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Should you give your teen a credit card?

Tuesday, September 7th, 2010

Martha C. WhiteMartha C. White
Sep 6th 2010 at 8:00AM

Pens, check. Calculator, check. Notebook, check. Credit card? As kids head back into the classroom, parents of teens may find themselves wrestling with a far-from-academic question: Should you let your son or daughter have a credit card? Thanks to the CARD Act, the question is now more in your hands than ever before.

Lisa Goell Sinicki, owner of a public-relations company in Peaks Island, Maine., says she added her 16-year-old daughter as an authorized user on one of her credit cards early this year so her teen would have a way to buy essentials while spending a semester away from home. The new privilege came with a discussion about responsible spending and the pitfalls of plastic.

“We basically told her if she spent on anything that she didn’t have permission for, we were going to take the card away,” Sinicki told WalletPop in a phone interview. When her daughter succumbed to temptation and spent $500 on clothes, Sinicki didn’t take away the card, but she told her daughter she’d have to find a job over the summer to pay it off. (Sinicki says she paid the bill and let her daughter pay back the initial charges, rather than making the teen also pay for the interest charges that would accrue over a period of months.)

“She also saw how it feels to be working really hard and giving away two-thirds of your money to pay a bill,” Sinicki says. What she characterizes as a minor abuse of the card turned into a valuable lesson for her teen about the consequences of overspending. “We see this as sort of practice for when she goes to college and gets a card on her own,” says Sinicki, adding that her daughter hasn’t bought anything without permission since the incident.

Other parents to whom WalletPop spoke expressed similar ideas: By giving teens a card while they’re still under the watchful eye of Mom and Dad, any poor habits can be caught early and nipped in the bud before they spiral out of control. “Kids are going to be kids, and once they had the cards, they realized how easy it was to swipe it,” says Rory Rowland, a professional speaker and consultant in Independence. Mo. Starting when his oldest son turned 16 a decade ago, Rowland co-signed cards for his kids, requesting a low limit of $500 from the bank.

Rowland says the temptation to swipe was too much for one son, who treated a group of friends to lunch during the last week of school. When confronted, Rowland says the teen was “sheepish,” the thrill gone once his father told him he’d have to pay for that lunch out of his savings when the bill came. Still, Rowland says the experience was a good one.

“I’d rather them make the mistakes under my watch,” says Rowland. “I didn’t want my kids not to have a card, get into their 20s and then destroy their credit by overspending.”

So what’s the best way to go about introducing your teen to both the convenience and the caveats of credit cards? The CARD Act implemented some consumer protections that prevent issuers from marketing on college campuses and issuing cards willy-nilly, says Barry Paperno, consumer operations manager for MyFICO.com. Companies are now prohibited from marketing on or in within 1,000 feet of a college campus, and they can’t use giveaways like T-shirts or water bottles to coax freshmen into signing up for an account. For consumers under the age of 21, getting a card is no longer as simple as just filling out the form. If a teen or college student doesn’t have a job, they’ll have to get an adult co-signer to get a card in their name. If they don’t want Mom or Dad on the account, they have to have a job and provide details about their income.

In other words, parents get a little bit of breathing room, but it’s not foolproof, cautions Paperno. The law doesn’t require that card companies actually verify income stated by a teen, and the rule requiring a credit limit in line with a teen’s income only stipulates that the cardholder be able to make the minimum payment. “You can get into plenty of trouble and still be able to make the minimum monthly payment,” Paperno points out.

As a parent, what are your options? If you don’t have a solid credit history or aren’t in a position to help out your teen monetarily, he or she can get a secured card. These cards require you to put up your own money as a deposit, and they do charge fees, but they’re reported to the credit bureaus just like any other credit card, which makes them a useful tool for building credit. While they have their flaws, they’re good “training wheels” for a teen who might not have the fiscal discipline for a conventional credit card.

If your teen is responsible and if you’re financially stable enough to help them out if they do slip up, you have two options, says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. You can open a joint credit card on which you and your teen are both account holders, or you can add him or her to one of your existing accounts as an authorized user.

“I recommend to parents not to open a new card and co-sign but to add their child as an authorized user,” says Cunningham. “That way, you’re in charge. You can monitor the account at any time, and you can take away the privilege if you need to.”

Whichever route you choose, it’s important to talk to your teen in detail before handing over the plastic. Cunningham recommends drawing up an actual contract with a monthly spending limit, appropriate categories of spending, and possibly even limits on categories in which you think your teen might be tempted to spend more than you think they should (clothing, music downloads and so on). Spell out who pays the bill and if the teen will be responsible for their discretionary purchases.

Also spell out the consequences if they fail. Do you want to be a one-strike-you’re-out parent or a more lenient one? Cunningham points out that a young adult who goes out into the world with a so-called “thick” credit file (three or more open accounts) is better off than having no credit history, so you might want to consider the option of taking the card away for a period of time without actually closing the account.

What about who pays for any spending lapses? Do you bail them out or not? Dorothy Guzek, group manager and financial counselor at Farmington Hills, Mich.-based nonprofit debt-counseling organization GreenPath Debt Solutions, says this decision should be based on your teen’s maturity level and the nature of the infraction. (A one-time movie ticket purchase is very different from a month’s worth of pizza dinners.) It should certainly be discussed beforehand, and Guzek says it should not be a recurring action. “Bailing them out time after time won’t teach them to become financially independent,” she says.

The most important thing is to maintain a dialogue with your teens about their use of credit cards, Guzek believes. “I feel that parents should have this talk early. It really needs to happen before they leave the house for college or to move to their own place,” she says. “They need to monitor what’s going on. Once it gets out of control, it might be difficult to mentor the child about good spending habits.”

Guzek says she sees many young adults in her office, deeply in debt, who say they were never taught how to use a credit card wisely. She urges parents to start their kids off on the right foot by displaying good credit-management habits themselves.

“Young adults watch their parents, and they can pick up good habits and bad habits,” she says. “That’s something even an eight-year-old is learning.

If you need help with credit repair or wish to sign up for our credit repair services go to www.creditbureauexperts.com

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5 Common Mistakes That Can Cripple Your Credit Score

Thursday, August 19th, 2010

Have you ever been surprised when your FICO score dropped? Most likely, it’s because you made one of the five mistakes below. Most people aren’t aware of the impact some of these actions have. And what’s interesting is that it appears that the higher your FICO score, the greater the drop when you make a mistake.

#1: Closing an account
People often decide to close a credit card account for one of two reasons. One, they think they have too many cards and that closing one will increase their score. Two, their credit limit has been decreased and they decide the card is no longer useful to them. But whatever your reasons are, closing an account can lower your score.

“There’s a misconception that having too much available credit lowers your score. FICO scores don’t take this into consideration. But when you close an account, it can often raise your utilization rate and that can lower your score,” says Barry Paperno, Consumer Operations Manager for myFICO.com.

Your utilization rate is the ratio of your credit card balances to your credit limits. For instance, let’s say you have two cards and one has a zero balance and one has a $1,000 balance. If each card has a $2,000 limit, your total limit (across both cards) is $4,000. Your utilization rate is $1,000/$4,000 = .25, or 25%. Not fabulous, but not too bad.

Close the account with the zero balance and your utilization rate jumps to 50% ($1,000/$2,000). Obviously, the amount of the impact on your score will vary according to your individual circumstances, but since the utilization rate may account for almost 30% of your score, you’re FICO score will probably take a negative hit.
Trap #2: Maxing out your credit cards
Many consumers make the mistake of thinking that their credit limit is an invitation to spend until it’s gone. Now that you understand utilization rate, you probably now understand why maxing out your cards is a problem. Let’s look at our example from #1 again. If you max out your two cards, you’ll have a $4,000 balance with a $4,000 limit. It’s doesn’t take a math genius to quickly figure out that your utilization rate is now 100%.

Your FICO score will take a hit. How much? “It depends on a lot of variables, including what your FICO score was before you maxed out your cards,” says Paterno. myFICO.com recently did a comparison of how much a score drops when one individual has a FICO score of 680 and the other individual has a FICO score of 780. Maxing out credit cards was one the “missteps” they used in the comparison.

Results showed that the consumer with the 780 score experienced a 25-45 point drop and the score fell into the 735-755 range. The person with the 680 score saw only a 10-30 point drop and the score fell into the 650-670 range.

#3: Making late payments
One problem with making late payments is that, depending on the terms and conditions of your card, you might trigger the penalty APR. The other problem with a 30-day or more delinquency is that it can make your score drop like a rock. “Someone with a 780 score could experience a drop of 100 points or more with a 30-day delinquent payment. If your score is in the 680 range, expect to lose about 60-80 points,” says Paterno. Now, if this late payment stretches into collections, then expect a really big drop.

#4: Impulsively opening accounts to save 15%
This happens every holiday season, doesn’t it? Whether it’s a Labor Day sale or Black Friday, you’re standing in line in your favorite department store holding a lot of merchandise, and then the cashier tempts you with a “get 15% off if you open an account today” offer. When you open a new account, this results in a hard inquiry, which affects your score. But that’s only part of the problem.

“Typically, inquiries knock only about five points off your score. The bigger problem is opening an account with a high interest rate and putting yourself in a situation where you get behind on a payment,” says Paterno. If you’re on the bubble between having good credit and excellent credit, those five points can mean a lot. And of course, if you end up with late payments, matters deteriorate from there.

#5: Not understanding the importance of the length of credit history
This mistake often ties into the #1 mistake on this list. Sometimes when people close a card, they close one they’ve had a long time. The length of your credit history makes up 15% of your FICO score. Now, FICO scores are calculated based on the average length of time you’ve had your credit cards. The score considers both your current accounts and any closed accounts still included on your credit report. Credit bureaus typically keep account histories on your credit report for years after you close the account or pay off the loan. “If you close a card you’ve had for ten years, this can eventually bring down the average length of your credit history,” says Paterno.

If you need help with credit repair or wish to sign up for our credit repair services go to www.creditbureauexperts.com

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Credit card rate hikes reviewed, penalty fees crimped

Wednesday, June 16th, 2010

Jennifer Liberto, senior writer, On Tuesday June 15, 2010, 3:54 pm EDT

Most credit card penalties will be limited to $25, and fees for customers who don’t use their cards will be eliminated under rules released Tuesday by the Federal Reserve.

The Fed also ordered a review of all credit card interest rate hikes imposed since January 2009, including most of the record increases that came in the wake of a nationwide cutback on credit.

The rules, which implement a final set of changes that Congress passed in May 2009, take effect Aug. 22.

“The Federal Reserve’s guidelines issued today are great news for consumers,” said Rep. Carolyn Maloney, D-N.Y., one of the authors of the credit card laws.

The Fed’s rules could result in lower interest rates for consumers. Banks will be required to reconsider the reasons for hikes that kicked in over the past 18 months. They would have to reduce rates if the reasons for the increases no longer exist, and regulators will review and enforce such cuts.

Consumers will most immediately notice the new penalty fee limit of $25. Reducing penalty fees was a central provision of the credit card law, but Congress left it to the Fed to determine how to do it.

The Fed leaves room for larger penalty fees to be charged if a consumer has shown a pattern of “repeated” violations or if a card issuer can show that a higher fee reasonably offsets its own costs in dealing with the violation that spurred the penalty.

Other parts of the new rules:

Consumers won’t have to fear being charged a fee for failing to use their credit cards.

Penalty fees can’t exceed the dollar amount incurred by the consumer’s violation that spurred the fee. For example, if a customer is late making a $20 minimum payment, the fee can’t exceed $20. A consumer who exceeds her credit limit by $5 cannot be charged an over-the-limit fee of more than $5.

Consumers will no longer face multiple penalty fees, if the violation was based on a single late payment.

The provisions announced Tuesday by the Fed complement previous rules implementing the 2009 credit card law that are already in effect.

Starting in February, issuers were prohibited from hiking interest rates on existing balances as long as customers paid their bills on time. They also have to notify customers at least 45 days in advance of interest rate increases and most fee changes.

The Fed was tasked with figuring out a way to set penalty fees in a way that’s “reasonable and proportional” to the violation that caused the fee.

Consumers scored a win, since these fee caps go beyond what the Fed had suggested earlier this year in a draft. The $25 limit will mean significant savings for consumers who face median penalty fees of $39, according to data collected by the Pew Safe Credit Cards Project.

However, if a cardholder is late or over his credit limit two times within six months, issuers could hike the second penalty fee to $35, or possibly more if the issuer can justify the fee to regulators, according to the Fed rules.

Although the Fed is cracking down on penalty fees, it hasn’t addressed the interest rate hikes that are also imposed on consumers who violate the terms of their credit card agreements.

So a consumer who spends more than his credit card limit by $15 may only face a $15 fee. But that consumer could still face a permanent penalty hike on his interest rate, which would apply to any future purchases.

Still, some banking groups have concerns. Financial Services Roundtable’s senior lobbyist Scott Talbott warned that the Fed’s cap on penalty fees will limit the industry’s ability to offset the risk that credit cardholders don’t pay their bills.

“The restrictions in the rules the Fed issued will decrease the ability of the credit card industry to price for risk and the net effect will be a decrease in [credit] availability,” Talbott said.

If you need help with credit repair or wish to sign up for our credit repair services go to www.creditbureauexperts.com

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Doing a credit card chargeback, even once, can lead to blacklist.

Thursday, March 18th, 2010

Disputing a credit card charge by asking for a “chargeback” can lead to being put on a blacklist that merchants can check for customers who might try to defraud them.

Getting off the list costs $99, although the fee is waived if the customer didn’t know they were committing “friendly fraud,” said Brien Heideman, founder of BadCustomer.com, which keeps such a customer list for retailers that don’t want to get hit with costly credit chargebacks.
But until they’re denied by a merchant, either online or in a store, many shoppers probably won’t know if they’re on the blacklist and should contact BadCustomer.com to get their name off of it. Getting off the private list can be done online, and it’s a pretty hefty list, with 6 million people on it from the United States and Canada, Heideman told WalletPop in a telephone interview.

“Friendly fraud” is an intentional action taken by a customer to cheat a retailer out of money and get merchandise for free. A common example is chargebacks, where customers contest a charge on their credit card, often claiming the item was never delivered or they never bought it. When a customer issues a chargeback, the retailer is fined and could lose the cost of the actual merchandise.

Most people on it know what they’re doing when they fraudulently do a chargeback for goods they’ve bought, and have to pay a $99 fee to get off the list if they can prove it’s a one-time thing that won’t reoccur, he said.

Customer chargebacks cost retailers $11.8 billion in the U.S. last year, according to BadCustomer.com, including charges for bank fees, credit card fees, loss of merchandise and loss of customer service agent time.

“Most of the time it’s almost cheaper for a company to send the merchandise again rather than to deal with a chargeback,” Heideman said.

“The ones that are having the toughest time right now are with trial offers,” Heideman said.

For example, a business will offer a 10- to 14-day free trial, and the customer won’t return it by then, so the customer is billed and another product is shipped. The customer calls his credit card company, claiming he either never made the order or sent the product back in time, when in fact he still has the product, Heideman said.

Another sign of “friendly fraud,” he said, is a customer who won’t sign for delivery of a product, then claiming he never received it when asking for a credit card chargeback. Many credit card companies allow chargebacks to be done online.

“Typically you don’t even have to make contact with the credit card company,” Heideman said.

Disputes can include claiming the item wasn’t shipped, it was sent to the wrong address, or was stolen from the front porch. BadCustomer.com can check with the shipping company to see if the package was delivered, and can track down a customer’s IP address from their computer to confirm that they bought it online, Heideman said.

And for a legitimate customer thinking of doing a chargeback? Contact the company first for a refund. It’s a lot easier than paying $99 to get off a blacklist.

Aaron Crowe is a freelance journalist in the San Francisco Bay Area.

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Credit: Know Your Limits

Wednesday, January 20th, 2010

by Jessica Dickler
CNN Money

You may not spend much time mulling your debt-to-credit ratio, but it weighs heavily on your credit score and can determine your ability to get a loan.

Consumers know all too well that going over their credit limit can mean a nasty fee, a higher interest rate and maybe even a lower credit score.

But few people are aware that merely approaching their limit can have costly consequences as well.

That’s because your debt-to-limit ratio, or “debt utilization,” is a key component of your credit score. Your debt-to-limit ratio is calculated by dividing what you’ve spent by your total credit limit.

If you have a $5,000 limit and you’ve charged $4,000 this month, your debt-to-limit ratio is 80%, which is enough to signal to lenders that you are a high risk borrower.

As a result, lenders may increase your annual percentage rate (APR) or deny you a loan – even if you pay off your credit card balance every month and have never exceeded your limit.

About 14% of Americans use at least 50% of their available credit, according to Experian’s 2007 national score index study. But, experts recommend keeping your debt-to-limit ratio under 30%, or even under 10% if possible.

That means if your limit is $5,000, then you should aim to charge less than $500 a month.

The lower your debt-to-limit ratio, the better your credit score will be. And to that end, there are two basic ways to improve your debt utilization: raise your credit limit or lower your debt.

Raise Your Limit, Lower Your Debt

Your credit card limit is listed on your monthly bill, but it can change from one billing cycle to the next. That’s because credit card issuers can raise or lower your limit as they see fit.

But even though credit card issuers generally dictate what your limit is, consumers do have a say. You can call and request that your limit be raised, as the more available credit you have, the better your debt-to-credit ratio will be.

“If you have a good credit history your credit card issuer will up your limit, but if your history isn’t great then they can say ‘No,’ which isn’t necessarily a bad thing,” according to Bill Hardekopf, CEO of LowCards.com.

“Getting turned down for a higher credit limit may be a blessing in disguise,” Hardekopf said. Chances are it’s a signal that you should reduce your spending or pay down your credit card balances instead.

When paying down debt, it’s important to consider that your debt utilization is calculated per card and cumulatively. That means that leaving one card nearly maxed out will negate all the hard work you’ve done paying down the balances on other cards.

And a higher limit isn’t always better. “If you are a spender and the temptation is there to spend more than what you can really afford, [then a higher credit card limit] can send you into the debt spiral,” Hardekopf said.

It’s also possible that potential lenders will view a sky-high credit limit as potential debt, which can count against you if you are trying to get a mortgage or a car loan.

Ultimately, “it boils down to how you handle debt. If you handle debt responsibly, then go for a higher limit,” said Greg McBride, senior financial analyst at Bankrate.com. But, consider whether “that higher credit limit is going to represent temptation to run up additional debt.”

Ideally, you want to illustrate that you can keep your spending under control, and that means “your focus should be on paying down debt, not racking up more,” McBride said.

Pitfalls to Avoid

Signing up for new cards to boost your total available credit and make your debt utilization appear lower can work against you, experts say. In fact, opening new accounts can even lower your credit score.

“Recent credit inquiries constitute 10% of your score,” McBride said. And each new inquiry means potential points subtracted from your total.

Additionally, closing unused cards is also a bad idea.

“When you close an account the amount of ‘overall’ available credit decreases, which could cause an increase in your [debt] utilization and inadvertently lower your score,” said Deanna Templeton, director of consumer education for Credit.com.

Templeton also recommends using old credit cards periodically, just to prevent your issuer from closing them because of inactivity. “Every so often charge something small like gas or dinner, and then pay it off when you get the bill,” she said.

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Fed finalizes credit card rules, limits teen cards

Tuesday, January 12th, 2010

WASHINGTON (AFP) – The US Federal Reserve finalized new rules aimed at protecting credit card holders Tuesday that also make it difficult for anyone under the age of 21 to obtain a credit card.

As part of a series of new rules aimed at protecting consumers, the measure forbids banks from issuing a credit card to anyone under 21: unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.”

The new rules, effective February 22, also prevent lenders from unexpected increases in interest rates on card balances, and limit fees and certain types of interest calculations.

The new measures implement a law passed last year by Congress.

Fed governor Elizabeth Duke said the effort “marks an important milestone in the Federal Reserve’s efforts to ensure that consumers who rely on credit cards are treated fairly.”

“The rule bans several harmful practices and requires greater transparency in the disclosure of the terms and conditions of credit card accounts,” Duke added.

The American Bankers Association praised the new regulations.

“These rules — the most comprehensive ever seen — herald a new era for America’s credit card customers,” said Kenneth Clayton, senior vice president at the ABA.

“Many practices that frustrated customers have been eliminated, and credit card users will now benefit from greater control and clearer terms for their accounts.”

The ABA said the new law “ends confusing billing practices, instituting new rules that are easier to understand.”

Due dates will be the same every month, and interest charged on a so-called “double-cycle billing” will be completely eliminated.

The measure bans fees for payment processing — such as surcharges for paying by telephone, and requires that promotional interest rates on new cards stay valid for six months.

It forbids rate increases on existing balances unless consumers are at least 60 days late paying their bill or the initial rate was a promotional rate that has expired, and requires 45 days’ notice to raise rates.

The credit card industry argued the bill could result in a tightening of credit at a time when a credit crunch is already depressing spending amid an economic crisis.

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Tips for applying for a new credit card

Friday, December 11th, 2009

Lita Epstein, Wallet Pop
Dec 3rd 2009

While many shoppers are planning to use cash or a debit card this holiday season, some will still find they need to apply for new credit. I know many at Wallet Pop will tell you that you should just spend less, but just in case you do decide to apply for credit, do it wisely. You also may find it harder to get.

“Shopping and applying for cards isn’t as easy as it used to be,” Bill Hardekopf, CEO of Lowcards.com and author of The Credit Card Guidebook, told me by e-mail interview. “Consumers should now expect higher rates and lower credit limits. Approval is no longer a sure thing.”

If you still want to apply for a new credit card, here are a few tips to think about first:

1. Start with your credit score. Lenders make their judgment about your credit worthiness based on your credit score. A FICO score of 700 or more is considered very good; over 760 will usually qualify you for the best rates (which is up from 720 several years ago).

If your credit score is less than 640, you’ll probably land a high interest rate and limited credit options. Your credit score will also be used to determine the features of your card, such as the credit limit and balance transfer terms. If you’re surprised by your credit score, check it for errors. Correcting mistakes is the fastest way to raise a credit score.

2. Before you get a credit card, be sure you know how you’ll pay off the credit card. You need to take a hard look at your financial habits to determine what kind of credit card customer you are. Will you pay off the entire balance each month on time, or will you carry a balance? Knowing the answer will help you determine the type of card you need.

If you plan to pay off your balance each month, then pay close attention to the rewards offered. The best type of rewards cards out there are those with no annual fee and cash back rewards. Rewards are skimpier than in previous years, so expect a 1% cash back reward rather than 2% or higher.

You may also find there are reward tiers based on your spending level. If you carry a balance most months, than apply for a card with the lowest possible rate. The less you pay for interest, the more you can pay toward your balance and the faster you can pay off that card. Whatever you do, do not pay a higher rate just to get rewards.

3. Transfer your balance to a card with a lower rate. It used to be easy to get a low teaser rate for a year so you could transfer your balances, especially when 0% balance transfer were common. People even used this tactic to make money. But issuers lost money on the deal, and 0% interest transfers for 12 months are nearly impossible to find unless you have a credit score that’s over 760.

Balance transfer fees have also jumped from 3% to 4% and in some cases even 5%, so don’t expect to play the transfer game as easily as you once did. If you’re thinking of doing a balance transfer or applying for a new card to get a balance transfer, Hardekopf has a recommendation: “Before you begin the process of transferring your balance to another card, contact your issuer and ask them to lower your current rate. This doesn’t happen as often as it used to, but it doesn’t hurt to ask.”

4. Pick one card and apply for it. Compare three or four cards by studying the terms and conditions of these cards. Then select the best one and submit an application. “Limit the number of applications you submit because each application is recorded as a credit inquiry on your credit report,” Hardekopf informed us. “Multiple applications are a red flag that can lower your credit score because people actively seeking credit are typically a higher risk to lenders than people who are not seeking credit.”

5. Avoid store cards. Don’t apply for a store card just because the store gives you an immediate discount on your purchase. The rates are usually much higher than an average card, and if you don’t pay off the balance in full the first month, you could pay much more in interest than the money you saved.

6. Pay attention to your rate. Most rates are now variable, and they’ll increase in the future as the Federal Reserve raises the prime rate.

The bottom line is, only apply for credit if you really need it. Think about others ways you can work with your existing cards before seeking new credit. Most consumers carry too many credit cards which only lead to further temptations to spend.

If you need help with credit repair or wish to sign up for our credit repair services go to www.creditbureauexperts.com

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Credit-card rates up before new law

Friday, October 30th, 2009

NEW YORK (AP) — Have you checked the interest rates on your credit cards lately? Odds are they’re going way up.

That’s because credit-card companies are rushing to raise rates and tack on extra fees ahead of a law slated to take effect Feb. 22 that is supposed to limit such moves in the future. In some cases, rates are doubling to as high as 30 percent or more, even for people who pay their bills on time.

The current maneuvering by the card companies is serving up another blow to American consumers who are already struggling with their finances. U.S. lawmakers let that happen by giving the card companies nine months to prepare for the rules.

“The delay allowed them to restock their arsenal with weapons,” said Lloyd Constantine, an attorney who has spent 22 years litigating cases tied to the credit-card industry and is the author of the new book “Priceless: The Case that Brought Down The Visa/Mastercard Bank Cartel.”

It’s hardly surprising that banks and other credit-card issuers would use a grace period afforded to them by Congress to their advantage.

The changes required under the Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, could go a long way to stop deceptive practices in the card industry. But before that happens, card issuers are grabbing what they can from the millions of Americans who are their customers.

Constantine is one of them. The interest rate on his Chase Visa card doubled to 17 percent earlier this month. He got a notice announcing the change and couldn’t figure out why. Constantine, who has a high net worth, rarely uses the card, and when he does he pays his bill on time.

Come late February, the CARD Act will prohibit lenders from raising rates on outstanding card balances. In other words, if you have a balance of $1,000 and the company wants to change your rate, it only applies to new purchases. It wouldn’t be retroactive on old debt.

Card issuers also won’t be able to change the terms of a contract so long as the cardholder makes a minimum payment on time.

The rules ban a practice known as “universal default.” That’s where lenders raise a cardholder’s interest rates when that person misses payments to other creditors or takes on new debt like a mortgage or a car loan.

The card companies lobbied Congress hard for the delay. They argued they needed the time to overhaul their computer systems, craft new sales’ pitches and rewrite disclosure documents to be sent to customers.

While all that may be true, the facts indicate that they are using the time for something else.

Even though interest rates set by the Federal Reserve are at historic lows — which has let banks and other issuers borrow cheaply — cards have become more costly for Americans, according to research released Wednesday from the Pew Charitable Trusts’ Safe Credit Cards Project.

The nonprofit organization found that credit-card companies boosted interest rates on new cards by an average of 20 percent from January to July. That data doesn’t include increases over the last four months when many lenders stepped up their pace of raising rates and fees.

The study reviewed nearly 400 cards offered by the largest 12 U.S. card issuers. It found nearly all contracts still allow banks to raise interest rates on outstanding balances. Card companies also have added or raised fees for things like balance transfers, cash advances and overdraft protection.

Representatives of the card business say the increases reflect the realities of the recession, not an attempt to gouge customers. The weak economy means a greater risk that all cardholders could potentially default, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group.

Banks and other card issuers have been seeing more late payments, and industry forecasts call for at least 10 percent of cardholders to default on their unpaid bills.

Bank of America’s annualized default rate in September was 14.25 percent on its credit cards, while payments more than 30 days past due were about 7.5 percent, according to LowCards.com. Capital One’s annualized default rate in September neared 10 percent, while 5.38 percent of cardholders were delinquent.

Now U.S. lawmakers are waking up to what they let the card companies do.

The House Financial Services Committee recently introduced legislation to move up the effective date for the credit card law from February to Dec. 1. But Federal Reserve Chairman Ben Bernanke, while acknowledging that change would benefit consumers, rejected the idea. He said it would force the Fed to implement provisions of the new law without adequate public comment and could lead to “unintended consequences.”

There have been bills introduced in both the House and Senate to immediately freeze interest rates on existing balances for the estimated 700 million credit cards in circulation.

“We worked long and hard to enact the safeguards included in the Credit CARD Act,” Sen. Chris Dodd, a Democrat from Connecticut who had introduced the bill in 2004, 2005 and 2008 before successfully passing last spring, said in a statement. “But as soon as it was signed into law, credit card companies were looking for ways to get around the protections this Congress and the American people demanded.”

His spokesman declined further comment about why Congress is being so aggressive with its actions now. Too bad they couldn’t see this coming a lot earlier.

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Credit Card Mistakes.Grade Yours on a 10-Point Scale

Thursday, October 29th, 2009

by Erin Peterson
Wednesday, October 21, 2009

Grade yours on a 10-point scale

Nobody’s perfect. When it comes to our financial lives, we’ve all done things we later regretted — whether it’s getting slapped with a $3 fee for using an out-of-network ATM or going on a Las Vegas bender and losing the house on an overly aggressive poker bet.

The key is to understand the scale of the transgression. With credit card blunders, that’s no easy task — is it worse to take a cash advance or to pay a bill a day or two late? Experts graded a range of credit card mistakes on a scale from 1 (losing a few bucks to a cash machine) to 10 (losing the house). Find out which worry the pros most — and which may (almost) get a free pass.

Paying Late
How bad is it? 6
The details: Credit card companies are notoriously prickly about late payments — even a payment that’s late by a few minutes can pile up fees, interest charges and other penalties. Depending on how late the payment is, your card issuer may also report the problem to any of the credit bureaus, which can wreak havoc on your credit score. The good news, says Stacy Francis, president of Francis Financial, is that the error may be reversible. “You do have the option of giving the credit card company a call and asking them not to report it,” she says. “If you’ve generally been an on-time payer, they may waive the fees and not report it.”

Paying Only the Minimum on Your Card
How bad is it? 4
The details: Credit card companies love it when you pay off your debt slowly, but you should loathe it. It won’t necessarily affect your credit score, but that doesn’t mean it’s a good practice. Sending in only the minimum payment “is definitely going to keep you in debt longer, and you’re going to pay a heck of a lot more in interest,” says Francis. “You may be paying twice as much — or more — as you would by paying in cash.”

Buying On a Card Just For Rewards
How bad is it? 1
The details: If you’re paying off your balance on time and in full, using your cards to grab extra rewards isn’t necessarily a bad plan, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “You can win the rewards card game if you know how to play,” she says. “But you do have to know yourself.” Because most people spend more when they’re paying with plastic than with cash, be cautious and recognize when you’re buying something only because plastic makes the purchase painless.

Missing a Payment
How bad is it? 9
The details: Not only are you going to be slammed with fees, interest charges and other penalties when you miss a payment, but you’ll likely see a rise in your interest rates. If that weren’t bad enough, you’ll also have to contend with a significant hit to your credit report — about 35 percent of your credit score is based on your ability to pay bills on time. As a result, you’ll pay more when you try to get a loan. “Missing a payment has both immediate and long-term consequences,” says Clarky Davis, Care One Debt Relief’s Debt Diva. “You may be dealing with the fallout for years.”

Having Too Many Cards
How bad is it? 6
The details: If you’re the type to apply for a card just so you can grab a discount on clothes or other merchandise, you likely have a huge stack of cards in your purse or wallet. You’re probably not getting enough value from the card to make it worth the high interest rates or additional complications from additional bills and junk cluttering your mailbox — and you’re increasing the likelihood that a payment slips through the cracks or that you’ll be a victim of identity theft. “There’s rarely a good reason to get a new card if you’ve already got a general-purpose card, a rewards card and a low interest card,” says Cunningham.

Maxing Out a Card
How bad is it? 7
The details: Maxing out a card can have a serious impact on your credit score, since about 30 percent of your score is based on “credit utilization” — the amount of credit you’ve used relative to the amount you have available. More important, says Davis, is the fact that it likely signifies a distressing trend in your personal finances. “Maxing out a card may not have an immediate financial pull, but it’s a sign that you’re not budgeting or spending your money wisely,” she says. “It means you don’t have enough saved up to cover unexpected expenses.”

Playing the Balance Transfer Game
How bad is it? 5
The details: Moving your debt from a high-interest card to a low-interest card with a balance transfer isn’t as smart a move as you think, says Francis. “About 15 percent of your credit score is affected by your recent credit applications,” she notes. Pile up a few transfers and your score will take a hit. “Credit bureaus don’t (differentiate) that these cards are for the same [debt], they just see it as you getting pre-approved for more and more credit.” Add in the fees that generally accompany balance transfers and you’re not gaming the system — you’re getting hammered by it.

Debt Settlement Plans
How bad is it? 9.5
The details: If you’re overwhelmed by debt, negotiating down your balance with the credit card company (also called debt settlement) sometimes helps you pay pennies on the dollar on your debt — but you’ll pay a steep price. First, there’s the tax hit you’ll take for the amount of debt that’s forgiven — it will count as income during that tax year. And your credit score will be decimated, so don’t expect you’ll be able to take out a loan soon after consolidation. Next to bankruptcy, debt settlement “is the most negative thing you can do to your credit score,” says Francis.

Getting a Cash Advance?
How bad is it? 8
The details: It may feel like free money, but the truth is that it’s anything but: You’ll likely have a fee associated with the advance, and you’ll likely pay a higher interest rate than you would by using the card associated with it. “You also have no grace period,” notes Cunningham. “You’ll start accruing interest from the moment you get the money.” While these are all dangerous attributes in and of themselves, they’re not the worst part, says Cunningham. “When you start using cash advances, you have to understand why you’re using them as they’re likely symptomatic of a deep financial problem.”

Using a Card in a Pinch
How bad is it? 2
The details: If the fridge went on the fritz or the furnace conked out in mid-January, you might not have the means to fund its immediate replacement. Putting the bill on a credit card — and paying it off quickly over the course of a few months — is a pretty solid option, says Cunningham. “You don’t want something like that to become standard operating procedure,” says Cunningham. “But it’s OK to have a balance on a card for a few months when you’re going through a rough patch in your financial life. Just make sure it’s on a card without an annual fee or with a very low annual fee.”

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Credit Card Industry Changes

Sunday, September 6th, 2009

Bloomberg.com reported that debt collection costs also fell, from 10 percent in May to 9.9 percent in June. While not a huge reduction, it signals that the record charge-offs and delinquencies that have wounded the credit card industry over the past 18 months might be easing up.

With unemployment being so high and the foreclosure forecast looking unfavorable, many people are asking how it is possible for delinquencies to be going down.

One factor may be President Barack Obama’s much-hyped credit card bill, which limits certain billing practices and effectively prevents credit card companies from irresponsibly offering low-rate credit only to hike fees and interest rates later. Before the legislation takes effect next year, credit card companies have been combing through their existing customer base to weed out the riskiest borrowers. As part of this process, some issuers, in an effort to tidy up their books, have been more willing to settle outstanding debts with consumers.

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