After we got married, my wife and I combined our finances. We moved most of our money from a local brick and mortar bank to a bank that we primarily access online and over the phone.
This arrangement has worked out well for us, but it does mean some accounts that were previously utilized many times a week have now lain dormant for quite a while. We’re not really too worried about the checking and savings account, but we do keep a close eye on the credit card from that bank.
The card is important to us because not only is it the largest line of credit we have available to us (we rent, have no student loans and no car loan), but it’s also been open the longest – it has a major affect on my wife’s credit score.
With the recent increase in banks closing customers’ cards, we started to worry that our card would mysteriously one day disappear, since we don’t use it very much.
According to this recent article from the Wall Street Journal, while ’surprise’ card cancelations are on the rise, there are risk factors and other things you can be aware of that might help you keep that card in your wallet.
From the article:
“An issuer can cancel a credit-card account without notice when …
* A customer hasn’t used the card in more than a year.
* A customer has defaulted or is delinquent on the account.
An issuer can cancel an account and send written notice within 30 days after the cancellation when a reassessment deems the cardholder too risky.”
In fact, your bank doesn’t even have to notify you about the account closure if your account is closed based on inactivity, default, or late payments. Many people find out about the cancelation only after their card is turned away at a store or restaurant.
So what can we do to keep our cards and avoid damage to our credit scores?
- Pay attention: Double check your bills to make sure you’re not late or in default. Monitor your credit report to make sure it’s accurate, and do all you can to fix any problems.
- Use your card: We use our card for the occasional entertainment expense. Interesting enough, despite hardly using the card over the past few months, our credit limit was increased, helping us our with our credit score. Having a set plan for a card (a small recurring bill or a determined budget category) will help keep the card active.
- Diversify: After reading the article, I realized that even if we do everything we can to keep that card active, we’d really be hurting if it was ever closed. We need another option that will reduce the overall impact of a card closure on our score. Granted, the impact won’t be as bad for someone with a mortgage or student loans, but when a credit card is the only credit you’ve had time to get, it could be a whopper.
I’m much more comfortable now that I know we’re working to keep the card open. I now know that we need to diversify to decrease the impact that each source of credit has on our credit score. Knowing what’s going on with your cards can help preserve your hard financial work and can prevent surprises at the check out stand as well.
Source: Wall Street Journal, Credit-Card Companies Can Cancel Cards Without Customer Knowledge, Aug. 12, 2009.
Now that regulations established by the Credit CARD Act and related rules by the Federal Reserve have begun to take effect, I’ve started receiving notices from card issuers regarding my accounts. My Discover Miles Card was opened in 2005 to attempt a 0% balance transfer, a way to earn interest on someone else’s money for free, but the move failed when MBNA denied the transfer and has gone almost completely unused since that event.
Nevertheless, Discover continues sending notifications of terms changes, balance transfer checks, and new cards requiring activation, all to encourage me to use their service. I received one from Discover today, even though I haven’t used my Discover Miles Card in several years.
Here is the summary of the changes.
- Discover will no longer increase the interest rate on existing balances if I pay late or exceed my credit limit, but the interest rate on new purchases may increase to a Default Rate if I miss a payment.
- The card is moving from a “fixed” interest rate to a higher variable rate for purchases: the Prime Rate + 9.74%.
- The same is true for cash advances. The new variable rate for these transactions is Prime rate + 20.74%. (Yikes!)
- The credit card company is using the grace period differently. They will not use new purchases to calculate the amount of interest due as long as I pay my credit card bills on time.
The notification included four pages on fine print, but none of these changes will affect me personally unless I need to use this credit card. I expect my other credit card issuers will send similar notifications soon, but even the new regulations for the cards I use will not affect me much because I charge only what I can pay off by the time the bill is due and pay off my entire balance at that point.
There is always a possibility that I experience a severe emergency for which I have insufficient cash. If for some reason I do need to carry a balance from one month to the next, I would prefer to fully understand the many ways in which I will be punished by the credit card industry.
The improvement of the grace period and the elimination of double-cycle billing are two aspects of the new credit card regulations that benefit consumers. Some of these changes, such as the elimination of double-cycle billing, won’t go into effect until February 2010.
My girlfriend is an elementary school teacher in the New York City public schools. One of the benefits of her employment is the reimbursement for the purchase of supplies and materials used in her class. Any teacher will tell you that they are required to pay for many of their own materials, and the amount of the reimbursement is subject to a maximum that never covers their full expenses.
The reimbursements until recently were distributed via check, an old-fashioned method of payment. More recently, the City of New York switched to prepaid Visa debit cards, offered by Chase Bank. This must be the result of some sort of a deal between the city and the bank because it does not make much sense for the employee.
Debit cards are meant to be used for spending, but these reimbursements take place after the spending is completed. If you want to use the reimbursements to pay yourself back for your spending on items for the classroom, you must visit a Chase branch to convert the card to cash. We tried taking the debit card to her personal bank of choice, TD Bank, but they claimed to be unable to do anything for us with the debit card.
These prepaid debit cards seem to be the latest trend for rebates. Verizon Wireless, the cellular carrier of choice for both me and my girlfriend, offers rebates on a number of its phones. The last time she needed to purchase a new phone, the rebate came not in the form of a check as it had on prior occasions, but in the form of a prepaid debit card. These cards are touted for their “convenience,” but absent direct deposit I would prefer a check.
Verizon Wireless offers a feature where you can replace your debit card by entering your information online, thus deactivating the card and issuing the old-fashioned paper check to the address on your account. This is a better option but introduces an extra step that many people will simply ignore.
Checks find their way directly into bank accounts while debit cards only make appearances in stores for purchases. If your spending is tight, this might not make a difference. If you use the debit card to purchase something you would have had to purchase anyway, without the debit card, the form of payment won’t affect the amount you spend. Most people’s spending is not tight and controlled. When you send debit cards out to 80,000 teachers, I would believe that many will be used for extra spending and some will not be cashed or used at all. The same is true for wireless phone customers who receive those rebates.
There are reports that the debit cards issued for consumer rebates are unreliable. Some have no problems while others find that cards are declined when they should not be. Even worse, some of these prepaid debit cards have monthly fees. The new rebate debit cards offered by Staples charge a $3 monthly “account maintenance fee” after six months. In states where they are allowed, which I believe is every state except California, fees can eat away at your rebate card balance until you are left with nothing. It is best to cash these rebates or convert them into a check and deposit the funds as soon as possible.
Have you seen more rebates offered in the form of prepaid debit cards? What are your experiences?
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
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.
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.
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?
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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