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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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Credit Card Issuers Making Life Tough For Consumers

by Flexo on July 2, 2009

in Credit

Whether due to the economy or the impending regulation enacted within the Credit CARD Act of 2009, credit card companies are taking the opportunity to raise interest rates and minimum payments. This is perhaps an unintended consequence of increasing regulation. These changes affect consumers with manageable debt, but others who are trying to get out of debt or living paycheck-to-paycheck are harder hit by these changes.

Issuers’ actions come as a growing number of consumers lose their jobs and default in record numbers on their credit card debt. The industry is also preparing for restrictions to take effect in February 2010… The banking industry says Congress has no one to blame but itself for higher rates and fees because banks had predicted that restrictions on pricing would lead to higher costs for everyone…

Yet some critics say that issuers are taking advantage of a loophole in the law to bolster their financial conditions… In a statement Monday, [Senator Charles] Schumer slammed issuers for trying to “wring more dollars out of their customers.” Some of the changes in card terms, Schumer says, are “against the spirit of the law and … just plain wrong.”

Is credit card reform — the Credit CARD Act of 2009 (Credit Cardholders’ Bill of Rights) — a mistake or are issuers just using the fear of losing future profits as an excuse for bilking customers now?

Consumers hit again as some banks raise credit rates, fees, Kathy Chu, USA Today, June 30, 2009

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Discover as the Most Forgiving Credit Card

by Smithee on July 1, 2009

in Credit

Bankrate.com recently completed a study of 20 different credit cards from 10 different issuers and concluded that if one of your priorities is a card which will forgive your human errors, Discover is probably the card to apply for (or not cancel).

Looking at the fine print for one platinum card and one rewards car for each bank, they found the following significant differences:

  • Most banks will raise your rates if you pay late once, or end up over the credit limit once. Discover will wait for you to make that mistake twice
  • Discover, along with Capital One, have a range of overlimit fees instead of just one flat fee
  • Discover’s grace period is 25 days, instead of 20-25

It’s not all hugs and puppies with a Discover card. For example, if you violate the terms of the credit agreement, your rate goes up to 29.99%, the highest in the industry.

Of course, no credit card is a wise choice to carry a balance on. Check the BankRate survey if you’re in the market for a new card; they’ve done most of the hard work for you.

If you want forgiving, Discover card is the one to pick, Becky Yerak, Chicago Tribune, June 30, 2009

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Comparing the Visa Black Card With American Express Platinum and Centurion Cards

by Flexo on June 3, 2009

in Credit, Reviews

American Express created a frenzy among the wealthy when it decided to take advantage of rumors of an exclusive black-colored charge card, used by movie stars and music celebrities for purchasing jets and other items beyond the financial reach of us mere mortals. In 1999, American Express introduced the Centurion Card, a black charge card with no spending limits and a veritable cornucopia of exclusive benefits, all for a significant fee.

Last year, Visa saw the opportunity to market to the same demographic when this company launched its answer to the Centurion Card, the Visa Black Card which I’ve previously described in detail.

Although the assumption is that the Visa Black Card would compete with the American Express Centurion Card, it actually has more in common with the American Express Platinum Card.

Do you qualify?

If you want to hold a Centurion Card, you must be a Platinum cardholder for at least one year and you must have spent $250,000 on the card in twelve months. Both the Platinum and Centurion Cards are charge cards, not credit cards, so you are expected to pay off your entire charged balance each month.

To qualify for an American Express Platinum Card, the prevailing thought is that you will need an annual income of at least $100,000 and a high credit score in order to be approved.

Visa Black CardThe Visa Black Card is a credit card, not a charge card, offered to only 1% of the United States population. You and three million other people might qualify for this card. Some current Visa customers have received invitations or have had their existing Visa cards automatically upgraded. There have been reports of people with poor credit and little or no income being approved for this card, and an invitation package was sent to a man who had been deceased for seven years.

Annual fees

The Centurion Card is in a class of its own. When you qualify for the Centurion Card, you will be charged a $5,000 initiation fee and an annual membership fee of $2,500. That’s a total of $7,500 will will owe after the first billing period without having spent any money.

American Express PlatinumThe Visa Black Card carries an annual fee of $495 while the American Express Platinum Card requires a yearly membership payment of $450. This fee comparison makes it clear that the features of the Visa Black Card are more likely to be in line with the Platinum rather than the Centurion.

Concierge services

All three cards offer 24-hour concierge services. The purpose of a concierge is to have a personal assistant with the resources to take care of arrangements you do not have time for yourself. A good concierge should be able to order and deliver gifts to the people you specify, give dining recommendations and make reservations, even in the most popular restaurants. A concierge would be your proxy for shopping.

American Express CenturionThe Centurion Card goes further by assigning you a personal concierge, so you theoretically always deal with the same employee from the service, who gets to know you and your preferences. Additionally, the Centurion Card reportedly permits you to schedule private shopping at high end stores, such as Gucci, Neiman Marcus, and Sony.

Travel services

The Visa Black Card offers 24/7 legal, medical, and financial emergency travel services, as does the Platinum Card and the Centurion Card. All three cards offer travel accident insurance. The Visa Black Card offers up to $250,000 insurance while the Platinum Card offers $500,000 insurance. The Centurion Card offers $1,500,000 in travel accident insurance.

If your baggage is delayed while traveling, the Visa Black Card will credit you $100 a day for three days, while the Platinum Card will insure your baggage up to $2,000. The Centurion Card will insure up to $1,250 for carry-on items and $500 for each checked bag.

Purchase protection and warranties

If there is a problem with any purchase you make with the Visa Black Card, the card can reimburse the owner up to $500 before 90 days have passed since the date of purchase. The Platinum and Centurion Cards protects holders up to $10,000 per occurrence and $50,000 total per cardholder per year within the same 90 days of the purchase.

Summary

In most cases, the Visa Black Card, despite its appearance, is more competitive with the Platinum Card. Based on these benefits, the Centurion Card is in its own class despite some features in common with the Platinum Card. Many of the Visa Black Card’s services are more aligned with Visa Signature benefits, a level that usually does not carry any annual membership fees.

I’ll stick with a free Visa Signature Card, which also comes with concierge services, purchase security, and all features at levels identical to the Visa Black Card.

Review the details from the sources: Visa Black Card, American Express Platinum Card, American Express Centurion Card, Visa Signature Card.

Your opinions

With fees starting at $450, are luxury credit cards worthwhile? Have you received any offers for the Visa Black Card?

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Congress Passes Credit CARD Act of 2009, Now What?

by Flexo on May 21, 2009

in Credit

Yesterday, the House of Representatives voted on and passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, the Senate’s alternative to the Credit Cardholders’ Bill of Rights. Here are some of the provisions, taking effect in February 2010:

Credit card companies must give 45 days notice before raising interest rates. Under current rules, a credit card company can raise interest rates on a customer for any reason at any time with no notice. Normally, the cardholder can refuse the rate increase and close the account, and the issuer will provide a chance for the customer to pay down the balance. The new bill, once signed into law and put into effect, will require advance notice.

Credit card companies must apply your payments to your highest interest rate balance first. Let’s say you took advantage of a 0% balance transfer offer for $10,000 but ended up needing to use the credit card for an emergency and made a $2,000 purchase at an interest rate of 10.99%. Currently, any payment you make is likely to be applied to your balance transfer until you pay off the $10,000, forcing you to be charged interest on your $2,000 balance. The new rules would change this practice.

Minors will not be able to own their own credit cards. Anyone under the age of 21 requires a parent or legal guardian to be the main account holder. The child or student could then be an authorized user on the account. There is an exception for students who have income and can prove they can be responsible for the charges on their own. Currently, my cat could get a credit card. He’s only twelve years old.

Consumers will need to “opt in” to charge above their credit limit. In the “good old days” of credit cards, if you charged more than the level of credit the issuer decided to grant you, your purchase would be declined, the waiter would return to your table, embarrass you in front of your friends, and cut your card in half with a pair of scissors. These days, you are allowed to go over your limit, but you will be charged a fee for doing so.

Credit card issuers claim this is a service; they would be mortified if one of their customers would be forced to live without air conditioning in the dark because the payment via credit card for the electric bill didn’t go through. Under the new law, consumers would have to “opt in” to receive the benefit of being charged a fee. In any situation, it helps to monitor your usage so you know when you are approaching the limit.

Your existing balance will not be subject to “universal default.” Today, it’s common practice for many credit card issuers to automatically raise interest rates if you are over 30 days late, or default, on a debt payment to anyone else who reports to agencies like Equifax and Experian. If this happens to you, you may find your interest rate to be increased on your full balance. The new law does not outlaw universal default, but it does prevent old balances from being affected. Only new charges will be able to be assigned a default rate.

Anticipating and fearing the future expense of these changes, some credit card issuers have already begun raising interest rates, lowering limits, and reducing rewards across the board. Many people I’ve spoken to, and some who have commented on Consumerism Commentary, are concerned that well-behaved credit card users who pay their bills in full each month and reap the rewards will have trouble finding amazing credit card deals in the future. I’m not too concerned.

The glut of rewards in the past decade is an anomaly. The game of credit card arbitrage, moving balances around from one card to another to take advantage of 0% interest rates while your borrowed money is earning high interest in a bank account, has always been dangerous, and in the end, a losing proposition. The ubiquity of these deals has significantly decreased over the past few years, anyway.

Credit is flowing better than it was six months ago. Yes, there are still people out there having difficulty obtaining loans, but for the well-qualified, like those who pay in full and are responsible, won’t find much trouble with credit card offers.

Credit card companies will still be competitive. They’re not going to drop their rewards programs. Even if they’re not making money on interest fees and late charges, they are making up to 3%, sometimes more, on every regular transaction through merchant fees, and the value of rewards that come back to the consumer is usually less than 1%. Credit card users who seek rewards, like me, charge more on their credit cards, so the issuers make more money on us than we’d like to believe.

Personal responsibility is an important lesson that should be learned prior to opening a credit card account. Paying attention to your own finances may alleviate 80% of the headaches pertaining to credit cards. But as customers get savvier, the industry finds ways to make dealing with them more difficult for the issuer, hiding rules deep in the twenty-page pamphlet of fine print and changing those rules on a whim.

I expect that credit card issuers will continue finding new ways to make money off of customers who either don’t pay attention to their finances or find themselves in financial distress due to external or unforeseen circumstances, and I expect that responsible users will continue to find moderate and reasonable rewards for good credit behavior.

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Senate Passes Credit CARD Act

by Flexo on May 19, 2009

in Credit

In a sweeping vote of 90 to 5, the Senate passed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, including the sole unrelated amendment to restore weapon carrying rights in National Paks.

The bill differs from the Credit Cardholders’ Bill of Rights Act of 2009, passed earlier by the House of Representatives. Now the Congress must work together to hammer out a compromise to be presented to the President to sign into law.

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