Your money is important, and so I want to make sure I’m telling you the truth in every instance. A few months ago I wrote an article called What You Need to Know About the FICO Update, which contained some news about the process of “piggybacking”:
Not too long ago companies started offering to add someone with poor credit as an authorized user on an account belonging to someone with better credit. After a while, the credit rating for the less fortunate person would improve. Under the new formula, this sort of—let’s be frank—trickery will not be rewarded. Spouses and children, however, will not be penalized in the same way.
Throughout that day, a commenter named Bill tried to tell me I was wrong, and since the e-mail address he used was linked to a company that provides such a service (he didn’t make the address public, so I won’t, either), I still had my doubts.
And I’ve had doubts ever since, in both directions. I thought it’d be worthwhile to wait a few months and see if any news outlets made retractions or corrections to the initial flood of reports that FICO 08 will no longer reward piggybacking. So far they haven’t. Here’s one from May 13th that says the same thing again.
So, I thought, “Well, why not just see what Fair Isaac (the FICO people) say?” And after searching for “fico 08″ on their Web site, exactly one useful page shows up: Fair Isaac Innovation Will Restore Authorized User Accounts to Calculation of FICO 08 Scores.
What that article says is this:
[FICO's] scientists have discovered a way to restore authorized user credit accounts to the calculation of FICO® 08 credit scores while materially reducing any potential impact to the score from tampering. Fair Isaac is now adding the patent-pending technology advance to its FICO® 08 formula. The company estimates that more than 50 million U.S. consumers are legitimate authorized users on another person’s credit card.
It’s that last phrase that I think is the most important: authorized users on another person’s credit card. So, if you have the authority to charge something to a credit card that also has someone else’s name on it, that’s not piggybacking. That’s being an authorized user, and your credit score will benefit from being associated with that person.
In the descriptions I’ve read of services that provide piggybacking, you don’t get access to the credit line or the authority to charge anything on a stranger’s card. Of course you don’t; that would be absurd. I think this is the gap where FICO’s scientists are able to distinguish between authorized users and piggybackers, and why my original conclusion still stands.
Here’s a good article from Bankrate (that updated a previous article) which explains FICO’s:
- original decision to ignore all authorized users
- the protests (from people like Bill)
- and the subsequent tweaking that FICO made to keep authorized users, but still ignore piggybackers
Here are a couple of key phrases:
Legitimate authorized users, such as spouses, parents and children, have relationships with the primary accountholders and reasons to share access to the accounts.
Fair Isaac said lenders complained that using FICO 08 would inhibit compliance with Federal Reserve Regulation B, which requires lenders assessing a married person’s credit risk to consider the credit history of accounts shared by the spouses.
Fair Isaac is keeping the specifics of the new analytic approach secret but says it has found a way to restore authorized-user accounts to the formula but also reduce the impact of piggybacking.
To conclude: authorized users = spouses, children, people with a relationship to the cardholder. Piggybackers = unauthorized.
I don’t want to riddle your screen with links to each news outlet’s report, so I’ll just direct you to Google News for more. Check out a comprehensive list of articles from 2009 that all agree. (Well, they all agree, except for the ones that are reproductions of press releases from companies that offer piggybacking services.)
As part of our complete coverage of the forthcoming (maybe) Credit Cardholders’ Bill of Rights, I noticed a helpful article over at SmartMoney.com highlighting four different cards which already adhere to the Fed’s new rules about Credit Cards (which don’t technically have to be followed until next year) and/or some of the provisions of the Bill up for consideration in the Senate.
Some of the “benefits” (in other words, they treat you like a human being) include:
- Set your own credit limit, lower than the one on the card, so that you can better control your own spending
- Choose your own due date
- Make payments by phone (you’d think this was already available everywhere)
- Make payments on the due date without being charged extra (ditto)
- Your card’s rate won’t go up if you behave poorly on an unrelated account (AKA “Universal Default”)
- Get at least a month’s warning before a rate increase goes into effect
- The statement is mailed well before the due date to prevent late payments
- Avoid double-cycle billing (imagine paying your rent for May based on how many days you lived there in May and April)
These cards also have other benefits that actually do go above and beyond in an effort to entice you to switch. The above list, however, are things that the average “man on the street” would reasonably assume are already true of every credit account.
The article cites four credit cards following the rules: Discover® Motiva Card (apply here), Citi Forward Card (apply here), Capital One Platinum Prestige, and Wells Fargo Platinum.
I’m just one man, of course, with one man’s opinion. Here’s a summary of the opinion of the general public.
4 Consumer-Friendly Credit Cards, Kelli B. Grant, SmartMoney, May 7, 2009
So the The Credit Cardholders’ Bill of Rights Act of 2009 (full details and timeline) passed the U.S. House of Representatives by a wide margin, indicating strong support from Republicans, Democrats and Independents alike.
Of the 427 Representatives who bothered to vote, 70 voted against it. So that’s about 84% in favor. I thought I’d take a trip through various parts of the Web to see how random groups of Americans felt about it.
Last August, CreditCards.com reported a survey which concluded that 74% of respondents agreed at least somewhat that “The government should regulate the credit card industry more carefully”.
A New York Daily News Poll which phrased the question as “Are credit card companies’ fees charges fair to consumers?” (which isn’t really what the Bill is about) found that 88% of respondents say “No.”
Over at OpposingViews.com, with only 250 votes so far, 75% of people think the Bill will help consumers.
A recent CNBC poll question: Do you think you have been unfairly treated by a credit card issuer? sees 67% responding “Yes”.
It’s not just Americans, either. A recent poll reported by the CBC in Canada says that 82% of Canadians want some kind of “bill of rights” to protect them when disputing unfair practices by the credit agencies.
It looks to me like the U.S. House vote is directly in line with what the public wants. I’m not sure I can tell you the last time I noticed that happening. If this topic is new to you, see what all the fuss is about.
The following timeline and details will be updated as the Credit Cardholders’ Bill of Rights, now merged with and known as the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, progresses through Congress and as the bill makes its way to the President to be signed into law. Visit this article often for the latest information and to read the current versions of the bills as they are amended, voted upon, and revised.
Credit Cardholders’ Bill of Rights Reverse Timeline
May 22, 2009: President Obama signs the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, (which has been merged with the Cardholders’ Bill of Rights), H.R.627, and the new regulations will begin to take effect starting in February 2010.
May 20, 2009: The House of Representatives agrees to the Senate’s version of H.R.627 and sends the bill to the President to sign.
May 19, 2009: The Senate passes H.R.627 with a vote of 90 to 5.
May 12, 2009: The bipartisan Senate Banking Committee has agreed on the Credit CARD Act of 2009 (S.414).
May 11, 2009: The Senate proposed an amendment to the Credit CARD Act (H.R.627) as passed by the House of Representatives.
April 30, 2009: The House passes H.R.627 with a bipartisan vote of 357 to 70.
February 11, 2009: S.414 is introduced in the Senate
January 22, 2009: H.R.627 is introduced in the House.
January 14, 2009: The Credit Cardholders’ Bill of Rights (S.235) is introduced in the Senate.
Credit Cardholders’ Bill of Rights Details
On April 30, 2009, the House of Representatives passed a bill commonly called the Credit Cardholders’ Bill of Rights Act of 2009. This bill goes a long way to end some deceprive practices used by credit card companies to lure and trap consumers into expensive debt. While many of the problems resulting from these practices can be avoided by using credit wisely or not at all and adjusting your expectations to assume that the companies only care about their bottom line, not their customers, not all the blame can be placed on the consumer.
Thus, the government is stepping in with this effort to protect credit card users from practices such as abrupt rate increases, retroactive rate increases, and double-cycle billing, a situation in which customers are charged interest even after the last monthly bill to include charges for spending is fully paid off.
Here are some interesting points included in the House version of the bill.
- Credit card issuers will be required to maintain low introductory rates for at least six months.
- Issuers must warn consumers if they are spending close to their credit limit, allowing them to avoid a penalty.
- Issuers cannot charge customers a fee for paying their bill over the phone or online.
The changes to credit card regulations will begin taking effect in February 2010. When President Obama signed the bill into a law on May 22, 2009, he reminded the public about the importance of personal responsibility:
So we’re not going to give people a free pass; we expect consumers to live within their means and pay what they owe. But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives.
A similar bill passed the house last year but did not get much further.
Read the current version of the Credit CARD Act of 2009 (formerly Credit Cardholders’ Bill of Rights), H.R.627, as presented by the Congress to the President (May 20, 2009)
The following are older versions of related bills:
Read the Senate’s Credit CARD Act of 2009, S.414 (February 11, 2009)
Read the Senate’s Credit Cardholders’ Bill of Rights, S.235 (January 14, 2009)
U.S. House acts to protect credit card users, Reuters, April 30, 2009
In addition to the Bill in the U.S. House that may see a vote as early as next week, the new rules by the Fed that won’t go into effect until July 2010 (unless voluntarily by individual banks), and yesterday’s meeting between the president and 13 top bank executives in which he urged them to act less like predators, there’s one more bit of news about credit cards this week.
From Bloomberg.com:
Senate Banking Committee Chairman Christopher Dodd and Senator Chuck Schumer, saying credit-card providers are “aggressively” raising interest rates, asked the Federal Reserve to immediately limit interest rate increases on existing balances.
We’ve previously reported on the recent aggressive tactics of credit card companies:
So you can be sure we’ll keep a close eye on this latest request of the Federal Reserve. Does it comply with the spirit of the “free market?” Absolutely not. Will it save many Americans from tipping over into bankruptcy or homelessness? We might just find out.
As Smithee mentioned earlier this week, the Congress and the White House are both working to introduce legislation to help consumers and curb deceptive techniques practiced by credit card lenders. Yesterday, a committee of representatives interested in financial issues put forth a bill to the rest of the House, the Credit Cardholders’ Bill of Rights Act of 2009. This bill, if signed into law, would increase transparency and eliminate certain interest rate increases.
For this bill to become a law, the Senate would have to approve a similar bill. The two bills, one from the House and one from the Senate, would need to be reconciled by a committee who would reach a compromise.
The bill currently in the House calls for a number of interesting changes to the rules for credit card companies:
1. If the company decides to increase a consumer’s interest rate, the new interest rate would not apply to existing balances, only new activity. The consumer will have an opportunity to refuse the interest rate hike. The account would then be closed to new purchases and the consumer will have at least five years to pay off the existing balance at the old rate. In addition, the minimum payment cannot be more than doubled as a percentage of the balance. Assuming a credit card company would try to circumvent these changes by charging an additional fee, the bill would prevent the company from doing so.
2. The above limitation that prevents the new interest rate being applied to the prior balance disappears if the rate increase was due to an index linked to the interest rate, due to an expiration of a promotional rate, or due to a late customer payment.
3. Credit card companies would need to provide the consumer a notice at least 45 days in advance if they intend to increase the interest rate.
4. Double cycle billing often results in being charged new interest a month after your pay off your balance in full. This occurs because in most credit card agreements, the interest charged is based on the average daily balance over the past two billing periods. Under the terms of this bill, double cycle billing would be prohibited.
5. Every statement would include an amount and instructions for paying off the bill in full.
6. If a consumer can prove that he or she sent a payment seven days or more before the due date, the payment would be considered on time even if the credit card company received the payment after the due date.
7. Currently, if a borrower has two balances at different interest rates such as purchases and a cash advance, the credit card companies apply payments made to the lowest interest rate balance first. This maximizes the interest charged to the consumer. This bill would require creditors to apply the payment in one of two methods, both more favorable to the consumer.
8. In some cases, credit cards allow purchases that exceed the credit limit are allowed to be processed, and the company assesses an additional fee for exceeding the limit. Card companies see this as a service to customers, to ensure important payments will be approved. This bill would give consumers the choice to opt out of this benefit, requiring the credit card company to decline the purchase.
All the above applies only to the House of Representatives version of the bill and only in its current form. It will take time and many changes before the President is presented with a finalized bill to be signed into law.
Read the current version of the bill here.
A quick roundup of current lending news.
In December 2008 we reported a prediction that credit card issuers would be reducing available credit by about 45%, and recently the company behind the FICO score released a report of credit lines being reduced from April to October 2008, right before that prediction was made.
From the study, we find that lenders reduced credit for 16% of consumers, and 31% of those affected had a late payment, collections account or public record (e.g. bankruptcy, foreclosure, garnishment or tax lien). Disturbingly, the median FICO score of those affected was 770, a very good score. So, while a smallish minority of Americans were affected, they were the best customers of the bunch: good scores with few red flags.
The better news is that the average credit line was reduced only 5%, so all other things being equal, the FICO score of someone in this group shouldn’t have been negatively affected. We’ll have to wait and see, of course, what happens to FICO scores after October 2008.
Deceptive Credit Card Practices Update
We haven’t written about this since inauguration day, but it looks like there may be movement again soon on a bill promoting the credit card holder’s bill of rights.
Lawrence Summers, a White House economic adviser said on “Meet the Press” this past weekend that the president will be “very focused in the very near term on a whole set of issues having to do with credit card abuses.”
It’s also possible that instead of passing a new law, credit card issuers may make a whole set of promises during a meeting with the president and his team on Thursday.
Then there’s the issue that banks aren’t lending what they are supposed to be. From Reuters:
Credit card issuers have received over $120 billion in taxpayer funds since October, money the government has asked them to use to expand lending.
But with U.S. credit card defaults at record highs, lenders are trying to protect themselves by tightening credit limits and closing accounts, actions that have infuriated lawmakers, consumers, and even triggered a New York state attorney general inquiry.
Bailouts Not Working?
Put too simply: taxpayers loaned billions and billions of dollars to banks who had stopped lending money to those same taxpayers, in order to get them lending again. Overall, this doesn’t seem to be working when we see headlines like “Bank Lending Keeps Dropping” and “U.S. Banks Line Up to Repay TARP Money“.
Commercial and industrial lending were down in February, but I was glad to see that Home Loan Refinancing was up 42% from January to February. Home equity lines of credit were also being processed at levels typical for the season.
Similarly, Americans feel like this is a good time to buy a house. In fact, 71% of people responded that way, the highest level in four years.
Earlier this year, JP Morgan Chase surprised customers with a new fee and an increased minimum required monthly payment. For cardholders who carried large balances month to month, Chase began charging a $10 monthly fee and increasing the minimum payment from 2% to 5% of the balance. The change was announced last November for about 300,000 customers and took effect in January. (See our previous coverage and visitor comments.)
Andrew Cuomo, the New York Attorney General received so many complaints about the surprise move, he required the company to refund the income collected from these fees, totaling $4.4 million, back to customers. Even though the order came from the Attorney General’s office, the official statement from Chase cites customers’ concerns as the reasons for the policy reversal.
The idea that credit card companies can change the terms of their agreements with customers at any time and that customers do not have the same power short of canceling the card provides a strong argument for never carrying a balance from one month to the next, charging only what you can pay off with income before the payment is due. Realizing that we don’t live in a perfect world, this isn’t always possible. But watch for notices in the mail from your credit card company which sometimes these notices arrive in unlabeled envelopes. They can contain information pertaining to changes in your agreement which, if you pay attention, you may decide are not worth continuing your relationship with the company.
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