Any debtor that agreed to this credit “offer” would be subject to new legal action on a debt that was previously off limits. They would have been at a disadvantage, since the old balance would once again be subject to fees and interest.  If the client wanted more available credit, they would have to pay down the old balance to well below the credit limit.

To further complicate matters, many of these accounts were charged a $59 annual fee. This annual fee was charged on the second billing cycle, thereby making account holders mistakenly believe they had more available credit. The annual fee would frequently cause clients to go over their credit limits, thereby incurring an over-the-limit fee.

West Virginia residents may contact the Attorney General at 1-800-368-8808 for more information.

The Federal Reserve enacted regulations in December 2008 that will limit the types of rate increases that credit card issuers can enact. This may bode well for consumers that carry hefty credit card balances, but they will have to wait until July 2010 to see any relief. By then, their interest rates will probably have been increased already.

Remember that card issuers could still lower their rate for any reason, but it will be harder to raise their rates for any reason after the July 2010 deadline. Also, while the Fed may be limiting rate increases, they have not made any rulings to cap minimum payment increases.

Consumers were initially hit with higher minimum payments in 2006 when the Fed pressured credit card issuers to raise minimum payment requirements. The Fed claimed that card issuers were not requiring a high enough minimum payment. In some cases, minimum payments as low as 1% of the balance were possible. Some cards even were characterized as negatively amortizing.

5% Minimum Payment Requirements

In November 2008, Capital One began raising its minimum payment requirements beyond what was requested by the Fed 2 years prior. One car issuer went even further. In December 2008, Chase raised minimum payments to 5% of the balance on may of its “fixed rate for the life of the balance” accounts. They also added a $10 monthly fee to these cardholders that applied as long as they carried these balances.

Some cardholders cannot afford the increase in minimum payments and are forced to make difficult choices if they do not get help through credit counseling. Other cardholders can afford the increase, but they are upset at what they perceive is an unwarranted change in terms.

Sure this is an important issue that is adversely affecting tens of thousands of cardholders. However, the Fed will probably drag their feet on this issue. Here is why:

Fed Action Unlikely

The Federal Reserve and other government regulatory authorities have for years criticized card issuers for allowing minimum payments that they deemed to be inadequate. The government mandates that cardholders be required to make a minimum payment so that they could be expected to pay off the balance in a reasonable period of time.

The government would love for all card issuers to require a 5% minimum payment. They see this as a long-term solution that would ultimately help cardholders avoid overpaying on short-term credit purchases.

There will be some short-term pains with the higher minimum payment requirements. There will be increased defaults just as there were back in 2006 when the previous increases in minimum payments were mandated. However, the Fed views the ultimate increase in minimum payment requirements as healthy for the American people.

I are not suggesting that the increases in minimum payments are warranted, nor am I suggesting that increases should not be made. What I am suggesting is that higher minimum payment requirements of 5% should be phased in on new purchases. This would help transform consumer credit into a safer form of financing that can reduce overreliance on credit cards.

Therefore, understand that the Federal Reserve will not be eager to force lower minimum payment requirements on credit card issuers. This would defeat what the Fed has been fighting for all along.

Credit card companies have begun raising interest rates and making other changes to accounts in order to increase revenues and reduce default risks. The problem is that some actions may have actually increased default risks. Here are the changes that some major card issuers have made in 2008:

• American Express changed terms of their credit card accounts to increase interest rates on purchases and fees for late payments. Foreign transaction fees have increased, but they are still less than what others charge.
• Bank of America has raised interest rates on many of their card accounts. Also, many cardholders have recently had credit limits lowered. My limit was recently raised, so any reduction in your credit limit is apparently a result of periodic account review inquiries that suggest financial weakness.
• Capital One changed their minimum payment calculation. This could result in some cardholders experiencing an increase in their minimum payments.
• Chase has implemented substantial minimum payment increases from 2% of the balance to 5% of the balance. Additionally, a $10 fee has been added to many accounts. These changes do not apply to all accounts. Most cardholders that experienced the changes had taken advantage of a low-interest balance transfer offer at least 2 years ago. Affected cardholders could see their minimum payments increase 150%. For example, a $10,000 balance would require a minimum payment increase from $200 to $500 a month.
• Citibank has raised its purchases interest rate and has increased the penalty rate charged to late payers. In addition, Citi’s Sears cardholders may no longer have extra payments applied toward the following month’s minimum payment.
• Discover had only minor changes that matched what other card issuers had also done. They removed the cap from balance transfer fees.

The Treasury has declared a deadline of July 1, 2010 that all credit card issuers must comply with new regulations. These restrictions will keep card issuers from raising interest rates on existing balances for “any time or any reason.” They will also lock in interest rates on existing balances, so that any rate increases would only apply to new purchases.

Many cardholders have experienced frustration with the recent changes. Some consumers have expressed anger at changes made to existing balances that they believed were locked into a deal for the life of the balance. Other cardholders have allowed accounts to lapse because they cannot afford to make the higher payments.

Some relief is on the way to cardholders that find they cannot afford to keep up with their payments. However, the regulatory relief will not reach most of them in time to make a difference. Instead, if you are in trouble now, you should get help through credit counseling before you find yourself in a hole from which you cannot escape.

If you believe that your credit scores are still good but you have experienced adverse changes to your credit account terms, then there is a good chance that your bankruptcy risk score has changed. It could be the reason for your high-risk classification.

Capital One is changing the method that it uses to calculate the minimum required monthly payment on credit card accounts. This change should result in an increase in monthly minimum payments on many Capital One credit cards.

Capital One, like other banks is trying to increase cash reserves, which it needs to weather the storm from subprime loan losses. It has been increasing its allowance for loan losses so that it is not caught off-guard from rising foreclosures and loan defaults.

Part of the reason for Capital One making the change is that it is transitioning from primarily a credit card issuer into a more diverse financial institution. It has been buying banks as it expands its network of branch offices, increases the deposit base and broadens its sources of revenue.

As part of that strategy, Capital One announced that it had agreed to purchase Chevy Chase Bank, which has many locations in and around the Washington D.C. metro area. This increases their access to customers as well as provides for more revenue.

Cardholders that are unable to afford the higher minimum payments may contact Capital One if they believe that they have had a major financial emergency that might qualify as a hardship. This would only be a 6 month solution, and you would likely not be approved if you cannot improve your situation in that short of a timeframe.

If you have multiple credit card accounts and are having a difficult time affording the higher minimum payments, then you might need to consider credit counseling. Credit counseling provides more than just budget education and classes. You can also find out about plans that might be able to lower your interest as a means for getting your monthly payments reduced.