Credit card use continues to decline. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

Use of credit cards is beginning to trail off as more people start preferring to use cash. Fewer people are willing to go into debt and less willing to borrow money for purchases by using a credit card. Card use has been declining for some time, and higher interest rates and fees make credit cards less attractive to the cost conscious.

Major credit bureau notes decline in credit card use

Credit bureau TransUnion has noted a decline in the use of general purpose credit cards, according to Daily Finance. The credit rating bureau asserted in a recently released study that nearly 8 million people quit using a general purpose credit card, the kind normally issued by a bank. The number of people who either don’t have or don’t use a credit card now is more than 78 million, according to TransUnion. TransUnion also noted that credit card delinquencies declined by 9.8 percent during the third quarter of 2010. TransUnion credit rating bureau compiles data used in determining a persons’ credit score.

Federal Reserve notes less credit card use

TransUnion also noted that consumers were still using other forms of credit, such as installment loans, despite the drop in credit card use. The Federal Reserve, according to the Wall Street Journal, observed that credit card use was still declining in February of 2011, but non-revolving credit use was increasing. Revolving credit use, or bank-extended lines of credit and credit cards, declined by $2.71 billion during February 2011. Revolving credit use has only risen once since 2008. Non-revolving credit, or non-mortgage consumer loans such as auto loans or personal loans, increased by more than $10 billion during the month of February. The increase was likely driven by auto sales, which have been increasing steadily for the past few months. The Federal Reserve data indicates that TransUnion’s assessment of declining use of credit cards and continued use of other forms of credit is plausible.

Interest rates and fees on the rise

Because of the Credit Card Accountability, Responsibility and Disclosure Act (the CARD Act), banks have stricter rules about how they can change interest rates. The rates are not capped, according to Fox News, but the card issuing institution is prohibited from raising interest rates without a certain amount of notice. The average interest rate on credit cards is beginning to slowly rise along with the number of memberships fees that banks are charging customers.

Sources

Daily Finance

TransUnion

Wall Street Journal

Fox News

Two major national banks, JPMorgan and Wells Fargo, are rolling out EMV chip equipped smart cards for high end credit card customers. The chip is in the upper left of the picture. Photo Credit: Channel R/Wikimedia Commons/CC-BY-SA

The nation’s largest banks are starting to compete for customers that want EMV chip-equipped credit cards. EMV chips are actually a very small integrated circuit built into a credit card, and the technology was developed by a joint venture between Europay, Mastercard and Visa. The chips provide greater security than magnetic stripe cards that are more typical in America.

International jet set wants greater utility from credit cards

A common complaint among jet set types traveling overseas and using their credit cards is that European merchants often have problems processing American credit cards that have antiquated magnetic stripes instead of EMV chip cards more common overseas, according to Bloomberg. So, in order to capitalize on the need among wealthier credit card users, Wells Fargo and JPMorgan Chase are bringing EMV chips to their high-end lines of credit cards. Wells Fargo is launching a pilot program, where about 15,000 customers will be invited to use the Wells Fargo EMV chip card sometime this summer. JPMorgan Chase is diving straight into the deep end, and will be issuing EMV cards to customers enrolled in its Palladium program for high net worth clients.

Americans have to be unique

The need to have an EMV card, also commonly called a smart card, for travelers is not a joking matter. An increasingly fewer number of merchants in Europe can still accept magnetic strip cards, and that technology gap accounted for $4 billion in losses to merchants and $447 million in lost revenue for card providers in 2008. Smart cards, according to Wikipedia, differ from magnetic stripes as smart cards use a technology called “Chip and PIN.” Chip and PIN cards use a small computer chip and integrated circuit board, about 3 by 5 millimeters in total, that stores the information of the user. Merchants carry a smart card reader, where the card is inserted and read, rather than swiped. The user simply gives their Personal Identification Number, and the sale is made. The benefit is that smart cards are less easily corrupted by thieves.

Card companies already have them

EMV chips are only one particular kind of smart card chips, developed in a joint venture between European credit card company Eurocard, MasterCard and Visa, hence “EMV.” American Express also has EMV chip equipped cards in its Express Pay line. However, the smartcard reader technology is not as widespread in America as in Europe, as the U.S. is slow to adopt technologies from other countries at times. JPMorgan intends to distribute EMV chip cards to the rest of its customers after implementing them in its credit cards for high end customers first.

Sources

Bloomberg

Wikipedia

Credit card debt protection plans are great, for credit card companies. Photo Credit: Money Blog Newz/Flickr/CC-BY

A recent report by the Government Accountability Office advises that consumers may want to think twice about entering into credit card debt protection plans. Such plans usually offer insurance against missed payments and so forth and seem like a good idea. However, it may benefit the card companies more than customers.

Debt protection plans benefit card companies

Credit card companies currently offer their customers dept protection plans, which the Government Accountability Office asserts is a beneficial arrangement, but mostly for the card companies. Essentially, if card carriers want to guard themselves against a possible default or missed payment, they can enroll in a debt protection insurance plan. The card holder pays a monthly fee, which is usually 85 cents to more than $1 per $100 of balance carried, according to Marlys Harris’ blog on CBS MoneyWatch. At $1 per $100, a $2500 balance generates about $300 in enrollment fees per year. Those debt protection fees added up to $2.4 billion in revenue for the credit card companies in 2009, according to the Wall Street Journal.

Few claims paid

From that $2.4 billion in revenue, card issuers only paid about $518 million in benefits to people who filed a claim and only about 5.3 percent of people who filed a claim and maintained a balance had their claim paid by the credit card company. That revenue was about 55 percent profit, and a further 24 percent went to administrative costs. The 21 percent of revenue that was paid out is far less than automotive and life insurance companies pay. A person could conceivably be better off using instant payday loans instead of credit cards with debt protection insurance, in that most payday loans get paid off all at once.

Bank fees hard to get clarified

A survey by the United States Public Interest Research Group, a consortium of public interest groups from all 50 states, found that less than 40 percent of 392 surveyed banks and credit unions would fully comply with the Truth in Savings Act when asked to provide a list of all the fees the bank charges consumers, according to Reuters. Upon request the institution should be able to produce a fee schedule that lists account service fees, account closure fees, ATM fees and other fees such as a stop payment fee, bounced check or check processing fee. Some complied after multiple requests, and 45 percent refused to comply at all.

Sources

CBS

Wall Street journal

Reuters

Paying credit cards has been the latest consumer debt payment trend, notes TransUnion. (Photo Credit: CC BY-ND/Adjustable Rate Mortgage)

Debt payment patterns in the U.S. were changed drastically by the recession, and the shift to paying credits cards first, over mortgages, is a perfect example. Traditionally, this had never been the case. Yet when the subprime mortgage crisis put many homeowners underwater, addressing credit card debt seemed the more feasible choice, reports the Huffington Post.

TransUnion has tracked the disturbing trend

Mortgage delinquency is now viewed as almost acceptable in the current housing market, a trend that may have costly repercussions. According to credit bureau TransUnion, 7.24 percent of U.S. homeowners were late on their mortgage but current on their credit cards in the fourth quarter of 2010. In the previous quarter, it was 7.40 percent, but the drop can’t be viewed as good news, said TransUnion consultant Sean Reardon.

“(It is now) 72 percent higher than it was at the beginning of the Great Recession,” he told the Huffington Post.

By comparison, only 3.03 percent of U.S. consumers chose to fall behind on their credit cards in order to keep up with their upside down mortgages. This is the lowest known percentage for the category on record.

When the tide turned

Not coincidentally, TransUnion found that more U.S. consumers began to pay more attention to their credit cards than their mortgages just a few months after the financial collapse began in 2007. Booming unemployment and a poor housing market submerged scores of subprime borrowers as the country shifted toward an unhealthy dependency upon credit.

The growth in number of underwater mortgages is staggering. By the final quarter of 2010, 23 percent of U.S. homeowners had upside down mortgages, according to business data provider CoreLogic. That amounts to 11.1 million residential properties in negative equity, up from 10.8 million (22.5 percent) in the third quarter of 2010. Another 2.4 million homeowners have less than 5 percent equity, making the total percentage of negative and near-negative equity mortgages 27.9 percent nationwide. But it hasn’t just been subprime borrowers opting to pay their credit cards instead of their mortgages, notes Reardon.

“Initially it was,” he said, “but it spread across all risk segments. It’s now an issue at the national level.”

Sources

CoreLogic

Huffington Post

Refinance your mortgage and whittle down credit card debt

A credit card debt settlement agreement may seem like security, but typically it's too expensive and is limited in its usefulness. (Photo Credit: CC BY-ND/CCQC.com)

If you have credit cards, you’ve heard the credit card balance protection sales pitch. It used to be that for the price of 99 cents per month for every $100 of outstanding balance on the card, your credit card company would allow you to skip the minimum monthly payment for as many as six months in the event you were suddenly hospitalized or unemployed. Now it goes under a new name – debt settlement agreement – and consumer finance experts are urging consumer to just say “no.”

How a debt settlement agreement works

According to Consumer Reports, a debt settlement agreement is a promise to maintain your FICO score in the event that you become disabled, lose your job or experience a major life-disrupting event like the death of a child or spouse. While it may sound nice not having to worry about your credit rating during a personal crisis, the U.S. Government Accountability Office has issued a report stating that the product is not worth the price – it’s a moneymaker for banks, plain and simple.

The GAO says debt settlement agreements raised $2.4 billion in 2009. For each $1 consumers paid for debt protection, the bank pocketed 55 cents in pre-tax earnings. Consumers only benefit from 21 cents of each dollar they pay for a debt settlement agreement. The GAO study also showed that only one in 20 credit card holders who were paying for the service actually used it.

Why debt settlement agreements are wrong for consumers

• Debt settlement agreements are loaded with fees. Depending upon the credit card company, consumers must pay from 85 cents to $1.35 monthly per $100 of outstanding balance for the service. Over the course of a year, that’s as much as a 16.2 percent APR, on top of the finance charges that come standard with the credit card. Sock that money away for a rainy day, instead.
• Most debt settlement agreements only cancel the minimum payment, but interest continues to accrue. At best, a consumer may find a card that freezes both the minimum monthly and interest, but the principal balance is still there.
• Read the fine print. Not all change-of-life conditions provide the full extent of benefits, particularly if the credit card carries a high balance ($10,000 or more).

Sources

Consumer Reports

Government Accountability Office

Is credit protection a good deal?

One year after the credit card reform law was passed, government agencies studied whether credit card holders saw benefits. Photo credit: MoneyBlogNewa/Flickr/CC-BY

Over the past few years, Congress has passed a slew of financial reform laws. There has been opposition, to be sure, but laws like the CARD Act were created in order to ensure that consumers were being treated fairly by financial institutions. The effects have been as intended in some ways, but there will be consequences.

Credit card reform laws reviewed after one year

Recently, the Consumer Financial Protection Bureau performed its first function, according to MSN and did a study regarding the impact of the Credit Card Accountability Responsibility and Disclosure Act by randomly polling people who held at least one credit card. The Bureau found that the credit card law was actually working The percentage of people in the study who reported an increase in their interest rate dropped from 15 percent before the CARD Act to 2 percent after it was passed. When subjects were asked if they benefited from the law, about 57 percent said that they noticed positive benefits from the law.

Bank backlash

When reforms or stricter regulations are passed, large multi-national mega-banks seek other avenues for income. One of the casualties of financial reform has been free checking. Large banks, such as Bank of America, JP Morgan Chase and Wells Fargo, are getting rid of free checking. Debit transactions for account holders at large banks may end up capped at $50 to $100, according to CNN. When customers pay merchants with debit cards, the merchant is charged an “interchange fee” by the customer’s bank to complete the transfer. The Fed is rumored to be considering a cap of 12 cents per transaction, far below the current average of 44 cents. Interchange fees generate billions in revenue for large banks, so they will look to make up lost ground by gouging customers.

The conspicuously silent party

Amid all the buzz surrounding large banks in financial news outlets, there is scant mention of credit unions. Credit unions are affected by new banking and credit regulation but not as adversely because the motive for business operations is the service of customers, not making sure shareholders and CEOs are awash in cash. Credit unions also can offer lower interest rates on credit cards, car loans and personal loans because they are nonprofits and face less risk in the marketplace than banks.

Sources

MSN

CNN

Credit card debt relief plan

As stated previously, a plan is essential to recovery associated with credit card debt. Think of this as your bailout plan. When creating this plan, you must examine your current expenses as well as how you spend your money. This will require some record keeping, so it is important to establish a means of tracking where your money goes. Many individuals may use a ledger, and others may benefit from making an Excel document to track expenses. The choice is yours, but remember that the goal is to track where every penny goes so that you understand exactly how you are spending your money. By having this type of record, you will be able to discover ways to curb your expenses so that more money is invested into paying off credit card debt.

Emergency fund

When creating a plan to eliminate credit card debt, it is essential to ensure that you have a sufficient emergency fund set aside. Though putting all of your extra money into paying off your debts might sound logical, it could actually result in incurring future debts when you run into an emergency that requires fast cash. It is best to open a bank savings account for emergency funding. This way, you can also accumulate interest payments — which results in more money.

Life Insurance Policy

If you are interested in recovering from credit card debt, you should look into the life insurance policy that you have. If you find that you have one that is described as being “Whole Life,” you will also find that you have the option of borrowing some of the money that is considered to be the value of the policy. You could use some of that money to pay down some of your credit card balances. Once you get your financial affairs in order, you may pay back the loan from your life insurance, and repayments typically do not have any interest added to them.

Minimum monthly payments

As you know, when you have credit card debt you are expected to make a minimum monthly payment each month. While making the minimum payment will avoid incurring more interest and penalty fees, it is important that you consider making more than a minimum payment each month. You may simply live a bit below your means or cut back on something that is not considered to be a necessity. Doing so will ensure that you have extra money to pay more on your credit cards.

Live frugally, save energy, money

In order to save more money to put toward paying off your credit cards, it is important to learn how to live frugally. You must become an expert at making a penny go as far as possible. For example, instead of using a clothes dryer, you can use a clothesline to save electricity. You can conserve energy by unplugging items when not in use, using energy-efficient light bulbs and reducing the electricity you use overall. You can also grow your own food, make your own soap and use solar lights instead of lighting that requires electricity.

Additional streams of income

There are many ways to create additional streams of income. Creating additional income will provide you with more money to put into your emergency fund. More importantly, it can provide the money you need to put toward your debt. You could work overtime, get an additional job or learn ways to make money online. You can clean out your attic, closets and garage to find items to sell.

Buy used products

When making certain purchases, consider purchasing used products because they are usually cheaper than newer ones. Yard sales, thrift stores, flea markets and online websites such as Amazon and eBay are wonderful places to purchase used clothing, movies, games, electronics, jewelry and more. The money you save could be used for payments on your credit card.

Skip entertainment

If you enjoy entertainment products such as movies and books, you should look for more frugal ways to enjoy them. For example, if you enjoy reading, go to the library instead of the bookstore. If you enjoy watching television shows or movies, there are many websites that offer those shows for free. You should use these alternatives instead of renting movies or paying for cable services. Doing so will save you a tremendous amount of money that can be applied to credit card debt.

Walk instead of drive

If you live in an area that is close to stores and your job, you should consider walking or riding a bike instead of driving a vehicle. This can help save on car insurance, fuel and vehicle maintenance.

Credit card debt relief

As you can see, there are many different methods of creating more cash for credit card debt relief. By following the steps outlined in this guide, you can easily pay two to three times more than your minimum monthly credit card payment and eliminate that debt.

Credit card delinquencies and debts declined over the last quarter of 2010. Image: MoneyBlogNewz/Flickr/CC-BY

Fewer credit card delinquencies are being reported, and the level of credit card debt is declining as well. Data released by credit bureau TransUnion indicates that more people are paying off debt and more credit cards are being issued. Falling delinquencies indicate many people are paying off holiday shopping sprees.

2010 the year of debt relief for many consumers

During the last three months of 2010, the number of delinquencies for credit cards declined considerably, according to ABC. Credit score bureau TransUnion released a report that indicated credit card delinquencies fell to just 0.82 percent in the last three months of 2010, compared with 1.21 percent in the last three months of 2009. The third quarter of 2010 had a delinquency rate of 0.83 percent. Delinquencies normally rise during the last three months of the year and the holiday shopping season, but now it appears more people are relying on themselves to avoid debt settlement relief, rather than having to get a loan to pay off toys for the tots.

Balances rise and fall

The national average balance carried by credit card holders has also declined. The combined average balance for all major cardholders — all people that hold a Visa, MasterCard, Discover or American Express — declined to $4,965 for the last three months of 2010, which is a reduction of 8.6 percent from the same period in 2009. However, according to the Washington Post, the average balance rose in 33 states. Mississippi, Iowa and Washington D.C. had the highest balances in the nation.

Rise in new issued cards

Despite recent caterwauling from credit card companies that their businesses will be hampered and lose lots of advance cash because of the CARD Act, new cards are being issued at a considerable pace. The last quarter of 2010 had the number of new credit cards rise by 19.1 percent. That was the first time since 2007 that the number of newly issued credit cards rose for two consecutive quarters.

Sources

ABC

Washington Post

Rebuild credit with secured credit cards. (Photo Credit: CC BY-ND/Secured Credit Cards)

When it’s time to apply for a car loan or home mortgage, it helps to have a good credit score. However, all is not lost for those whose consumer credit history has seen better days. Although it can be expensive, using a secured credit card with an initial deposit requirement can help rebuild a credit rating so that large-scale loans are no longer out of reach. Here are some things to consider before applying for a secured credit card.

Know how secured credit cards work

In order to apply for a secured credit card, have an active savings account to serve as collateral for purchases. Generally, the credit limit on the secured credit card will be the money held in savings, although it can be a smaller amount. The card issuer will only take money out if you’re 30 to 60 days delinquent. Once bills on the secured credit card are paid on time for six months to a year, the credit score may have recovered enough to where unsecured credit card options that require no upfront collateral become available.

Issuer must report to the credit bureaus

If the issuer of your secured credit card doesn’t file with the major credit bureaus, the card can’t help you. Showing that you can make payments on time is essential for rebuilding your credit score. Keep in mind that a secured credit card will have an interest rate and grace period, so it pays to shop around for the best terms. Bankrate.com is great for comparison shopping. If you have a savings account that earns interest to go with your optimal-rate card, you’ll be on the road to credit repair.

Watch the fees and spending

Two major but often unavoidable drawbacks to secured credit cards are upfront and annual fees. Ideally, you won’t need a secured credit card for long, so the annual fee won’t hurt much, but the upfront fees can exceed $100 or more. Minimal or no upfront fee is best, but one’s eligibility for such a card will depend upon his or her credit rating.

In terms of usage, try not to use a secured credit card more than you can handle each month. Your goal should be to pay the balance in full monthly and keep total spending at less than 30 percent of the credit limit.

Sources

Bankrate

FOX Business

Rebuilding credit can be an expensive path

Credit card issuers, such as Bank of America, have been affected by new laws regarding credit cards. Image: MoneyBlogNewz/Flickr.com/CC-BY

New regulations for credit cards on how interest rates and fees can be assessed are working. However, some loan lenders are lamenting the new rules that require greater disclosure when changing terms with customers. Outlawing guerrilla-style fee and interest raises has led Bank of America and other companies to lose value from credit card units.

Bank of America realizes loss from credit card unit

The largest loan lender in the nation, Bank of America, recently announced that it would be adjusting previously filed financial statements regarding the banks’ credit card unit, according to Bloomberg. B of A announced that it was adjusting a write down of FIA Card services, its credit card unit, for late 2009 from $10.4 billion to $20.3 billion, meaning the credit card unit is worth $20.3 billion less thank it was in 2008. In other words, the company adjusted previous filings to reflect a greater loss of value than previously thought. The write down is not a true cash loss, but an adjustment of the “goodwill” value, or the value of an asset above market value, due to the prestige of the holder of the asset. The bank cited regulatory conditions and “deteriorating credit quality” for FIA Card Services being worth $10 billion less than estimated in 2009.

CARD Act cited for losses

Some credit card loan lenders, such as Bank of America, are claiming that they are being hampered by new regulations, specifically the CARD Act, or Credit Card Accountability Responsibility and Disclosure Act. It is posited that the act means less access to advance cash for further lending, though this means that the law is working. Since the CARD Act was enacted, fewer people have been hit with late fees and stung with sudden interest rate raises, according to CNN.

New card law a smashing success

The CARD Act has yielded some great results. Since the law was passed, studies show that about 2 percent of card holders had interest rates raised, compared to 15 percent before the CARD Act was passed. Late fees, which accounted for $901 million in instant cash for card issuers in January 2010 — before the Act took effect in February 2010 — had dropped to $427 million by November 2010. That means companies from Scottsdale to Birmingham and all over the U.S. that look to seemingly surreptitious practices for revenue are having a harder time, which is what the CARD Act is supposed to do.

Sources

Bloomberg

CNN

Use of credit cards has risen for the past three months, after two consecutive years of decline. Image: MoneyBlogNewz/Flickr.com/CC-BY

The use of credit cards by consumers has started to rise again after a two-year decline. During the recent recession, fewer consumers have been making as many purchases on credit, and more people have been paying off debts. The credit card industry recently began booming again.

Three straight months of increasing use of credit cards

For three consecutive months, there has been a marked increase in the use of credit cards by consumers, according to USA Today. A new report by the Federal Reserve disclosed that consumer use of credit cards had risen by 3 percent in December. The rise in borrowing amounted to $6.1 billion in personal loans from card companies being utilized by consumers over the last month of 2010. The seasonally adjusted rate for credit card borrowing rose to $2.41 trillion in advance cash, which is likely to grow over the year. Consumer borrowing has increased by 3.5 percent after a 27-month period of decline, including use of credit cards and an increase of 2.8 percent for people taking out auto loans. Fewer people were willing to start borrowing money during the recession.

Years of decline despite rising profits

During the past few months, major credit card companies have begun posting major profits. Visa and MasterCard both posted large gains, despite new fee rules imposed by the CARD Act. The CARD Act, or the Credit Card Accountability Responsibility and Disclosure Act, mandated that credit card companies not raise interest rates on cardholders without notifying them in advance. This has led to the base interest rates of credit cards being raised so the rates higher when people sign up. Buying an Alabama Crimson Tide jersey online could get that much more expensive.

Merchant fees also contribute

Credit card companies are also enjoying the benefits of merchant fees, according to the Washington Post. Some credit card companies have raised fees charged to merchants for swiping the card, which could lead to prices being raised in stores to counter the fees. Customers who made purchases with credit cards rather than with cash also have to pay more in interest thanks to higher prices.

Sources

USA Today

Washington Post

Do you live in one of the top 10 most credit card debt-ridden cities? (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

Credit-card-wielding consumers have found that old habits die hard. That’s why it comes as no surprise that a recent study by credit reporting agency Equifax states that the U.S. is buried $790 billion deep in credit card debt. Broken down by city, here are the top 10 most credit card debt-ridden cities.

10. Winston-Salem, N.C.

On average, credit card debt per household is a robust $6,505. As the median household income is $42,869, the percent of annual income owed to credit card companies is 15.17 percent. Imagine what could have been accomplished with payday loans, rather than high-interest revolving debt that most people nurse along with monthly minimum payments.

9. Fayetteville, N.C.

One of four N.C. cities on this list, Fayetteville has 126,723 households that owe $6,519 per household on credit cards. A sizable percentage (15.34 percent) of median annual income – $42,506 – is paid in attempt to eliminate that credit card debt. With short term loans with a two-week maturity cycle, a great deal of interest debt could have been avoided.

8. Youngstown-Warren-Boardman, Ohio/Penn.

Median income here is lower – $39,304 – but so is the average household credit card debt: $6,142. However, that’s still 15.63 percent of the annual income on credit card debt alone. That’s about $1.4 billion in total debt, citywide.

7. Pensacola-Ferry Pass-Brent, Fla.

The 170,817 households in the Pensacola area owe $6,649 each to credit card companies, 15.79 percent of the median household income, $42,106. With personal loans, there would have been no cycle of debt.

6. Asheville, N.C.

North Carolina has heavy anti-payday loan legislation in place, so the credit card debt comes as no shock. Households owe 16.12 percent of annual income.

5. El Paso, Texas

Average credit card debt is lower at $5,349. That’s still 16.15 percent of annual income in El Paso, though.

4. Duluth, Minn.

Median household income: $38,392

Percent owed on credit cards: 16.72 percent

3. Toledo, Ohio

Another state that makes payday lending impossible, Toledo households owe 16.72 percent of annual income on credit cards. If payday lenders were allowed to operate at market rate in Ohio, hitting that percentage would be nearly impossible.

2. Canton-Massillon, Ohio

Median income: $40,912

Percent owed: 17.23 percent

1. Wilmington, N.C.

Households earn $42,392, but owe 17.26 percent on credit cards.

Sources

About.com

Yahoo Finance

‘I’m going to come steal your toys because your mommy didn’t pay her Discover bill’

Interest rates on credit cards have hit a 13-year high. Image: MoneyBlogNewz/Flickr.com/CC-BY

The interest rates charged on credit cards have recently reached a 13-year high. Since legislation has changed the rules about how interest can be charged, card companies are raising the base rates to make up lost ground. It is working, as credit card companies are also posting high revenues.

Legislation leads to higher rates on credit cards

The interest rates on credit cards is reaching a 13-year high, according to CNN. The current average interest rate for credit cards is 14.72 percent. However, the interest rate charged to a customer varies between card issuers and also can depend on credit scores. People with poor credit ratings can be charged interest rates in excess of 50 percent. The average APR on credit cards has been rising over the past two years, as the recession ate into card company and bank profits. On top of consumers being less willing to add to their debt, Congress passed the CARD Act, which prevents credit card companies from raising interest rates after a customer signs an agreement or without due notice. However, the major card issuers won’t be running for emergency loans anytime soon.

Card companies post huge earnings

Despite rising rates giving the impression that it is harder for credit card companies to earn a living, recent earnings statements show that is certainly not the case. Visa, according to the New York Times, recently posted an earnings report stating the company had increased profits by 16 percent, a profit of $2.24 billion, in the most recent quarter. MasterCard, according to the Wall Street Journal, managed to post a 41 percent increase in profits by the end of the most recent quarter.

Harder to get a credit card

Though card issuers certainly want more people to get credit cards, the interest rates may make it prohibitive to people who have less than stellar credit. Having to take out installment loans to pay for a weekend trip from Jackson to Birmingham is not a thrilling prospect for many people.

Sources

CNN

New York Times

Wall Street Journal

Many NPSL card users have difficulty keeping credit utilization low and FICO scores high. (Photo: Andres Rueda/Flickr/CC-BY)

Everyone knows about the misleading and predatory credit card practices that characterized the pre-Great Recession personal finance landscape. We know how malicious credit card companies preyed upon vulnerable demographics, making money for themselves and dragging down Americans’ credit in the process. However, many people believe that these practices are largely a thing of the past, that the Great Recession is over and that the new credit card laws (CARD Act) have helped protect consumers. While these things are indeed true to a certain extent, unscrupulous credit card practices still persist, and not all target those with bad or little credit history. In fact, some of the most popular credit cards and charge cards for people with excellent credit are inherently deceptive products that have the potential to damage the credit standing of those who use them.

NPSL cards – the background

If you have a Visa Signature credit card, a World MasterCard credit card or an American Express charge card, you are in possession of what is known as a No Preset Spending Limit (NPSL) card. People with excellent credit gravitate to NPSL cards as a result of the common misconception that they provide unlimited spending capabilities.

In reality, however, NPSL cards do have limits; they just are not disclosed to consumers. Credit card companies refrain from providing users such crucial information in order to prolong the lucrative myth of endless spending. While this practice lines issuers’ pockets, it also creates problems for NPSL card users. Because consumers have no idea how much they can spend with NPSL cards, they are extremely vulnerable to their cards being unexpectedly declined, an occurrence that can be both logistically difficult to manage and downright embarrassing.

NPSL Credit Risks

NPSL cards also have the potential to drag down users’ credit scores. Although NPSL cards do have spending limits, issuers do not report them to the credit bureaus. Instead, according to a No Preset Spending Limit Card Study conducted by CardHub.com, they either report proxy limits for their NPSL cards or no limits at all. This is important because the largest credit scoring agency in the U.S., FICO, uses information about consumers’ credit limits to determine the balance-to-available-credit ratio, known as credit utilization, that factors prominently into their credit scoring calculations. Exhausting much or all of one’s available credit leads to high credit utilization and a lowered credit score.

However, according to the Card Hub study, no uniformity exists in what faux limits credit card companies report for their NPSL cards, and three of the top 10 issuers — Chase, HSBC and U.S. Bank — refuse to be upfront about how they report. Consequently, NPSL card users have difficulty keeping credit utilization low and FICO scores high.

Avoid NPSL Card Use

As a result, use of an NPSL card is simply not worth the risk. All they truly provide is a great deal of uncertainty and the potential to affect consumers’ credit standing in unpredictable ways, ranging from FICO not rewarding you for your NPSL card’s available credit to your FICO score falling because of high utilization. What they don’t provide is unlimited spending power. Therefore, people with excellent credit should refrain from using NPSL cards and open credit cards that reward rather than punish them for having such high credit standing.

This guest post comes from Odysseas Papadimitriou, CEO and Founder of CardHub.com, a website that helps consumers compare credit cards and gift cards.

Credit card companies are considering student loan debt "income" to be used to pay back credit. Image: Flickr / MoneyBlogNewz / CC-BY

The Credit Card reform act of 2009 was supposed to fundamentally change how credit card companies worked. Many aspects of the credit card business have changed. For students, however, student loan debt can be considered as income to pay off debts.

Student loans versus credit cards

In June of 2010, student loan debt surpassed credit card debt for the first time ever. Student loans are a form of debt, though they are deferred until the student graduates or leaves school. For the purposes of taxes, loans and most other financial products, student loans are not considered income. For many credit card applications, though, student loans may actually count as “income” to be used to pay back the credit card. This seems to be the case for credit card companies advertising on campuses from Reno, Nevada, to Irving, Texas.

The problem with student credit

Student credit cards were one product specifically targeted by the Credit Card Act of 2009. Credit cards can be a particularly damaging form of short-term credit, because interest and fees for paying late can build up quickly. Credit card companies were accused of targeting students with credit card offers, offering high-limit cards that were essentially unsecured loans with no credit check. Students were often graduating from college with  more credit card debt than student loan debt.

Credit cards for students

Many new credit card regulations try to limit the amount of debt a person can take on. Students can include just about anything as income on a credit card application — including the income of other people who live in their household. There nothing specific in the law that says whether student loans can be considered income to apply for more credit. In the rules of good financial management, though, using debt to apply for more long-term credit does not add up to a way to improve your financial situation.

Sources

Daily Finance
Wright State University Guardian

People looking to rebuild or establish credit could try secured credit cards like the kind offered by Wells Fargo and US Bank. Image: MoneyBlogNewz/Flickr.com/CC-BY

There’s a great tool for rebuilding or establishing credit called secured credit cards. Secured cards work just like traditional cards, except the limit is determined by an upfront deposit that secures the credit. Most major banks offer them.

For lousy or nonexistent credit, try secured credit cards

Credit cards are one of the most ubiquitous forms of credit in modern America. There is a way for people who have either a dismal or nonexistent credit history to get credit cards that will help with credit repair or establishing a credit score. They’re called secured credit cards. Secured credit cards have the backing of collateral in the form of an upfront deposit. The deposit, whether for a few hundred or a few thousand dollars, determines the credit limit. Other than that, they work just like typical credit cards. Payments have to be made, and discretion should be used making purchases.

Great way to get credit back on track

Just like trying to find the best personal loan rates, the interest rates and fees of card companies should be checked out thoroughly. Consumers should be cautious; there are perfectly legitimate companies out there, but others are out to rob people blind. If something looks too good to be true, it usually is. If e-mails show up from “Bank of the Gobi Desert,” don’t open them. Beware of cards endorsed by celebrities as well; the “Kardashian Kard” was rated among the worst prepaid debit cards in existence by US News and World Report. Wells Fargo, U.S. Bank, and other institutions offer secured cards. You should also consult with local community banks and credit unions. Community banks and credit unions invest into the local area, whereas huge multinational banks invest in ski chalets in Scottsdale and Aspen for executives.

Credit is important

Access to credit is an important part of modern American life, for good or ill. People who want to get a loan to buy a house or fly to Birmingham to watch an Auburn Tigers game but lack sufficient cash on hand, need to have the credit available.

Sample of secured credit cards

Here are the secured credit card offers from Wells Fargo and US Bank.

Get professional credit repair help

Speak to a professional today and take proactive steps to repair your credit. For a FREE credit consultation, call 1-877-563-2076.

Source

U.S. News and World Report

New Fed restrictions are expected to take effect in October 2011, at the earliest. (Thinkstock)

The Great Recession occurred largely as a result of unsafe lending practices that allowed consumers to exceed their means and drag the nation’s economy down with their personal finances. The extent to which this occurred could have perhaps been decreased if more proactive federal regulation had taken place.

It appears as if the Federal Reserve learned its lesson from the national financial swoon as it recently announced regulations that serve to close loopholes within the new credit card law (CARD Act) before they cause significant damage. Such a move comes in refreshingly severe contrast to the laissez fair-type policy practiced by the Fed for the last decade and seems to be a positive sign for the financial well being of the United States.

CARD Act background

The CARD Act — which took full effect in August — instituted numerous consumer protections designed to curb the predatory, harmful credit practices that were previously allowed to perpetrate unchecked and helped lead to the nation’s financial malaise. While this is the most sweeping piece of credit card legislation passed in years, sometimes vague language has allowed certain unscrupulous credit card companies to continue dangerous practices.

APR change protections

Prior to the Fed regulations, the CARD Act stated that issuers could not change a consumer’s interest rate during the first year that an account was open or apply increased APRs to existing balances unless consumers were at least 60 days delinquent. Such rules even pertained to accounts with introductory rates. However, some companies evaded the spirit of the law by offering to waive consumers’ APRs for a certain period of time while retaining the self-conferred right to revoke the waiver at will. For example, instead of offering you a 0 percent APR credit card, they would give you a card with a 15 percent APR, that they would offer to waive for the first 12 months. Their rationale was that waiver revocation would not be an APR change rate but merely a re-instituting of a normal rate. However, the Fed restrictions — expected to take effect in October 2011, at the earliest — close the door on such fee waivers.

Fee limits

The CARD Act also prohibits credit card companies from charging more than 25 percent of a card’s limit in fees during the first year an account is open, a provision that affects bad credit credit cards most significantly. Certain companies found their way around this by charging processing fees that had to be paid before an account could be opened. These fees, according to issuer thinking, did not count toward the 25 percent limit because they were not assessed during the account’s first year. However, like the fee waivers, this semantic interpretation was nullified by the Fed’s decree.

Income Determination

The Fed also banned the use of household income as a determining factor of a consumer’s ability to pay, holding that personal income will provide a far more accurate indication of how much debt someone can afford comfortably. This distinction will help protect people from the widespread severe disparities that existed between amounts owed and means of payment prior to and during the recession.

These Fed changes will surely provide consumer aid upon taking effect, but their larger implication is what’s truly important. If the Federal Reserve continues to address issues before they become significant problems, the chances of facing another recession down the road will decrease significantly. This organization had not acted so swiftly in more than 10 years, so it appears as if a policy shift has taken place. However, once could be a fluke, but two or three make a trend, so pay close attention to how the Fed acts in the coming months. Its behavior could serve as an apt indicator of our economic future.

Liability considerations

It is a common belief that business credit cards confer some measure of financial liability protection to small business owners. The perception is that because these cards serve business purposes, any financial difficulties encountered while using them ultimately falls not on the owner as an individual, but on the business as a separate entity. This is not the case, however, because lenders make no distinction between a small business owner and his or her company. Unlike with larger businesses, small business liability is personal liability. Therefore, one advantage commonly attributed to small business credit cards is actually nonexistent. This fact becomes especially important when the effects of the new credit card law (CARD Act) are considered.

CARD Act implications

Among the many regulations instituted as part of the CARD Act are stipulations prohibiting lenders from applying increased interest rates to existing balances or implementing penalty APRs until a consumer is 60 days delinquent. While these changes do provide significant consumer benefit, they only apply to personal credit cards. Therefore, a bank can assess an arbitrarily increased interest rate on a balance held with a business credit card, thereby making a user’s credit card debt more costly. This fact makes use of such cards inherently risky for carrying debt, as it is a common practice for credit card companies to raise interest rates as a means of quickly increasing profits. Thus, a small business owner should employ a personal credit card for this type of spending because of the protection and stability it will provide.

Still, having a business credit card for smaller purchases that will be paid for in full each month is a good idea, as well.

Business card utilities

Business credit cards should be employed for all purchasing that does not expose one’s balance to vulnerability because such cards have certain features that make them apt for business use. More specifically, business credit cards provide better reporting that allows users to easily track and monitor business purchases as well as give cards with personalized limits to employees, which owners can then earn rewards on.

Recommendations

Personal and business credit cards have inherent perks and drawbacks. However, when used correctly in concert, they provide a net benefit to small business owners. A user must simply remember to fund any purchases that will lead to a balance with a personal credit card and all others with a business credit card. By doing so, this person will be able to manage his or her small business with the predictability and cash flow stability necessitated by the current state of the economy and precluded by unexpected cost-of-debt increases.

Credit card application checklist

The following is a checklist of key terms of your credit card agreement that you should look for before applying: the introductory and regular APRs for new purchases and balance transfers, the annual fee, the balance transfer fee and details on rewards programs. In order to determine how much of the above information could be easily found on credit card applications, CardHub.com conducted a study investigating the online applications of the 10 largest credit card issuers, based on outstanding balances.

Which companies have the clearest disclosures

In the CardHub.com Summer 2010 Credit Card Applications Study, Capital One and Bank of America ranked the highest in terms of clarity on their applications. These companies did the best in clearly disclosing the key information mentioned above without the applicant having to actively search for it. The credit card issuer with the least upfront applications was U.S. Bank, followed by USAA and American Express.

Common problems on credit card applications

The area in which most of the credit card companies were lacking was disclosure of the balance transfer fee. This is particularly problematic because not only is it the hardest component to find, but it is also the component that applicants are least likely to know to look for. The balance transfer fee is a common fee that is assessed when a customer transfers their balance from one credit card to another, and it is usually between 3 percent and 4 percent of the amount of the transferred balance. Another common problem was clarity on how much rewards points and miles are worth on non-cash back rewards credit cards (i.e. are 20,000 rewards points worth a family ski trip or a new dress?).

Improvements on credit card applications

Although there were common areas of weakness, the study also found that vague and misleading language, such as “as low as” or “up to,” has diminished considerably. Many companies were much more likely to clearly display the full range of APRs (e.g. Regular APR 12.99 percent — 24.99 percent) and clearly define how much cash back a customer would get on the purchases they made for cash back rewards credit cards.

Changes in payment allocation from CARD Act

The CARD Act changed payment allocation rules by requiring that credit card companies apply consumers’ payments to the balance with the highest APR first, thereby paying down their most expensive debt as quickly as possible. However, in the final draft of the bill, the language was changed to say only payments above the minimum should be applied to the balance with the highest APR first. The minimum payment amount is still applied to the lowest APR first, which means extra costs for consumers and extra profits for credit card companies.

The Bill Was Changed Unfavorably In Committee

Senator Dodd introduced a bill on Feb. 11, 2009 (S.414) that proposed a payment allocation method that would apply the consumer’s entire payment to the balance with the highest APR first. However, during negotiations in the committee process, the committee reported an amended bill that changed the rule to only apply to payments above the minimum to the highest APR first.

How this affects consumers

The change in the language means a portion of everyone’s payments is allocated in an unfair manner. Even more troublesome, the 29 percent of Americans who can only afford to pay the minimum* have 100 percent of their payments allocated in a way that prevents them from paying down their most expensive debt. The people who need the most help are getting no benefit from the new rules meant to protect them.

How to avoid the pitfalls of payment allocation

Unless consumers are able to pay at least 15 percent of their credit card balance each month, they should only carry one type of balance on each credit card. Have a separate credit card for balance transfers and purchases – one credit card with a low interest rate on purchases and one with a low interest rate on balance transfers. Otherwise, just as in the old system, credit card companies will be able to delay consumers from paying down their credit card balances with the highest APRs.

* Source: FINRA National Survey – Financial Capability in the United States, December 2009