Credit Card Debt Management

Wall Street analysts are dubbing MasterCard (MA) and Visa (V) shares “recession-proof stocks.” It’s no secret that these two companies have shown a solid performance. Despite the roller coaster stock market, especially in the financial sector, these two stocks have remained relatively stable.

Visa has already more than doubled its IPO price of $44 a share in mid-March of this year. Its IPO also enjoyed a record-setting take of $17.86 billion, first place in the history of U.S. domestic IPOs and third place among IPOs worldwide.

MasterCard, more veteran to the stock market scene than Visa, has been floating near or above the $300/share mark for a while. The company has $2.66 billion in cash and $229 million in debt, according to StreetSpeculator.com. The site further points out that Visa’s cash is more than twice that of MasterCard and the debt is less than half.

But what makes these two companies such buoyant choices in the violent sea of stock turmoil? No liabilities. Aside from legal disputes, something they’ve both just experienced, these two companies cannot be touched by the bad debt wreaking havoc on so many banks and other credit card companies like Discover, Capital One and American Express. Visa and MasterCard are safe because they do not make loans, they merely facilitate loans and purchase transactions. Their profit does not come from late fees and interest charges imposed on card-carrying consumers. They instead derive profit from fees imposed on banks who use their logo on cards and merchants who allow customers to pay for goods or services with their card.

It makes for a very “cash cow” stock choice, as StreetSpeculator.com puts it. July 31 is quarterly earnings report day for both companies — if profits exceed forecasts, the share values will likely soar and it could be a good day for stockholders indeed.

MasterCard (MA) shareholders are undoubtedly excited to see the stock’s performance this year, an amazing 45% increase thus far. On Friday, the stock hit a record high of $320.30 — more than double its 52-week low of $120 in August 2007 — before settling at $308.65 at the close of Friday trading. The good news came after the company reportedly announced its expectation of double-digit net revenue growth in 2008.

According to Thomson Financial News:

“The Purchase, N.Y.-based company said it continues to see gross dollar volume growth rate slowing in the U.S. in the second quarter, but growing in the rest of the world, according to slides from the company’s investor meeting Thursday. In the long-term, Mastercard said it expects average annual net income growth of 20% to 30% and net revenue growth of 12% to 15%, according to the slides.”

It might not the best entry-level point for newcomers to the MasterCard stock, but Visa (V) might be worth considering. It closed Friday at $86.36, up 1.11% from the day before and almost double its IPO cost of $44 a share in March. That’s remarkable growth and still a relatively reasonable price per share, considering the respectability and stability of the Visa corporation.

Both Visa and MasterCard are considered relatively stable investments for a couple reasons. Other than the fact that we live in a credit-obsessed society and these two companies stand among the industry giants, they also have a great business model. Unlike the banks and competing credit card companies AmEx and Discover, Visa and MasterCard don’t stick their necks out with loans. All they do is collect fees off credit card transactions. Therefore, they have very little exposure to the bad debt so prevalent in these turbulent economic times.

In other credit card news, American Express (AXP) finished last week down 10.9% YTD at $46.35. Discover Financial Services (DFS) finished at $17.15, up 13.73% YTD. Capital One Financial Corp (COF) finished at $48.12, up 1.82% YTD.

The New York Police Department is telling victims of identity theft to keep their stolen credit cards open and active. From a financial advisor’s point of view, this would sound like the worst possible advice. However, from a detective’s perspective, it becomes much easier to track down the thief.

As might be expected, the plan is meeting with some resistance, according to the New York Daily News:

“‘Nobody trusts credit card companies or banks, so no one really believes they won’t be on the hook for some crook’s spending spree,’ said a Manhattan lieutenant familiar with (NYPD Deputy Commissioner of Operations Phil) Pulaski’s push to reduce grand larcenies.”

NYPD officials are saying they will attempt to work with credit card companies to gain a commitment for the companies to pick up the tab. It’s an “investment,” they say, well worthwhile in light of catching a thief run amuck. However, there is a mixed reaction in the credit card world as well. Visa, MasterCard and American Express stated that a consumer would never be expected to foot the bill for a criminal’s spending spree, even if the card was left open under the advice of law enforcement. However, Capital One spokesperson Diana Don had the following to say:

“We might be responsible for the expenses. We want to work with law enforcement to stop such thefts. It would be on a case-by-case review.”

This story still doesn’t answer the common complaint of law enforcement officials — jurisdiction. Might we assume that the feds would get involved in this effort as well? By many accounts, credit card fraud and identity theft often becomes an international issue, so that may be necessary. At any rate, it’s nice to see law enforcement officials trying to take a solution-oriented approach, even if it is still in the idea stage.

So maybe you’re about to head overseas. Maybe you’re one of the many soon-to-be honeymooners planning for the upcoming wedding season. Or perhaps you’ve just decided it’s finally time to fulfill that lifelong dream of visiting another country. When it comes to money, there are a few things you should know. Credit or debit cards may seem the easiest route, particularly when you reference those Visa commercials showing globetrotters plunking down their Visa card at exotic locales around the world. But what they don’t show you is all the related fees.

The L.A. Times outlines the fees attached to debit or credit cards:

-2% foreign transaction fee from the credit card issuer

-1% additional foreign transaction fee from Mastercard or Visa

-2% additional foreign transaction fee from American Express

-ATM withdrawal fees of up to $5 or up to 3% of the withdrawal amount, or possibly even both.

So even though there may be fees associated with cash conversion or money orders, the related fees can make credit cards more expensive in the long run. Nevertheless, many international travelers prefer to stick with credit cards for their rewards, convenience and safety. Most travelers would much rather be carting around a credit card or two than a large wad of cash.

Some international shoppers (and this applies to international e-commerce as well) received a surprise related to their foreign transaction fees. A mailing circulated two months ago concerning a class action lawsuit settlement by Visa, Mastercard, their member banks and Diners Club. It seems tons of consumer were entitled to a small refund if they made significant international purchases during February 1996 to November 2006. Allegedly, those companies issued credit cards without clearly stating their foreign transaction fees.

To find cards that fit great with international spending, check out My Money Blog’s list of Best ATM or Credit Cards. Topping the list: HSBC ATM cards, which have nominal fees, and Capital One credit cards, which charge no foreign transaction fees. Apply for one of these cards and never worry about refunds again!

Banks.com’s Weamein Yee posted an interesting personal finance article recently on how consumer spending is slowing across all sectors. One of those sectors, of course, is credit cards. Even despite recent reports that American consumers were prioritizing credit card bills above mortgage payments, it seems the credit card industry is not immune to the current economic pressures. Companies are reporting less consumer credit card spending and more late payments.

Credit card companies are now getting more innovative in their marketing schemes. And we’re not talking about free sandwiches to lure college students off campus so they can fill out credit applications. Capital One’s Card Lab has seen much television commercial airtime recently and is being touted “a winner” by Ron Shevlin’s marketing blog.

Choose your own interest rate, rewards, card design, etc. It’s interactive marketing genius. By the time consumers get to the fourth and final step of “review and apply,” they’re already emotionally invested in this deal. They’ve answered the questions, picked the perfect balance of features and rewards and they’ve carefully selected the perfect picture of their kid, pet, spouse, favorite vacation destination, sports team logo, etc. And consumers feel completely secure because they were “in control” from start to finish in this, the first-ever “do-it-yourself” credit card offer. They are wanting that card in a bad way. I’d take it one step further than Ron Shevlin – this is sheer marketing genius.

Shevlin credits Capital One for being notoriously good at the marketing game and, he says, this Card Lab will only sharpen their efforts. It’s all about the actionable data, he writes.

“Analyzing the usage, trends, clickstream, etc. should help Cap One marketers get a really good understanding of who’s looking for cards online, what their preferences are, which features are most popular, and so on. And knowing Cap One, and what good marketers they are, they’ll use this data to develop and refine their offers and marketing programs.”

Lenders are increasing their reserves in anticipation of more charge-offs in the coming days, according to analysts quoted by MarketWatch.

Capital One expects charge-offs, known to the financially illiterate as extremely past due balances on credit cards, to reach 5.25%, or between $4.9 and $5.2 billion in 2008.

Discover Financial Services expects charge-offs of around 4.25 to 4.75 percent in 2008, or roughly $2 billion. Citigroup is facing plummeting shares, a leadership shake-up and an all around bleak future.

One can only wonder how much worse the charge-offs situation will be following Black Friday, Cyber Monday and the holiday shopping season. Lenders are insisting their charge-offs are mere precautions and, though unusually high, are still manageable. After all, FY 2001-02 saw many large credit card companies stating charge-off levels of 7% and higher, even up into the double digits. However, analysts see lenders’ current increase of their reserves as a sign that further charge-offs are expected, and may even reach historic highs.

Analysts also believe the problem largely stems to the state of the economy, which is, ironically enough, directly tied in part to the health of financial institutions. It is an enigmatic problem indeed.

For most of us, the holidays mean travel. Don’t be a grumbling grinch about it. Use your credit card travel rewards to make the most out of that 300-mile trip to see Great-Aunt Bertha. Jason Giacchino has several tips on how to spend wisely during the holidays, one of which is to “develop a buying strategy.”

It’s a great idea. Gas purchases and hotel stays can rack up rewards to help you enjoy a little post-holiday stress release. Check out Mr. Credit Card’s post on Kiplinger’s recommended list of credit cards for various categories.

The Capital One Platinum Plus MasterCard came out on top in the travel card category, according to Kiplinger’s. Mr. Credit Card agreed with this choice, as well as the magazine’s choice on best gas card, the BP Rewards Visa. That card offers 5% rebates on BP purchases and 2% on other travel and dining expenses. But Mr. Credit Card makes a good point – not everyone uses BP to fill up. I certainly don’t; I think their gas tends to cost more than competitors.

For non-BP users, Mr. Credit Card recommends the American Express Simply Cash Card. It is a business credit card that pays 5% rebates on gasoline and certain types of business expenses. The site mentions that a person can obtain a business credit card without actually owning a business; they will simply be treated as a sole proprietor. It’s worth a try!

For those who will need to fly instead of drive, Kiplinger’s has a recommendation on that too. Here’s what Mr. Credit Card had to say about the magazine’s choice, the Citi Premierpass Card Elite Level.

While this is a very good card, I think there are just too many types of travel reward cards to simply pick one. What they failed to mention is that this card will only suit those who travel a lot because you can earn points from the dollars you spend and also from the miles you fly. For those of us who are not really frequent flyers, then this card may not be suitable. Plus, Citi’s ThankYou Network airline reward system could get complicated as they have “fixed options” and “flexible options” for redeeming points for airline tickets. Check out our review of Citi’s Rewards for more details.

Something else to keep in mind is that the Platinum Plus MC (best travel card) is for consumers with “excellent credit,” according to MasterCard’s web site. If you can get it, go for it – and happy traveling!