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Some Credit CARD Rules Happen Earlier than Others

by Smithee on August 14, 2009

in Credit

When the Credit CARD act passed earlier this year, we weren’t expecting to see many changes until February 2010, unless taken voluntarily by individual companies.

Thankfully (for me, anyway, since I have a personal vendetta against many aspects of credit cards, admittedly due in part to my own foolishness), some of the rules described in the law were designed to go into effect earlier than others. As the Wall Street Journal reports:

Credit card issuers, starting next week, will be required to give consumers 45 days’ notice before raising their interest rate or making other significant changes to a card plan’s terms.

I don’t see this as a punishment, or a blow to capitalism in any way. I think it levels the playing field, assuming life is a competition between a consumer and the huge corporations who do everything they can to maximize profits.

Furthermore:

Issuers also must begin sending bills 21 days before payment is due.

In related news, Discover and American Express are getting rid of fees for exceeding your credit limit. A part of the upcoming Credit CARD rules also has something to say about those fees:

The law doesn’t require issuers to eliminate over-limit fees, but it will prohibit them from imposing these charges unless consumers say they want the ability to exceed their credit line.

Once again, I find that totally fair, and I think it’s a shame that we had to have the legislature step in and finally put a stop to such offensive practices.

New Credit Card Rules To Take Effect Next Week , Jessica Holzer, Dow Jones Newswires, August 13, 2009

Discover, American Express end fees for exceeding limit, Kathy Chu, USA Today, August 11, 2009

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Credit Card Use Increases Prices for Everyone

by Flexo on August 10, 2009

in Credit

I use a total of three credit cards. The first is a card issued by Citibank that offers a rounded set of cash back rewards, my alternate is a Bank of America Visa Signature card, and for business expenses I use an American Express Blue Cash for Business card. But I don’t pay interest fees because I don’t carry a balance — I only spend what I can pay off before the due date.

For a conscientious consumer, there are a number of reasons to use a credit card for as many expenses as possible.

  • You can often automate regular expenses like cable and electricity. Your accounts are automatically charged rather than opening yourself to forgetting to send a check.
  • Credit card statements provide accurate records of your spending. Cash spending often falls under the radar.
  • When you pay for most expenses with a credit card, you do not have to carry as much cash around with you.
  • You are not liable for fraudulent charges on your credit card.
  • Many credit card companies offer rewards like cash back for their use.

Last year, I decided to reduce my credit card spending to practically zero while paying for as much as possible with cash. After a couple of months, I found that my level of spending did not significantly decrease but my level of accuracy in tracking my expenses did decrease. Sometimes, you can’t receive a receipt and it requires time and effort to track these expenses. There are studies that show people tend to spend less when they use cash rather than credit cards, but for people whose spending is already stripped down or optimized, there is no significant difference.

The real problem with credit cards is hidden. I first experienced this first-hand when I worked for a non-profit organization almost a decade ago. Somehow I inherited responsibility of managing the organization’s website, which wasn’t too far-fetched considering I had been running websites for several years at that point and it was a small company. The website included an online store, my first exposure with e-commerce from the management side. Our merchant agreement was with a monster of payment gateway services, Authorize.net. We were paying a third party to manage our store in addition to the merchant account.

I redesigned the store to be managed through what was called Yahoo! Store at the time. It was significantly less expensive and rather than dealing with an unresponsive third party, we managed the store from the office. But I had an interesting inside look at the cost of being a merchant.

It’s expensive to accept credit cards. This cost has to be built into the price of the products — for all customers, even those who pay cash — to ensure a modest profit. Per most merchant agreements, retailers are not allowed to charge a premium for credit card usage. (Some gas stations play fast and loose with these rules by offering what they call a cash discount.)

These fees make it possible for credit card companies to offer rewards even to those customers who pay their bills in full each month. Customers like me feel they are beating the system by earning rewards without paying interest or late fees, but credit card companies have the last laugh; our fervent use of credit cards to earn rewards simply increases their income from the fees charged to merchants for every transaction.

So widespread use of credit cards, with the high fees charged to merchants, increase the cost of goods — all goods — for everyone.

But what possible solutions are there?

We could encourage people to stop using credit cards. I think Dave Ramsey is one of the most influential people who has tried this approach. It has worked well on the individual level, but even if all of his followers were to stop using credit cards, it would not make a dent on the industry. Higher prices due to widespread use of credit cards is something we just have to deal with. Visa, Mastercard, and the others have too much power over retailers, and unless that changes, everyone pays the price for credit cards.

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Answering Mail: Using Debit Cards as Credit Cards

by Flexo on August 6, 2009

in Credit

Every so often I address questions and comments I receive via email or Twitter. If you have a question, please contact me using the form on this page. I try to respond to everyone, but it might take a while before I read every email I receive.

From A. Parker:

What is the difference between the options when a cashier asks you whether you would like to use your debit card as “credit” or “debit?”

Merchants often pay the middlemen between them and banks less for “debit” transactions, which generally require you to enter a PIN. You will likely see merchants, if they show favor between “debit” and “credit” transactions, lead a customer towards “debit.” To use a debit card as “credit,” you are not actually using it like a credit card. Your bank account will still be debited immediately, overnight, or on the next business day. In most cases, you will be required to sign for the transaction rather than entering your PIN, but signature-less credit card transactions are increasingly common.

According to Visa, using a debit card as “credit” helps to ensure you’ll receive the credit card network’s protections like “Zero Liability.” This also ensures that Visa receives a bigger chunk of the merchant’s money.

If you have questions, let us know. You can email your questions directly to me (or to Smithee, Jeff, or Tom) or leave your questions in the comments area.

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OCC Requiring Credit Cards to Report all Interest Rate Increases in 2009

by Flexo on August 5, 2009

in Credit

The Office of the Comptroller of the Currency (OCC), a governmental regulatory organization feeling the pressure with the White House proposing replacing many of their duties with a new consumer-oriented regulatory body, has sent out a warning to the CEOs of all national banks. The Credit CARD Act of 2009 requires credit card issuers who raise a customer’s interest rate to abide by a number of regulations.

These regulations, such as the requirement to reassess the rates for anyone whose rate increased since January 1, 2009 and for the bank to provide a specific reason for any rate increase, don’t take effect until August 10, 2010. The OCC’s warning is designed to remind credit card issuers that although the rules don’t change until a year from now, they will be in effect for any customer who has been effected since January 1, 2009 — before the Act became a law. The banks will need to maintain these records so they will be available when the regulators come calling next year.

Read the OCC’s letter to CEOs of national banks.

Unfortunately, I am unaware whether my credit cards have increased their interest rates. It has been a long time since I’ve used a credit card to pay for something I could not pay back by the date the credit card payment was due. But I consider myself lucky and thankful to be in that position.

Has your interest rate increased this year?

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FICO Suing the Credit Bureaus Over VantageScore

by Flexo on July 29, 2009

in Credit

Fair Isaac, the company that created and owns what is generally known as your credit score, is suing Experian and TransUnion, two of the three credit reporting bureaus, for creating a competing product that blurs the line between the “real” credit score and the others. The third credit reporting bureau, Equifax, agreed to settle with Fair Isaac. Fair Isaac uses data from the three bureaus to determine the main credit score used by lenders, security companies, employers, landlords, and many others. This is the FICO score. Fair Isaac has also been developing a new and improved score, FICO 08, used less frequently.

After years of selling their own credit scores to customers — “FAKO” scores — the credit bureaus worked together to create VantageScore, a product to compete with the FICO score. The bureaus claim the VantageScore is more accurate for determining the credit risk of an individual, but Fair Isaac believes the credit bureaus have marketed the VantageScore as if it were the “official” FICO score and the VantageScore infringes on Fair Isaac’s copyright.

There is always an advantage to having competition in the marketplace, but in this case, competition and the lack of clear marketing creates confusion. An individual’s credit score can vary wildly from one company’s calculation to another. It’s also important for consumers to know exactly what they are buying, or even accessing for free.

Even with CreditKarma, which promises to provide your real credit score for free thanks to the support provided by advertising, there is no indication on the website to explain which credit score you are receiving. It is my understanding that CreditKarma receives the score from TransUnion, but it is unlikely they provide the FICO score used by the vast majority of lenders. If it were, CreditKarma would be advertising the fact that you can receive your FICO score for free.

Fair Isaac wants customers to go directly through Fair Issac, and only Fair Isaac, to obtain your FICO credit score. Through myFICO, Fair Isaac charges $15.95 for the “standard” FICO score, and they want to stop credit bureaus from selling or offering products that are confusingly similar to the FICO score.

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Variable Rate Loophole in the Credit CARD Act

by Smithee on July 14, 2009

in Credit

I’m still looking for a second news source to back this up, but the circumstantial evidence is strong. We got a notice to our “tips” e-mail address about a loophole in the recently-passed Credit CARD Act of 2009, namely:

The law requires credit card companies to give 45 days notice of a rate increase, but only if the card has a fixed rate. The law also requires rates to stay the same for one year after a new account is open, but only for fixed rates.

And since credit card issuers are proactively punishing customers as a result of new legislation which hasn’t taken effect yet, they’ve also decided to start changing fixed-rate cards to variable-rate cards. Simply switching the rate type will enable the banks to raise rates whenever they want, again.

With a variable rate, rates generally rise as interest rates rise, and fall in a declining-rate environment. With rates already near a bottom and expected to rise, most consumers probably won’t see their rates fall further.

Not all customers are being affected, but Bank of America, Chase and Discover have all announced this change for some of their customers.

With some of the banks, you can opt out of the change, which of course comes with a requirement to close the account. The last time our readers encountered this widespread kind of change, they had a surprising amount of luck getting their original terms back by calling and talking to the right people, in the right way. Hopefully many of you can manage the same thing this time. Let us know in the comments.

Fixed-Rate Credit Cards May Vanish , Jane J. Kim, Wall Street Journal, July 13, 2009

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Possible Federal Action on Credit Rate Hikes

by Smithee on July 10, 2009

in Credit

Nationwide, and probably on your street as well, credit card issuers are making life tough for consumers by raising rates and adding fees on otherwise good customers.

The recently passed Credit CARD Act of 2009 is meant to protect non-risky customers from arbitrary rate hikes, among other things.

Now, Senator Chris Dodd of Connecticut is asking Federal Regulators to review recent actions taken by credit companies and possibly force them to undo these punishing moves. Since the law doesn’t go into effect until 2010, he wants Bernanke and company to start regulating retroactively to the beginning of 2009. Specifically, he wants:

credit card companies to review every six months any account where the interest rate has been raised since January 1, 2009. It also directs the companies to reduce the rate if the customer has become less of a credit risk or the circumstances that warranted the increase are no longer present.

It’s basically taking the spirit of the law recently passed and helping out non-risky customers now instead of later. Of course, in light of what we recently learned about how credit issuers decide what makes a person risky, I’m sure there are still plenty of loopholes available.

Sen Dodd seeks review of credit card rate hikes, Karey Wutkowski, Reuters, July 9, 2009

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10 Purchases That Can Harm Your Credit

by Flexo on July 10, 2009

in Credit

Do you live your life as if everything you do could be made public? I once heard a suggestion that you should judge every decision you make based on whether you would like to see this decision on the front page of the New York Times. That is a good theory, but I can’t say I fully live by this philosophy.

Regardless of the life decisions I make, my purchase decisions are being recorded and analyzed. Almost all of my spending, particularly my major spending, is accomplished through a credit card. I only buy what I can afford and I pay the bill in full every month, but the fact I don’t enter debt or pay interest fees is besides the point.

Based on the places I shop, credit card companies may decide that, based on studies and calculations of the American consuming public en masse, I have become a riskier consumer. If I shop at Some Discount Store, and the algorithms show that people who shop at Some Discount Store are more likely to miss payments or default on a loan, the credit card companies can increase my rates or lower my credit limit. They can change the terms of my credit agreement without missing a payment, exceeding my credit limit, or using a higher percentage of my available credit. Yes, the credit card companies can decide to categorize me in a lower “credit class” based on where I shop. The Credit CARD Act of 2009 doesn’t change this possibility.

If the credit card companies decide to place me in a lower class of consumer, they could increase my interest rates or lower my credit limit. With less credit available, my credit score could be negatively affected. A lower credit score could then have significant financial consequences; I may not qualify for as low as an interest rate on a mortgage than I would have otherwise.

So if you are concerned more about what the credit card companies think of you than you are about what your friends and family think of you, avoid raising a red flag with your banks by choosing cash for these ten purchases. These were suggested by Marketplace.

1. Traffic tickets. If you are more likely to speed and get caught, and to pay for your ticket or court fees with credit, you are a bigger credit risk. Because people who pay for tickets on their credit card tend to default on their payments more often, the credit cards may place you in a lower category of borrowers.

2. Retreading your tires. If you choose to retread rather than replace tires, credit card companies assume you do not have the money to properly maintain your possessions. And if the issuers believe you have less money than you may have indicated when you applied for the card, they might choose to reduce your benefits.

3. Bargain stores. Marketplace points out that American Express has been accused of lowering customers’ credit limits just for shopping at Wal-Mart. That sounds like class discrimination disguised as risk management, but the issuers argue that a change in shopping behavior in a direction of bargain stores indicates concern about money, and if that concern is legitimate, a job loss might be on the horizon. Following the thread, unemployed consumers are more likely to cause a problem for credit card companies.

4. Porn. While the Marketplace article says adult entertainment is simply considered escapism, and those who wish to “escape” may do so due to financial conditions, it seems more likely that credit card simply find consumers of porn to be riskier than others. I wonder if there is any distinction between local strip clubs and high-class escort establishments.

5. Marriage counseling and therapy. If your relationship is on the rocks, divorce might be imminent. Divorce brings on financial problems of its own, such as increased debt and even bankruptcy. The credit card companies will want to cover the possibility of future losses if they believe you are likely to go through a divorce.

6. Lottery tickets. Considered a tax on the poor, lottery tickets are purchased overwhelmingly by people without much money; perhaps winning the jackpot is seen as the only way for people who may not have been given the opportunities of the middle class, or those who had the opportunity to succeed but did not take advantage of them for whatever reason, to build a successful life. Credit card companies see lottery ticket purchases as acts of desperation, and those who are desperate are greater credit risks.

I must confess that when a co-worker goes from cubicle to cubicle, collecting a dollar from each of us to play in the large-jackpot lottery, I still contribute most of the time — not in an act of blind hope but in an act of being social. My coworker doesn’t accept credit cards, though, so I stay out of the banks’ radars.

7. Cash advances. Many years ago, I did take a cash advance. This was before I knew much of anything about personal finance. I had no emergency fund and I left my low-earning non-profit job without a concrete plan. I just needed a few hundred dollars to get me by for a little bit, and I paid it back quickly. But the credit card issuer could have used this event to lower my limit, increase my interest rate, and lower my credit score.

8. Personal pampering. Marketplace suggests women refrain from charging visits to the spa on the credit card if they haven’t established a history of doing so previously.

9. Income taxes. the IRS allows you to pay your income tax bill via credit card. In fact, many people have recommended doing so if you have the cash to pay the bill in full when it comes due and if you can earn cash back or other valuable rewards by paying a large amount of money through credit. But a credit card company may interpret this method of payment as a sign that you can’t handle your financial responsibilities and may penalize you to prevent a larger loss if you default.

10. Alcohol. Drowning your financial sorrows at the bar? That is what the credit card issuers are likely to think if you start using your credit card in bars and liquor stores. Start making a habit of visiting bars and charging the drinks and you may raise a red flag.

While it’s unlikely that some Chase employee is poring over your credit card statement marking demerits for your porn, booze, gambling and spa vacations, the credit card companies have algorithms that detect these patterns automatically. Effectively, a computer program is making the “decision” that could result in you paying thousands of dollars more for your mortgage than if you just paid cash for these certain products and activities.

10 purchases not to put on credit cards, Marketplace, July 8, 2009

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