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Credit


Banks in the United States are undergoing a major transformation in credit card technology, a process similar to the one Europe successfully completed several years ago. Despite the technological advances in mobile payment that have already rendered plastic cards obsolete, the financial industry wants to replace every magnetic stripe credit card in every wallet.

When I received a business credit card in the mail last week, in an envelope anyone paying attention would recognize as a new credit card delivery, it featured a new security measure: a chip. The embedded computer chip stores information, like the magnetic strike, that ties the card to my identity and my bank account (and in this case, my business credit card account).

Credit card issuers are going through the process of replacing magnetic stripe credit cards with embedded chip cards because they are supposedly less prone to fraud. For instance, there’s a chance that using a chipped credit card would have prevented a different credit card number of mine from being stolen a few weeks ago and used in places which I had never visited.

But are these cards really less prone to fraud? No. Is the banking industry wasting millions of dollars replacing credit cards before they expire? Yes. Is the banking industry using this as a way to earn more money from retailers? Yes. Will the credit card issuers raise consumers’ fees to cover the increased cost of producing and distributing these cards? Probably.

Here’s why these chip-embedded credit cards are a waste of time, money, and effort for the industry and offer no more protection for the consumer.

1. The new cards still contain a magnetic stripe. If the magnetic stripe makes it easy for cards to be duplicated, the only way to eliminate that vulnerability is to eliminate the stripe! But without the magnetic stripe, billions of card readers currently in use by merchants would be rendered useless.

The banking industry wants retailers to “upgrade” all card readers to those that read chips at a significant cost to the retailers. But stripe readers will still be around for a while.

2. The new cards don’t require a PIN. In Europe, chip-and-PIN cards have a better chance of reducing fraud, because they can only be used with knowledge of a secret code. Because PIN transactions in the United States are less profitable for credit card issuers than signature transactions, issuers will stick with the more profitable signature requirement.

A PIN involves a second layer of protection, while a signature provides no protection at all. Signatures aren’t checked when credit card transactions are processed.

3. The credit card numbers are still stored digitally. Regardless of the card type — chip or magnetic stripe — all credit card numbers in the United States are fifteen or sixteen digits long with a simple algorithm to determine which numbers are valid and which are invalid. These numbers are stored in a database or a computer’s memory the same way.

If a hacker is able to access a database of credit card numbers, those customers are vulnerable regardless of the type of credit card they own.

4. Chip duplicators already exist. These devices may be more expensive than credit card duplicators with magnetic stripe technology, but they’ve been in use in Europe for as long as chip-and-PIN credit cards have been around. If a hacker does retrieve your credit card number from a database, he or she can print a credit card with a chip that duplicates that card for in-person use.

5. Fraud is moving online. Even with a chip, when you want to use your credit card for a transaction over the internet, you’ll still need to type your card number into a website. Companies that do not protect those databases (or for some reason accept credit card information over an unencrypted connection) will allow your credit card number to be exposed regardless of whether the physical credit card has a magnetic stripe or a chip.

Perhaps the chip-embedded credit card is a small piece of overall “security theater.” Consumers will feel more protected because their plastic contains something new and novel, but there’s no real improvement for the avoidance of fraud. In fact, by feeling more confident about using plastic, some consumers may feel emboldened to use the credit card in a situation where they might not be safe.

The production and distribution of credit cards with the chip seems to be nothing but a bridge between today’s current method for payments and newer card-less technology that is all ready becoming more widespread. Mobile payments like Apple Pay represent the future, and plastic with or without a chip is getting in the way. The obstacle here is that the banking industry controls the plastic, and outside companies control mobile payment schemes.

To eliminate fraud in the payments industry or to reduce it by a significant amount, the industry must eliminate static credit card numbers. Some banks all ready offer software that will address this issue for online purchases. Consumers can click a button to receive a single-use credit card number that they can use for a transaction of a certain amount, and after that transaction is processed, the credit card number will no longer be valid.

Other technology replaces credit card numbers or accompanies the numbers with a token — another code, but secure and unknown to the purchaser and the retailer — which must be verified through a separate system to confirm the transaction is valid. This token is unique for every transaction.

The unique identifier, whether a separate credit card number for each transaction or a token, is the only way to significantly reduce credit card fraud. Until these are required for every transaction and the magnetic stripe is eliminated, fraud problems will continue to grow.

The chip-embedded card is no solution. When Europe switched to a chip-and-PIN credit card, which in theory should be safer than a card with a chip that doesn’t require a PIN like these in the process of being released in the United States, fraud increased.

This is not a solution. This is a way for banks to force retailers to buy expensive equipment. The financial industry wants to shift the burden of fraud to the retailers. Today, banks pay for unauthorized use of a stolen credit card or credit card number. The companies are now telling retailers that if they don’t upgrade their devices to handle chip-embedded credit cards, those retailers will be responsible for paying for fraudulent transactions — even though the chip does little to prevent fraud.

In addition, retailers pay higher fees per transaction for processing chip-embedded cards, just like they pay higher fees for processing cash back rewards cards and other premium credit cards over basic credit cards and debit cards with PINs.

Well, there’s always cash. Until you want to buy something online, anyway.

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This is a guest article by Neal Frankle. Neal is a Certified Financial Planner® in Los Angeles. He is also the senior editor for WealthPilgrim.com, MCMHA.org and CreditPilgrim.com.

Your credit report is like a financial passport. If it’s clean you’ll find the doors to the financial world wide open. Your credit journey will be carefree and wonderful. But if you have blotches on your record, the credit border control is going to make it difficult and expensive for you to go anywhere.

You probably already know this. But what you may not know is that your credit report may contain significant errors. According to the most recent Federal Trade Commission study [pdf], more than 20% of all credit reports do. And if you are that 1 in 5 person who has a botched credit report, it means that you could be penalized for something you didn’t even do.

To make matters worse, once you identify credit report errors, it can be difficult to correct them. That’s because the main players (credit bureaus and creditors) don’t like to be bothered. Fortunately, there are three tools you can use to get these organizations to clean up their sloppy work. Let’s jump right into it:

1. Blaze your own path.

There is a well-defined route to clean up credit report errors but you should not follow it blindly. The process the credit bureau suggest is to inform them of the problem first. Supposedly, the bureau will then work with the creditor to fix the problem.

In theory, this sounds great but in practice this fails miserably. Here’s why. Once you dispute an item on your credit report to the credit bureau, they are only required to ask the creditor to verify the charge and they have 30 days to do it. As long as the creditor comes back to the credit bureau and tells them the charge is correct, the bureau has complied with the law.

From their standpoint, the case is closed. This is great for the clerks who work at the credit bureaus -– they get to go back to their donuts and coffee. You on the other hand are still left holding the bag –- and paying the price.

As a result of this ineffective loop, many people just give up trying to correct credit report errors. It’s understandable; people just get tired of the run around. But you don’t have to put up with being led on a wild goose chase and you don’t have to give up either.

Instead, you should simultaneously contact the creditor and the bureau to demand the false negative item be removed. Dispute the negative credit item with both parties at once rather than waste time with the bureau before contacting your creditor.

While just about everything you read tells you to go through the bureau first, there is absolutely no reason for doing so. If you go directly to the creditor you can force them to prove your dispute is wrong. You don’t have the kind of firepower with the bureau friend.

2. Exercise your legal rights.

By law, all negative items must be verifiable, accurate and complete. If they fail any of these tests, the bureau must remove them. Despite this being the law, many bureaus simply don’t comply. So the best way to force them to play by the rules is to let them know you’ve read the rule book.

There are four main laws that protect consumers from having bogus information reported on their credit reports. These are Fair Credit Reporting Act, Fair Credit Billing Act, Truth in Lending Act and the Fair Debt Collection Practices Act. These laws are written in straight-forward language and they are pretty easy to understand. It’s in your interest to spend 10 minutes and familiarize yourself with these laws. That’s all it will take.

In summary, these regulations require the credit bureaus and creditors to investigate if you dispute a negative item on your credit report. If these organizations still believe the negative information is correct, they have to send you proof if you request it. These laws spell out other protections and rights you have as a consumer. My suggestion is to familiarize yourself with these stipulations and reference them when you contact the bureau and creditors. This will let them know they are dealing with a serious person.

3. Sue the creditor.

If a creditor won’t ask the bureau to remove an item that by all rights should be removed, don’t hesitate to sue them in small claims court. This is an easy and inexpensive process for you but a complete pain in the rear for the creditors. Perfect.

You see, in most states, lawyers aren’t allowed in small claims court and that means you have the advantage. All you have to do is follow the small claims court process carefully and have the right people served at the creditor’s business.

In many cases, this alone will bring them to their senses. It’s usually not worth the creditor’s trouble to go to court so this move usually wakes them up.

The credit repair process is skewed in favor of the credit bureaus and creditors. But you can disrupt their advantage and get mistakes wiped off your credit report by going directly to creditors simultaneously, reading up on the laws which protect consumers and suing the creditor to force them to do the right thing.

Have you ever been frustrated by the process of fixing credit report errors? What was your experience?

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Since the credit crunch in the midst of the latest recession, credit card solicitations have seen a significant increase. Unless you’ve opted out, and good luck with that, you’re probably getting junk mail from credit card issuers with invitations to apply for the latest credit card offers.

Don’t get too excited, especially if you have bad credit and are seeing these invitations for the first time. The letter might say you’re pre-approved, but all that means is that you are pre-approved to apply. It’s highly rare that an issuer will run your credit and then send you an invitation to apply. In fact, it’s nearly impossible.

Even if you’re at a bank branch like Wells Fargo and Chase, they could be looking at your account on their computer, and they’ll “notice” you can apply for a new credit card. Even in this case, you need to go through an approval process and could be declined if your credit score isn’t high enough.

Before you waste your time, even if you have good credit, ask yourself these questions before applying for a new credit card.

1. Do I already have enough credit available?

If you already have credit cards, add up your limits. You may all ready have all the credit you need, and if you manage your credit wisely across those cards, you may not need another card.

That being said, having — but not using — more available credit can increase your credit score. Your credit utilization ratio will be more favorable if you maintain the same level of balances on your cards overall while increasing available credit. The same effect, however, can be accomplished by negotiating a higher credit limit with one of your existing cards.

And that approach may be better, because when you do apply for a new credit card, you allow the issuer to do a “hard pull” on your credit, which may negatively affect your credit score. Asking for a higher credit limit on an existing card may also initiate a hard pull, but there’s a chance that it won’t.

Here’s what Capital One says about the process of asking for a credit limit increase:

When you request a credit line increase online or in our automated phone system, our review to determine your eligibility will not impact your credit score. To check your eligibility for an increase, we use the information that we normally receive from the credit bureaus each month. This does not generate an additional inquiry.

If you are unsure, call customer service before requesting an increase.

2. How is my credit score?

It’s a good idea to know two things before you apply for a credit card offer. First, know whether the card is targeted to consumers with excellent credit, good credit, or bad credit. Additionally, know the category in which your credit scores place you. In some cases, if you apply for a card for consumers with excellent credit but you do not have a high enough credit score, the issuer will offer a different version of the card to you, with different interest rates, a low credit limit, or reduced benefits.

In looking at a credit card application recently, I saw a declaimer that explained that the application’s terms pertained to the Visa Signature version of the card, a variety of the card with the most benefits. If the application were not to be approved for the Visa Signature version, the issuer might offer a regular Visa.

The issuers see this “bait and switch” as a better alternative than flatly declining the application, because this way the issuer can steer the customer into a credit card product that is priced according to the customer’s risk category.

Check your credit score before applying for new credit, so you don’t face any surprises. I just use Credit Karma to check my scores from TransUnion and Equifax. This may not be exactly the same score the banks use — usually a FICO score from one of the three credit bureaus — but the exact number isn’t as important as the range. If you check all of your credit reports on a regular basis, and all reports are generally the same, your different scores shouldn’t have much variation.

3. Am I highly disciplined with my spending?

On average, consumers tend to spend more with plastic in their wallet or more electronically than with cash. This is a subconscious effect, so you may not even be aware that it is happening. So unless you are in the habit of conscious spending and tracking your expenses, you may find a new credit card will cause you financial distress in the long run.

Credit cards with rewards are best for people who pay off their entire credit card bill on time every month. If you are disciplined, you might be able to make those cash back rewards or airline miles work for you. Or you may benefit from growing a credit profile with a secured credit card, but again, only with disciplined spending habits.

4. Are the rewards affecting my decision?

Cash back rewards can be a dangerous incentive, and many people believe they have the “hacking skills” necessary to maximize their profits from cards. I’ve used cash back credit cards for a long time while tracking my spending, and I’ve switched to an airline miles card for my primary spending, but I’m not an expert rewards hacker. I don’t spend the effort to buy cash-like products to accrue a large amount of benefits without really spending money.

Credit card issuers know how a small percentage of people use back doors. For the most part, they allow it, but every once in a while, they cut benefits or change the rules, usually without any notice to consumers, and people need to change their approach. Once again, this is a legal bait-and-switch tactic. Entice and attract customers with rewards, and change the value or operation of those rewards at a later date — while the consumer continues using the card as much as possible (generating income for the issuers) to reap what little rewards the issuers offer.

5. Am I desperate?

If you have bad credit, living a middle class life can be frustrating. You’ll have difficulty buying a car without saving up first, and if you want that car to be reliable, you’ll need a lot of money.

You will have difficulty buying a home because purchasing a house without a mortgage is largely unthinkable, especially if you need a house that fits a family. It can be done, of course, usually after years of saving, but that needs to be weighed against quality of life issues.

One reason to apply for a credit card, specifically a secured credit card, is to build a good credit history. It’s easier to qualify for a secured credit card, and if you have bad credit, it’s probably your only option. Many times, secured cards, especially those that are offered through “pre-approved” application mailings, come with annual fees and high interest rates.

That’s the world people with bad credit live in, even if their bad credit is due to no fault of their own, like a deadbeat ex-spouse, a parent who used your name and Social Security number without your knowledge, or an accident not covered by insurance. I’ve had friends with personal experience in all three cases.

Being approved for the right card, and operating that credit card with good behavior like spending only what you can afford to pay off from savings within a month, can help get you on the path for solid financial footing in the future.

Do not apply for a new credit card without self-reflection that involves the above five questions. Credit cards are tools that can help you financially, but if you don’t consider the consequences and how you fit in the relationship between issuer and consumer, you could end up damaging your future in a short amount of time.

It could take the rest of your life to recover from bad financial mistakes involving too much credit, if you recover at all.

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Cash back credit cards can help consumers practice responsible spending while earning a little extra for their efforts when used properly. The days of earning 5% cash back for credit card purchases may be nothing but a memory, but the smart use of credit cards can still be profitable for diligent spenders. You may be able to find some credit cards offering a high level of cash back in certain spending categories, but these are often subject to maximums.

Most of today’s better cash back credit cards offer 1% to 2% cash back on purchases. However, if you look hard enough, you’ll find a number of credit cards with higher cash rebates than just 1%. This article lists a selection of cash back credit cards you can find today, and I update the article when there is new information to share.

Keep in mind that in order to make credit card with rewards programs worthwhile, you must avoid interest charges and late fees by paying your bill on time and in full every single month.

Editor’s choice

Chase Freedom. You may want to check out this offer, Chase is offering a $100 bonus for new cardmembers. You can earn this bonus after spending only $500 on purchases within the first three months of owning the card. You can earn an additional $25 cash back bonus by adding an authorized user to your credit card account and by making a purchase within this same 3-month period.

Besides these bonuses, Chase Freedom offers 5% cash back between April 1 – June 30, 2015 on up to $1,500 in combined purchases at restaurants, Bed Bath & Beyond®, H&M®, and Overstock.com®. Keep in mind only the first $1,500 spent in combined purchases qualifies for the 5% cash back rate. All other purchases — purchases in other categories or purchases in these stores and restaurants beyond $1,500 from April through June — earn 1% cash back.

So while the most you can earn from the 5% bonus cash back rate is $75, your cash back at the 1% rate is unlimited. Chase Freedom carries no annual fee.

Other cards

Read the full article →

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