Yesterday I got a payday loan. Tomorrow I’m headed to New Zealand

I’m headed to New Zealand, because I have cash today, thanks to an online payday advance. Plenty of people will call that irresponsible, but plenty of people haven’t walked in my shoes. If you’ve been through the economic wringer in recent years, maybe you’ll get it. Or maybe you won’t. Either way, I’ve got money now and I’m going.

After two layoffs, I have money now

Two years ago, I was laid off from a good-paying job I’d had for several years. I collected unemployment for a few months and watched my retirement and investment accounts melt away like everyone else’s. I found a new, lower-paying job, but was laid off again after just a couple of months. This time, I didn’t qualify for unemployment benefits. After seven months, I was tapped out and couldn’t make my mortgage payment.

My head is barely above water, but I have money now

I managed to avoid a foreclosure with a lender-approved short sale, but everything I owned – other than my paid-off car and some beat-up furniture — was gone. I gave the furniture away and moved in with some friends. I finally found yet another even lower-paying job, and a couple months later, I was able to rent the apartment I have now. Luckily, I cut up my credit cards when I lost my first job, so I don’t have debts. My head is above water, but I’m still struggling to make ends meet.

The weather in New Zealand is perfect, and I have money now

I’m not in a stable financial place yet, but I’ve had my job long enough to get a personal loan. Now that I’ve got a little extra cash, I’m taking my life off hold. The coastline and mountains of New Zealand defy description. The whales are amazing. People say the Sauvignon blancs of the Marlborough region are better than the ones they make in Napa Valley. The air and water temperatures are perfect this time of year, and New Zealand is still a dollar-friendly place.

I have 23 hours plus a weekend, and I have money now, too

Last week I hit 23 hours of accumulated vacation time. Last night, I applied for an online payday loan. I had one in five minutes flat. The money was in my bank account this morning. I’ll pay it back out of my next paycheck and worry about how I’ll get by when it comes to that. Twenty-three paid hours plus a weekend isn’t at all enough time to visit New Zealand. Mostly I’ll be sitting on a plane. My grandmother is 94. I haven’t seen her in six years. She lives in Ashburton on the South Island. I fly out tomorrow morning.

Apply HERE for Money Now!

Credit card interest rates are going up. Has your bank dropped the bomb on you? (Photo: wilpf.org)

If you have been relying on credit cards to get by each month, you may need to borrow money just to pay the minimum payment these days. Credit card companies are raising interest rates dramatically in an effort to stay ahead of the declining economy. But the problem is that they are not just doing this to those who have had problems paying their bills on time, but those who have always paid on time. Does this seem unfair to you? Yes, but the cold reality is that people who have had their credit cards for 10, 20 or even 30 years, with previous interest rates at about nine percent, are now getting slapped with rates over 20 percent!

Is This Legal?

Yes, because the fine print in your agreement that you signed when you first accepted your credit card states that they can raise your rates at their discretion. But it will not be for long, because the new rules affecting their behavior, known as the Card Act of 2009, will not take effect until August, 2010. Regardless of your personal situation, even if it hasn’t changed, the overall financial environment has changed, creating more risk for banks and credit card companies. If they spread out the risk, they can limit their losses on those who default on their payments.

Shouldn’t I Be Notified?

Currently, banks do not need to give you more than 15 days to let you know that your rate will be increased, and what you can do about it. Did you miss this notification? You probably did, as they put this in your monthly statement, or even in a separate envelope that you may mistake for junk mail and throw it away. You have a chance to decline the new rate and continue paying off your bill, but if you miss the deadline, you will be stuck with the new rate. After August, 2010, you will get at least 45 days notice, which should help you actually see it.

My Rates Increased – Now What?

The ideal situation is that you catch the notification before the deadline and call your bank right away to let them know that you decline this new rate. If you opt out of this new rate, they will close your account, but you will continue paying off the balance at the lower rate.

However, if you miss the deadline, another option is to pay off any balance that you owe and close your account. You can possibly borrow money at a lower rate than what your credit card is currently at to pay off the balance and save yourself thousands of dollars in interest rates.

Or, if you want to keep the account open, transfer the balance to a lower rate card. Be sure to check your credit on your other card first, as well as what the balance transfer fee is. If you are not careful, you may end up paying more in fees doing this, than if you were to accept the changes and keep your account open.

Plan Ahead

The best route to saving money in the long term is to plan ahead. Before you borrow money to pay off your high credit card debt, create a budget that shows where your money will go and when. This way, you know exactly what to count on. Of course, creating a budget is only half the story—you must stick to the budget you create, so that you will have no need for credit cards or high interest loans in the first place.

Payday advances help make ends meet

If you want to use plastic without overspending, get a payday advance and use your debit card.

Just when you could really use it, you run out of cash. You scrape together enough money to pay the mortgage, and the home insurance bill comes in the mail. You might be able to let that slide until next payday, but then, just for good measure, the car won’t start. Naturally, your kid takes this opportunity to remind you that his karate class fees are due tomorrow.

Payday advances can help you avoid credit card debt

When money is tight, it can be tempting to use credit cards. But when you’re living from paycheck to paycheck, credit cards make it very difficult to stick to a budget. If you charge just a couple hundred dollars a month and pay the minimum payments, you’ll soon find yourself swimming in debt. Before long, you’ll run up a debt that will take years to pay off.

Applying for payday advances is absolutely hassle-free

It’s quick and easy to apply for online payday advances. At Personal Money Store, it takes just a few minutes, and in many cases funds can be deposited to your account in as little as two hours. You can apply for payday advances of up to $1500, and the minute you do, Personal Money Store connects you with the payday lender that best meets your requirements. You don’t have to fax anything or even pick up the phone. Best of all, there’s no credit check.

Payday advances are easy to pay back

Most online payday advances are paid back on your next payday in one automatic deduction from your bank account. You don’t have to bother to write a check or remember to pay online. Sometimes you can qualify for an installment payday advance that lets you make several smaller payments over a longer period of time.

Payday advances can help you avoid overspending

Next time you’re short of cash, consider applying for an online payday advance instead of using a credit card. A payday advance doesn’t drag on the way credit card debt does. When you get a payday advance instead of using a credit card, you can’t accidentally overspend: You know exactly how much money you have available. And compared to credit cards, there are no surprises: With payday advances, you know exactly when the debt will be paid off and exactly what it will cost.

Payday advances can get you through to payday

Borrowing should never be undertaken lightly. (That’s the problem with credit cards – it’s just too easy to forget that every purchase is a loan transaction.) Any form of credit can be misused, and a payday advance is no exception. But it’s completely possible to get the benefits of a payday advance without digging yourself into unmanageable debt.

Before you apply for a payday advance, ask yourself this question: After paying this back, can I get by on my next paycheck without having to borrow again? If your answer is yes, a payday advance is the ticket to your next paycheck.

APPLY for Payday Advances HERE!

Credit cards are both a blessing and a curse for millions of people worldwide. Managed use of this form of consumer credit can help build one’s credit score and provide a convenient means through which to transact with merchants who require a credit card in order for a consumer to secure services (automobile rentals, hotel rooms, etc). The key to managing one’s credit card usage, however, is a something that many consumers do not practice: paying off the balance each month. By making only the minimum payment, credit card debt grows significantly as interest is compounded. Revolving lines of credit like credit cards can saddle a consumer with a lifetime of debt.

Then There’s Identity Theft

Use of credit cards can expose consumers to the nightmare of identity theft. Whenever you pay a restaurant bill with your card, you’re exposing yourself to risk if the server is less than honest with your sensitive information. If you’re shopping online at a site with less than industrial-strength security, great potential for an information leak is there. Giving your credit number over any form of telephone connection is highly problematic as well.

Such scenarios of financial pain and horror might cause you to wonder how you can keep yourself from becoming a victim. One answer is to use payday loans rather than credit cards in emergency situations where you need quick cash, as the process does not generally expose you to potential identity theft. However, having a small number of credit cards can be beneficial to your FICO score (indicating diversity in your credit portfolio, which creditors like to see), so perhaps a better long-term answer would be how to make credit card usage less dangerous.

Make it Anonymous, Perhaps?

Elli Androulaki and Steven Bellovin of Columbia University recently published a study entitled “An Anonymous Credit Card System” which proposes a system that could serve as a solution to this problem with credit cards. Consumers would be able to kept close track of their credit card usage while banks would be able to justify the payments it makes to merchants through an anonymous E-cash system.

An Anonymity Barrier

One of the benefits consumers enjoy when using credit cards is that logs of transactions are readily accessible. In addition to convenience, this provides a level of security in that consumers can challenge erroneous charges. However, such logs can be a double-edged sword in that banks can (and often do) sell that consumer profile information to third parties. What the study authors propose is a system that maintains the benefits while at the same time protecting consumer and bank privacy through a barrier of anonymity. For consumers, however, the anonymity system express is conditional in that the consumer must make honest attempts to keep up with payments. If an overspending transaction occurs, the consumer is blacklisted from the anonymous service.

For online retail, truly anonymous credit cards would prevent any unauthorized outsider from acquiring information about a transaction or those involved in the transaction. Androulaki and Bellovin stress that banks would not be able to create profiles that they sell without the cardholder’s permission. In order to achieve this level of privacy and security, the authors have created a theoretical system whose high points will be discussed here.

The Dawn of Credit Card Security

According to previous studies of credit cards and state-of-the-art security methods, measures have existed since at least 1994, but such schemes have involved extraneous trusted parties to maintain security. Furthermore, previous credit card protection schemes offered no expense reports or means of error correction for consumers. Using E-cash as a money substitute that cannot be copied or spent more than one time has furthered security schemes, but it requires prepayment to function and works only for online transactions. It also provides no avenue for error correction or clear listing of transactions. Prepaid debit cards are limited in their security application for similar reasons.

What the authors propose is a system that combines an E-cash system for making payments and a combination of “blind and plain digital signatures” for other operations. Consumers, merchants, card-issuing banks, acquiring banks (institutions merchants are authorized to receive payments through) and credit card associations (Visa, MasterCard and others who set transaction rules between the different bank types named here) would all be served by this system. Credit cards under the new system, write the authors, “should not be forgeable or usable by any third party. It should be possible for cardholders to track their transactions (Expense Report Service) and provide an undeniable proof of any mischarge (Error Correction Service) without endangering their privacy.”

How E-cash works

There are two types of E-cash used in this system, drawn from “wallets.” One is accessed by the consumer while the other is where merchants deposit E-cash received from the consumer. Blind signature schemes are used to ensure that merchants get paid and consumer identities are protected from third parties. If set limits are exceeded, conditional anonymity of the consumer is revoked – an added incentive to make payments, which appeases the banking establishment. For the most part, merchants and consumers are identified only by signature keys when they open their E-cash accounts with their banks. In order for consumers to access their E-cash credit cards, they create an anonymous pass code. Backups, multiple layers of encryption and loss recovery systems are present here, as are timestamps for online transactions; consult the study for a more detailed account. It is interesting to note that encryption is performed by the consumer during the anonymous credit card origination process, via secure home software. Thus, a home computer would be required.

How are Anonymous Credit Cards Paid?

Obviously a consumer honor system would be inappropriate, so the consumer is required to report the amount of money spend each month to the card-issuing bank. Regular backups and reporting are required to protect both banks and consumers. Spending is proven through receipts. The card-issuing bank then computes the consumer’s monthly payment through the same formula used today for standard credit cards.

How Does Error Correction Work?

The consumer has the right to contact their credit card association in the event of an error or fraudulent use. In the event of a error, a receipt is required in order for a correction to be made. When the merchant makes the correction and gives back funds via E-cash, the currency passes the refund to the credit card association, who in turn moves it to the merchant’s acquiring bank. It is the acquiring bank who finally moves the funds back to the consumer’s card-issuing bank. If fraudulent charges require purchase cancellation, the exchange is handled in a similar fashion.

Breaching the Veil of Anonymity

As mentioned previously, consumer anonymity is dropped if credit cards are charged over their limit. In that instance, all E-coins withdrawn by the consumer are traced. The authors mark this as necessary for loss recovery. But seeing as how a cardholder may open as many anonymous accounts as desired, being able to achieve transaction linkage is possible.

Buying into the Checks and Balances

The anonymous credit card system proposed by the study authors could eliminate identity theft altogether (until someone figures out how to introduce decryption technologies in the middle of the process). That could occur, but the system proposed could be the best current option for safe credit card use.

I find it interesting that the proposed system would require consumers to hang on to their receipts. It’s something consumer groups and banks (not to mention mom and dad) always advise us to do, but how often do we practice what they preach? If you’re a conscientious consumer who already keeps track of such things, your adjustment to such an anonymous credit card system would likely be painless. For those of us who are forced to become more accountable, the transition would be more difficult. However, it is a much safer financial road to travel. It is also a responsible road. Sure, payday loans are still be more desirable in situations where carrying a balance over from month to month becomes too expensive, but credit cards will still have their place. The layers of checks and balances that preserve security may sound inefficient to some, but remember that the financial world rarely gives us something for nothing. This isn’t trading freedom for protection, in my opinion.

The Obama administration is working hard to reform laws for companies who issue credit cards. On May 22, the president signed off on the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, act of 2009.

The bill is set to improve the way companies deal with consumers and act as a watchdog agency that protects users. Here are some of the benefits of the new law.

Increases are retroactive

Card companies can no longer raise rates on an existing balance unless the customer is 60 or more days past due. There will no longer be “anytime, any reason” clauses that almost every credit company employed in former contracts.

If the cardholder does trigger the default rate, the bank has to be willing to restore the rate if the cardholder maintains six consecutive on-time payments. Rates also can’t be raised the first year after the card is issued and low introductory rates have to last at least six months.

Rate hikes

Lending companies are still able to raise credit card rates, but they have to give consumers 45 days notice before the new rate is effective. This can help consumers to budget more wisely and switch to new credit cards if needed. Currently, notification time is only 15 days.

Gail Scherwood, a consumer in Billings, Montana stated, “The notice we received was dated two weeks prior, but we didn’t get it until four days before the increase. That didn’t seem fair.” This new rule hopes to resolve this issue, and give customers time to react to pending increases.

Fees

Fees are another hot topic with credit cards. Cardholders no longer will face over-limit fees “unless they elect to allow the creditor to approve over limit transactions.” Also, in general banks won’t be able to charge fees to consumers who pay their bills over the phone or online.

The only fee they will be able to tack on is an expediting fee at the consumer’s request. In addition, if cardholders pay at a bank’s branch, the payment must be posted same-day to avoid late fees.

Student credit cards

There are restrictions on students ages 18 to 21. This consumer group has to have:

1. An adequate income or a co-signer
2. Attended a financial literacy course

If they don’t have both, they won’t be approved for a credit card. This law protects young people who, in the past, were heavy targets for the credit card industry. As a result, many young people were overwhelmed with debt because of the “free” credit cards they were being inundated with. A recent survey showed that the average college student is holding $3,173 in credit card debt. This is a record high since 1998 when the first study was done.

Double-cycle billing is over

Another result of the new credit CARD law is a ban on double-cycle billing. This is when credit card companies base their finance charge on the current and previous balances. This allowed companies to charge interest on debt already paid from the previous month.

Payment allocations

Previously, payments were applied to lower-rate balances first, thus bringing in fees and interest rates on higher balances. Credit card companies are no longer able to do this. The new law requires that any “above minimum payment is applied first to the credit card balance with the highest interest rate.” This could save thousands for consumers.

More time

Finally, consumers will have more time to pay. Card companies must send out statements to consumers 21 days prior to payment due dates. This will give people adequate time to make their payments and adjust their budgets.

Credit CARD

The new law for credit cards should be enacted shortly. It will do a lot to monitor companies’ actions and protect card users. President Obama’s goal was to set in motion a safeguard for credit users, and this law is the first step to reaching that goal.

Add a "c" to "Shleppers" and you may have an arduous journey! (photo: flickr.com)

No one wants to max out their credit cards when moving. But that’s what happened to John Winston of Salem, Massachusetts: “We were a simple move…going to a neighboring city. Our moving company promised that it would cost $875, and a possible added cost for extra time. That was reasonable.”

In the end, the moving company gave John an onsite estimate of $1,950, after his things were loaded on the truck. Fearing the movers would hold his property hostage, he decided to pay the bill with a credit card and dispute it with the office later.

The dispute with the office never happened, however, because the moving company closed before John could contact them. The company completed the move, but John ended up paying the entire $1,950. The contract he signed clearly stated that any disputes had to be handled prior to moving.

How to move without breaking your budget

Moving can be a disaster if consumers aren’t prepared for the transaction. People who are moving should settle the details before the moving truck shows up. Here are some tips for moving without breaking your budget.

Do some comparison shopping

Moving costs can vary widely based on the company you choose. Check with at least three companies before signing on the dotted line. Visiting CityMove.com is a great way to get online bids from several moving companies. Consumers can compare quotes and decide which services are most important and most cost effective.

John Katz, CEO for Flat Rate Moving Company advises, “Request the moving company visit your home prior to moving so they can see exactly what items, big and small, are going to be going. You don’t want any surprises on the day of the move for yourself or for the company.” Also, make sure that quotes include an estimate of how long the job will take. The last thing you want is additional charges to your credit cards for over-time hours.

Perform background checks

Consumers should also run background checks on every company they are considering. The Better Business Bureau can give valuable information on the business dealings of each company and consumers can see the complaints, if any, that have been filed. Make sure the company doesn’t have any repeat offenses, such as continually showing up late, misrepresenting themselves, or overcharging. BBB.org or Yelp.com can provide reviews of businesses. Consumers should also ask moving companies for three recent client references.

Sort through your stuff

Moving time is a great time to get rid of things you don’t use or need. Moving estimates can be made on either total weight or per-hour rates. Either one can be minimized by less having less to move. Garage sales, donations, and give-a-ways are great ways to get rid of things you don’t want to pay to move. Not only does getting rid of excess baggage cut down on moving expenses, it provides extra cash from garage sales or a tax deduction receipts from donations.

Jon Sorber of Two Men and a Truck, suggests people move small items themselves. Sorber said, “Every time a mover has to go into the house, that’s more time [you're paying for].” It’s often easy to move lamps, plants, books, china, and toys for yourself. You can also can pack items, roll up rugs, and break down bed frames yourself rather than pay movers to do it.

Invest a little extra effort

With a little extra effort, consumers can spare themselves unnecessary expense when it comes to moving.  Rather than maxing out credit cards, paying twice as much as the estimate, or paying for unnecessary things like packing, consumers should take a proactive approach to moving. Doing so will save time and ultimately, money.

Pursuit of alternative financial services like payday loans is sometimes necessary. But do the costs break the budget? (Photo: flickr.com)

There are numerous entries in the volumes of study on payday loans which suggest that low- to middle-income (LMI) families are the most frequent users of the product. Where access to credit and liquid assets are limited – particularly in areas that are not well-served by the traditional banking industry – the need for short term credit is greatest. Yet payday loan industry critics continue to produce statistics which they claim are evidence that too much of LMI families’ income is being eaten up by the allegedly excessive fees that payday lending outlets charge for their services.

Not According to this University of Michigan/Federal Reserve Study

In an August 2009 paper entitled “And Banking for All?” by Michael Barr and Benjamin Keys of the University of Michigan and Jane Dokko of the Federal Reserve Board, we see the expense for alternative financial services like payday loans expressed in very different terms for LMI families. Contrary to your average slapdash media expose, their well-researched study found (using the Detroit area as a sample) that “for the vast majority of households, annual outlays on financial services for transactional and credit products are relatively small, around one percent of annual income.” Payday loans and similar alternative financial services make up only a fraction of that, as we’ll see.

The Nature of the Study

The authors derive their data from the Detroit Area Household Financial Services (DAHFS) study. The survey takes into account which alternative and mainstream financial services LMI households tend to use. Respondent demographics, socioeconomic patterns and full access to balance sheet information helped the authors to piece together an interesting portrait of nearly 1,000 Detroit LMI households. Mainstream financial sector fees like annual bank account fees, check fees, NSF fees, bank overdraft charges and annual credit card fees are significant, while alternative financial service costs like money orders, check cashing, payday loans and others are somewhat less so.

Banked vs. Underbanked (or Unbanked)

The authors found that LMI households with access to bank accounts were more financially active and had access to more forms of credit than those households with little or no traditional banking usage. In short, the banked households tended to spend more. Underbanked LMI households displayed less willingness to access credit, but their status did not entirely preclude them from mainstream bank services. Furthermore, the state of being unbanked was shown to be a far from permanent condition. Expanding bank policies which strive to extend services to the “invisible minority,” would account for this.

Who Chooses Payday Loans?

“The alternative financial services sector plays a significant role in the provision of financial services to LMI households,” write the authors. According to Federal Reserve studies like those conducted by Brian Bucks et al in 2006, 25 percent of such households nationwide tend to be unbanked. This creates the need for such products as payday loans and check cashing services to fill the gaps that traditional forms of credit might be used.

Do Payday Loans Burden Them Unnecessarily?

That is a widely held view, but the authors’ findings suggest that convenient, easy-to-use payday loans have a negative financial impact on only “a small fraction” of LMI households. On average, LMI households (banked and unbanked) have been shown nationally to pay between $400 and $600 on payday loans yearly, which only amounts to two to three percent of annual income. For the Detroit area, the median was much lower, ranging from $41 to $98 for various credit services.

Time and distance costs for LMI households to use alternative financial services were observed to be somewhat more significant. In most cases this appeared to be the time and cost of transportation to get to brick-and-mortar payday loan and checking cashing outlets. However, I would suggest that if more consumers were aware of online payday loan services like those found at PersonalMoneyStore.com, time and transport costs would be greatly reduced or cut to nothing, so long as a home Internet connection is available.

Conservative Spending

LMI households necessarily displayed low level spending in the study. Mainstream financial service usage was low, as was alternative service usage (like payday loans). Being banked and having access to direct deposit – both of which are generally necessary in order to receive payday loans – are two areas in which LMI Detroit households surveyed were behind national averages. What this means, of course, is that widespread abuse of payday loan products would be impossible, as the possessing both of the above criteria is generally required.

Staving Off Food Shortages and Eviction

These were two categories where use of payday loans were reported among LMI households in Detroit, which would appear to indicate that such credit is relied upon in emergency situations (rather than in superfluous spending, as the media would have people believe). Access to more credit options (following a transition into the traditional financial services sector) would perhaps assist such consumers in dealing with financial issues, but the fact remains that most traditional banks simply do not have programs for which LMI households can qualify, whether it is because their credit rating is insufficient or the entry cost is too great.

Payday Loans and Fees: a Minute Percentage of Annual Income

While it is true that LMI households may curtail spending due to their relative lack of financial means, the observed debt load from payday loans and similar products didn’t prove to be excessive when they were used. Some financial institutions are rushing to catch up with payday lenders by offering similar products, but since they draw so much of their operating income from more expensive services like overdraft protection, there is little incentive to face risk and greater loss potential that goes with payday lending.

Savings is Important

The savings factor is not included in the authors’ analysis, but they do mention that consumers who face credit restrictions and income shocks that threaten to destroy their budget could certainly benefit from such education. Sadly, such things as how to budget and maintain savings for a rainy day is still something that the American public school system tends to gloss over. Basic financial literacy is something everyone should be aware of, which is why a great deal of institutional reform is needed. To their credit, many payday loan outlets and traditional banks offer information on financial education, but the ideal time to learn is during childhood.

Why So Many Unbanked?

Recall earlier that I mentioned that payday loans aren’t terribly lucrative for banks, to the point that things like overdraft protection are more interesting for them. It is true that the costs of collecting small deposits are high in relation to potential earnings. The only way to make up for that on the institutional level is to charge a higher fee. Unfortunately, such fees even apply to maintaining bank accounts, particularly for LMI customers who banks might consider to be of greater risk. The fees make having a bank account less attractive to some of the more challenged LMI households. Costs for transactions, not maintaining a minimum balance and overdrafts are often excessive. And if a household has had difficulty maintaining a bank account in the past, systems like ChexSystems let banks know. It would appear that the traditional banking system itself is designed to oppose the entry of many LMI households.

Is it Any Wonder that Payday Loans are Popular?

They are popular, indeed. And the authors’ findings regarding payday loan fees in relation to total annual income clearly indicate that they are not an excessive burden. There is a need that payday loans fill. The aftermath for most borrowers is far from catastrophic. Only the slim catastrophically impacted minority make for juicy news, I suppose.

Even a place like this is hard to enjoy when you don't know what you're paying! (photo: wikimedia.org)

Now that the recession is leveling off, many people are getting ready to start using their credit cards again. Because the economy is projected to reach its turnaround point mid-summer, consumers are looking to use their cards to pay for summer vacations.

Marilyn Dean of Los Angeles, California stated, “We haven’t had a real vacation in two years…the first year we just opted not to go but the second year the recession hit us hard and we couldn’t.” Like many other Americans, Dean is planning for a year of normalcy, and that includes a well-deserved vacation.

Paying for vacations

When it comes to paying for vacations, many Americans are looking to their credit cards. Anne Banas, editor of SmarterTravel.com, stated, “It’s pretty much the best way to make a purchase, especially your big items. It’s just really easy. And you don’t lose much in the exchange.”

Some consumers are worried about exchange rates, however, those are secure. Both Visa and MasterCard secure money based on “wholesale rates offered to large banks and corporations,” instead of the retail rates most customers are charged. Every time Americans use a credit card for an overseas purchase, they are guaranteed an excellent exchange rate.

Stiff fees for overseas purchases

Although the exchange rate is taken care of if a consumer pays with credit cards, there are other things to be aware of when traveling. Fees can crop up quickly with any overseas purchase. Most banks charge a “currency conversion fee” when their customers purchase items outside the US. This fees can range anywhere from 1% to 3% of the purchase price. Consumers should do some advance planning and call their credit card companies to find out what the fees for foreign conversion are.

A recent study by Bankrate.com showed that Capital One was the only card company that did not pass the conversion fee on to their customers. If you know you’re going on vacation in a few months, it may benefit you to open a credit card account that has no conversion fees and use it solely for travel.

Over-the-top fees for cash advances

Taking out cash advances on credit cards is a huge budget-breaker. Interest rates on cash withdrawals often exceed 20%, and that interest begins accruing from the minute the money is withdrawn. David Lytle, editor of Frommers.com, stated, “The rates on those things are awful. It’s the worst way to get money.”

Hidden fees for debit card withdrawals

When traveling abroad, the best way to get money is to use a local ATM and a debit card. A debit cards is linked directly to the cardholder’s account, so it deducts funds automatically. Consumers should be aware, however, that some banks charge anywhere from $2 to $5 for each withdrawal from an ATM outside their network. It’s also possible for some banks to charge 2 to 3% of the amount withdrawn with a debit card at an ATM.

Consumers need to understand the fees and policies of their banks before they travel abroad, and if they find a bank that offers a better deal it may be wise to open a special travel account. With some careful research and planning, paying for  an overseas vacation really can be worry-free.

Installment loans have been there for people from all walks of life who have been failed by the traditional credit and lending system. (Photo: flickr.com)

You’ve more than likely heard the call to arms “Stimulate the economy!” before. It takes expenditure in order to keep the wheels of commerce flowing. While the current recession has made that difficult – people are still highly unwilling to spend on non-essential purchases – the standard progression in America has been that accumulation of household debt can be just the grease needed to lubricate the economic wheels.

Of course, access to credit is a very large first step toward accumulating the managed debt and consumerist desire that creates the consistent cash infusion the American economy requires. But what happens when traditional credit is unavailable?

For large segments of the American population, being denied for traditional credit has forced them to consider other options like installment loans. The reason for these denials, according to researchers like Christian Weller of the University of Massachusetts and Center for American Progress, are multiple.

However, concepts of race and ethnicity may indeed be a determinant. In his study “Credit Access, the Costs of Credit and Credit Market Discrimination,” Weller considers household debt information in an effort to determine whether discrimination in the consumer credit market has declined, gone away or actually persisted as deregulation of credit industries has occurred. The survey referenced is the Survey of Consumer Finances (SCF), which the Federal Reserve conducts on a tri-annual basis.

Borrow to Spend, Spend to Stimulate

As families borrow, more of them can afford to undertake major purchases like homes, cars and education than otherwise. Consumer credit such as installment loans also help smooth over financial shocks that come about due to medical emergencies and other situations. If the playing field were level, it would indeed be that simple.

Yet Weller acknowledges what we all know: families don’t all have the same access to consumer credit. Demographics, minority status and income levels have contributed toward lessened chances to obtain a loan and high loan costs. Weller identifies this as “credit market discrimination.”

Restricting access to traditional loans on the basis of race, ethnicity or other personal traits yet not providing sufficient access to some form of installment loan credit when consumer need is imminent has been a failing of the traditional banking industry. As deregulation began in the late 1970s and grew to fruition in the 1990s, the message became clear: America’s economy was on track for more market competition and less discrimination.

Payday loans and installment loans filled consumer need, promoted competition (an invitation banks still haven’t taken up in earnest) and turned back some of the tide of discrimination.

Measuring the Credit Market

Weller analyzes evidence of financial constraints from the years 1989 through 2004. Looking at a sampling of borrowing families, demographic characteristics like family size, marital status, living arrangement and others are considered. Financial indicators like credit history, family income and accumulated wealth are also potential factors, although some of Weller’s findings indicate a “taste-based” form of discrimination based upon prejudicial perception may play a role. Sometimes this is even a more socio-economic form of discrimination, where those of higher income judge those with less negatively.

Consulting Professionals in Times of Financial Insecurity

When consumers face financial stress and don’t have the liquid assets on hand to absorb their financial shocks, seeking out assistance is wise. Among those surveyed by Weller, however, we see that consumers in need of aid don’t always do this. Not only that, but a disparity appears to exist along racial lines. The percentage of Caucasians who relied on financial professionals in 2004 was 45.7 percent, compared with only 27.7 percent of African–Americans and 27.2 percent of Hispanic consumers. Those families who did rely on professional assistance were found to be 17.3 percent less likely to be denied for a traditional loan.

On a related note, the rate of those who applied for traditional loans but were denied also bears a connection to race. Weller found that African–Americans were 41.7 percent more likely than Caucasians to be denied a loan. This difference became even larger when larger-scale loans like home mortgages were considered. The author cites a 1996 study by Jonathan Crook, which suggests that lower-income and older families were also more likely to experience denial on traditional loans.

Negative Expectations

Weller found that 14.9 percent of African-American families and 11.9 percent of Hispanic families claimed that that rather than experiencing a denial, they didn’t even apply for a loan because they figured they’d be turned down. Among Caucasian families, this figure was only 4.9 percent. Low versus high income levels showed a similar order. Tracking these figures from the beginning of the study period in 1989 to the end in 2004, loan denial and application discouragement increased.

For those groups who experienced the greater traditional loan denial or discouragement, Weller finds that short term consumer loans like installment loans tended to be more prevalent. In 2004, 18.2 percent of African-Americans respondents used installment loans, while 10.5 percent of Caucasians and 10.9 percent of Hispanic families. While critics of the installment loan industry would point to some of the short term consumer loan products a small number of credit unions across America offer, Weller found that only 3.6 percent of all consumer debt in the survey originated with credit unions.

An Important Distinction

Weller found that even though minority groups borrowed less from traditional lenders, which did not mean that they were significantly more likely to borrow from sources like installment loan companies or rely upon credit cards. “There is no statistically significant difference by race and ethnicity when it comes to borrowing from consumer lenders,” writes Weller. “The combination of these results with the ones on traditional banks is consistent with the earlier finding that denied and discouraged applications are larger for minorities.” The common conclusion here is that minority families in the survey had restricted access to credit when compared with Caucasian families. Low- versus high-income showed a similar breakdown.

Installment Loans are an Answer

Used responsibly, installment loans can enable any consumer to handle the financial shocks that life inevitably will throw your way. The credit restrictions that have existed in various segments of American society have necessitated the need for short term consumer credit, and products like payday loans and installment loans have filled the need. If consumers are going to partake of whatever source is available when the need is great, then the presence of a regulated industry that saves consumers from highly negative alternatives.

Thus, installment loans fill a need; they do not target groups in need. Claims of “aggressive advertising” would seem to apply more to traditional lenders, as their advertisements are much more prevalent than anything the payday loan and installment loan industry offers. I base this on my own observation, but I’m convinced it is accurate.

Weller’s suggestion that further study is needed as to why such a disconnect exists between minority and low-income groups and traditional banks is an interesting suggestion that could possibly help to close the gap and create more of the competition that fuels the American economy.

Image from Flickr.

Well, it seems at least a few people are finally getting over the “Saw” franchise. Then again, it was the second highest grossing film at the box office last weekend. However, more people chose to buy tickets to “Paranormal Activity.” In the ads for “Paranormal Activity” it promises to give you nightmares, so anyone who wants to get seriously spooked for Halloween might want to give this film a try.

“Paranormal Activity” reviews report that it’s a pretty good film, too. Critics agree this film is worth whipping out the credit cards to get tickets. Gary Wolcott from the Tri-City Herald calls it “a creepy, make the skin crawl, heebie-jeebie producing scare fest.”

More “Paranormal Activity” reviews

The top critics at Rotten Tomatoes agree that “Paranormal Activity” delivers on its promise of scariness. Colin Covert from the Minneapolis Star Tribune comments “Without financing, stars or more than a couple of special effects, first-time writer/director Olen Peli has made a diabolically effective essay in irrational horror.”

Sure enough, IMDB reports that the estimated budget for this film was only $11,000. In the film making universe that is chump change. Apparently director Oren Peli shot the movie in his own home over seven days. Is anyone else getting flashes of “The Blair Witch Project”?

Quality creepiness

Despite its teeny budget and timeline, Peter Travers from Rolling Stone says “the no-frills Paranormal Activity comes packed with thrills.” Rob Gonsalves from eFilmCritic.com says that it “actually makes its premise work.” The story is that a couple moves into a new home and is then terrorized by a demonic presence.

Dennis Harvey from Variety says “Horror fans who value credible creepiness over the usual splatdom will welcome this.” The two non-famous leads in the film go by there real names, Katie and Micah, and Kevin Lalley from Hollywood Reporter says “The banality of the couple’s day-to-day existence when they’re not hearing unwelcome guests enhances the sense of realism.”

A Halloween treat

No new movies are coming out this weekend, so anyone seeking a good Halloween movie should probably head for “Paranormal Activity.” It sounds like a true scare fest, and you have to give Peli props for pulling that off without any special effects or famous actors.

Last weekend “Paranormal Activity” pulled in more than $20 million, so obviously Peli’s little investment has already paid off. In closing, I’ll leave you with the words from Adam Graham from the Detroit News. His “Paranormal Activity” review: “Now that’s horror.”

Despite Japan being one of the most technologically advanced nations in the world, it is largely a cash-based society. Larger stores do allow you pay with a credit card, but on the whole, Japanese shoppers don’t use credit cards as often as Americans do. I was told this before I was stationed in Tokyo and warned not to use my credit card, but I decided to try it anyway.

Option One or Two?

I bought some household items at a well-known Japanese retail chain and pulled out my Master Card. I was terribly curious to see if I could actually use it, and I had enough money to pay in cash just in case my advisers were right.

The cashier recounted to me in Japanese each item she rang up, not that I understood what she was saying. Obviously she realized this because when it came time to announce the total, she smiled politely and turned the display around for me to see the price. I handed her my credit card. She smiled, asked me something in Japanese and held up two fingers, one at a time: one or two?

What Does It Mean?

Oh, boy. I wasn’t sure but decided to take a guess. One. She nodded, took my charge card, rang up the purchase and gave me the receipt. Now I’m curious. I had to know what the one or two thing meant. Sadly, no one on the base nor at work knew.

Even my friend who’d been in Japan longer than me simply advised, “All I know is you just say one.”

Enlightenment

Then one day, a translator came in from the States. We had lunch, and I was dying to ask him about the one or two credit card option. Finally, I had found someone who had a clue. Apparently, the Japanese credit card system is fashioned after the original American Express program, where you could split the charge or pay for it in total. When you choose option one, you’re asking to pay for the entire charge. If you choose option two, your charge is split into two consecutive bills.

For the Japanese, regardless of whether you choose option one or two, you are required you to pay the entire balance on your credit card each month. In other words, if you owed $300 and chose to split the bill, you would be charged $150 at the register. The following month you would be charged another $150. In both cases you would be required to pay the full balance of $150 when your credit card bill is due. There is no option of a minimum payment like in the United States.

In many countries outside the U.S., cell phones have replaced credit cards. In Japan and Finland, for example, travelers rarely carry cash, checks or credit cards, but rather swipe their phones or send text messages to pay for train rides.

In the U.S., the cell phone hasn’t yet reached this capability, mostly because of carriers who cannot settle on how that service’s revenues would be divided amongst each company. One up-and-coming company, however, thinks it just may have a handle on how to make it work. Paymo is a mobile payment network and it has so far confirmed deals with AT&T, T-Mobile, Cellular One and Virgin Mobile, allowing consumers to make online purchases with their phones.

Their business model is quick and simple. When a consumer decides to purchase an item, they click on a Paymo logo, much like the PayPal logo. This takes them to the online checkout area where they enter their cell phone number. A text is sent via Paymo to their cell phone asking for a verification on the purchase. Once the customer replies, the transaction is verified and completed. The item will then be either deducted from the owner’s prepaid account or be itemized on their next cell phone bill.

Paymo in the U.S.

Paymo is used in about 45 countries, and it’s slowly working its way into the online business world. Credit card companies, banks and mobile carriers have tried in the past to work out a deal that allows for online pay tied to cell phone accounts. So far two methods have been tried in the U.S. The first allows customers to wave their phones in front of a reader for payment. The second allows them to pay via a text message confirmation process. Neither one has taken off with the American public.

Paymo, a San Francisco-based company, still thinks paying with cell phones will become mainstream in the U.S. once people understand its true value. CEO and co-founder Paul McGuire stated, “Paymo will succeed by serving cell phone and website users who don’t have credit cards. They want to buy stuff online but need an easy way to pay. And what better way than via a mobile-phone account?”

Will cell phone companies bite?

Most cell phone companies supplement their phone packages with additional items, such as ringtones, wallpapers, games, news, e-mail retrieval and web-browsing. Because of the economy, they are looking for more revenue-building ways to bring services to consumers.

Paymo believes it has the perfect solution and is hoping to woo cell phone companies into using their product. With Paymo’s proposal, cell phone carriers would walk away with 20-50percent of revenues generated by online sales. The remainder would go to the retailer and Paymo.

Paymo is no longer alone

Although Paymo does have an aggressive pay structure, it is not alone in trying to break into the cell phone payment market. PayPal has been working on the same thing for a few years now and met with the same success rate. Zong and Mobilcash are two more companies working hard make cell phones replace credit cards. With this type of competition it will be hard for Paymo to gain its market share in the US.

Novak Djokovic may need one of his credit cards to help pay the fines for his latest on-court outburst. (Photo: Wikipedia.org)

“Use one of your credit cards, Novak!” I shout from my semi-comatose position on the couch. I just witnessed a tennis player’s breakdown that’s going to cost him money, maybe lots of it. Novak Djokovic missed a tiny little lob over the net and smashed his racquet into the court surface in rage. The racquet, of course, folded and close-up shots from the TV cameras showed possible ridges in the court surface.

This is Gonna Cost!

Whatever happens, this little display of temper is going to cost you, Novak. Probable fine from the APT tennis organization will be in the region of $10,000, wasted racket – $200, repairs to courts surface – a whole debate. The Shanghai Club may decide to lay a complete new surface, because the surfacing contractor will no doubt tell them that it is impossible to ‘patch’ a court surface… “We will never get it perfectly smooth.” If you are really unlucky, they may decide to resurface all the courts in the club so the colors match. As far as the racquet is concerned, one of your credit cards will look after all the messy details.

The Money Angle

This year is the first that Shanghai joins eight other cities in hosting an ATP World Tour Masters 1000 event, the new top tier of tournaments on the ATP World Tour. It is also the finale to the three-week Asian swing of the ATP World Tour. The prize money is over five million dollars. Wow, Novak, you couldn’t have picked a worse place for your demonstration. Over a billion Chinese will remember you.

We Understand

We may be highly critical of your actions and your uncontrollable desire to smash something, but inside we do understand. The court surface was a better choice than your opponent, Gilles Simon, or the umpire or even some stray character out of the audience. But the media is going to dine out for weeks on this event. All sportsmen and others who are trained to such a high pitch snap easily. My grandson, aged nine, lost a swimming race by a touch last week and he’s inconsolable, mentally kicking himself for taking too long on a turn. He hasn’t smashed anything in rage, but I’m sure he will learn as he gets older.

Ambition

It’s all about ambition, the desire to win, to excel, to never be second. Every time we are on the way to the swimming pool, grandson reminds me that his ‘dream’ is to swim in some future Olympic Games. I hope he makes it. Then he says, “What was your dream when you were my age, Pop?” It’s difficult to explain that I wanted to be a tail-gunner in a Liberator bomber. Luckily, I was too young to achieve my dream.

The Novak Djokovic Dream

Novak has achieved his. At age 24, he will be elevated to the world’s number three ranking in a week’s time, something very few people manage to do. He has already won about 14 million dollars playing tennis, so he walks with a wallet full of unlimited credit cards. The racquet-slamming incident was not money linked, just an outward sign of sportsman’s total frustration.

Rather than being a product of impulse or vanity, payday loans are a reflection of consumers' reaction to a harsh economic climate. (Photo: flickr.com)

There currently exists no definitive study of how payday loans are used. Researchers from both sides of the aisle (pro and anti-payday loan interests) are working on it, however. For now, there are studies like “What Do High-Interest Borrowers Do With Their Tax Rebate?” by Marianne Bertrand and Adair Morse of the University of Chicago. They attempt to make sense of the correlation between spending and borrowing habits in relation to the 2008 tax rebate checks. What they find is that there is consistent evidence supporting the idea that the average payday loan user experienced a lessened dependence upon payday loans because of their tax rebate check. In so doing, I suggest that these average payday loan customers are not so impulsive and uneducated as reactionary media would have the masses believe, but reacting to a difficult economic climate in a natural way.

Average and “Temptation” Users

Bertrand and Morse identify different payday loan usage groups, from low to medium use and a smaller high-use group they classify as “temptation” or impulse spenders. While most payday loan customer groups showed a marked decline in the use of payday loans following the appearance of their tax rebate check, the temptation group showed no such decline. The size of this group is marginal compared to the majority in the authors’ survey.

While the temptation group tends to be governed by impulse and use payday loans for non-essential things like large entertainment purchases and vacations, it is significant to note that payday loan users as a whole in the survey did not tend to use their tax rebate check to pay down or “retire” their payday loan debt (only nine percent said they did). They did tend to answer that they were using payday loans to help with regular monthly bills.

Low-to-middle frequency payday loan users (the bulk of those surveyed), are more likely to use payday loans as an infrequent bridge between paydays, absorbing surprise budget gaps. A related study by Shapiro and Slemrod that the authors cite (”Consumer Response to Tax Rebates,” 2003) indicates that this group tends to depend upon credit when their budget is unable to handle financial shocks.

Details of the Study Sample

Here’s how Bertrand and Morse’s study worked. For two weeks they distributed surveys at 70 different payday loan outlets. As added incentive to participate, customers were offered a free one year magazine subscription. In total, the final survey sample included 881 people. Contrary to media rhetoric that the payday loan industry preys on the elderly, the median age of the respondent was 42, and their monthly income averaged $2,257 (around $27,000 annually, which is neither rich nor destitute poverty). Only five percent lacked a high school diploma, while a telling 15 percent lacked a college degree. Thus, the average payday loan customer is educated, which also runs counter to the popular media image of simple people being manipulated by payday lenders for their life savings or something equally ridiculous.

Looking For a Buffer

The authors’ study results appear to indicate that tax refund checks and payday loans play a similar role, although the one-time nature of a tax refund means that the buffer it provides against surprise expenses is temporary. Considering the average appearance of respondent demographics, it could serve to reason that the predominance of those in the survey who claimed they had to depend upon credit of the payday loan nature during emergencies are in fact… average people. They are not an exploited minority or fringe group. The case of temptation spenders – being more aberration than norm in the study – could simply indicate that there will always be a segment of the population governed by impulse rather than genuine need. Such a condition exists among payday loan users, but it is hardly symptomatic. Numerous studies indicate that more extreme financial behavior exists throughout society and is not confined to lower income groups.

Everyday Living and Payday Loans Do Not Mix

Clearly, everyday dependence upon payday loans (such as those observed in the temptation group) is harmful. The temptation group’s habits placed them in a situation where they needed to use their tax refund for staving off catastrophic situations like eviction or utility shutoff. Excessive use of payday loans (just like excessive use of credit cards or other types of consumer loans) could lead to such difficult financial straits. The onus falls upon the consumer (whom studies like Bertrand and Morse’s indicate are generally educated) to correct their behaviors or seek help in doing so. To their credit, reputable payday loan companies are able to steer consumers in the direction of credit counseling, should the need exist.

Borrowing Decisions: A Product of Duress, Not Coercion

The bulk of American society has been under financial duress during the current recession. It’s difficult to argue otherwise. The constraint of one’s shrinking economic reality forces them to make difficult decisions. Bertrand and Morse suggest that while their study tracks spending and borrowing patterns of payday loan customers, what is truly needed is a study that reveals the thought process an individual goes through when facing financial shocks. If it is reasonable to assume that the bulk of those surveyed in the authors’ study – low-to-mid use payday loan customers who are covering for infrequent troubles – correlate into a bulk of American society, then it would seem that this generally educated populace is reacting to harsh conditions. That there is not a permanent reduction in payday loan use observed in either of the surveyed groups would seem to suggest that even after the tax refund check has made its impact, economic environment conditions persist. These are educated people – “average” in age and income – who run into difficult situations. If payday loans can spare them from financial catastrophe, it is not unreasonable to think that they would consider the option.

Banks have suffered through the recession with huge mortgage industry defaults, but a new fear that credit cards will do the same is looming. Ken Lewis, Bank of America CEO, stated he believes that despite the government’s $700 billion rescue program, it will be “an awful year” for credit cards and companies that issue them.

It’s estimated there are almost $76 billion in credit card loans, and more than half of that debt is held by Bank of America, JPMorgan Chase and Citigroup.

The charge-off rate

Already setting the stage for disaster is the banking industry’s estimate that  their charge-off accounts have reached a historic high of 7.73 percent. Most experts anticipate that figure will increase, as the unemployment rate is still dangerously high.  This rate is commonly accepted as the most accurate indicator of future losses in the banking, mortgage and credit card industries.

Analyst Mike Taiano believes that the charge-off rate could be higher than 10 percent by year’s end. “With the economy the way it is, most consumers are still struggling. … Though there are some indicators that we are through the recession, there is still a long way to go to recover,” he said.

Bracing for the loss

Unlike the recession of the ’80s, when unemployment rates ran high also, this generation brings its own set of problems. First, new proposed legislation is set to allow consumers to request their banks reduce their mortgage debt if they have filed bankruptcy. Experts are fearful that this will cause more people to file bankruptcy so they can default on credit cards and other outstanding debts.

On the brighter side

David Robertson, publisher of the Nilson Report, stated that it’s “encouraging” that banks are adept at maneuvering recessionary periods after “years of practice.” When facing credit card losses, they know what cautionary actions to take.

For example, banks are slashing limits already and raising interest rates to bring in as much revenue as possible.  They are also working their customer service teams exceptionally hard, encouraging communication with customers. American Express is a leader in the mitigation process and recently offered their credit card holding customers a $300 cash-back return if they paid their account balances off and the closed their accounts before April.

Citibank

There is also news that Citibank is joining the ranks of a banks coming up with strategies to mitigate loss.  The company is looking to work out a joint venture for its private credit card division that serves retailers, as a way of moving out of the credit card business altogether.  However, experts say Citibank is alone in wanting to distance themselves from the credit card industry.

Most banks know they will have a difficult time attracting a completely new set of customers and would rather work hard to keep the ones they have, while easing their own risk.  Stuart Gunn, director of Bridge Strategy Group, stated: “If you want to be the retail bank of choice, it means you have to have CDs, debit cards, home equity loans and credit cards. Do you really want to exit one of the major lines of business?”

Credit card lenders take a gamble with bankruptcy (photo by Freerangestock.com)

Although many interest rates were recently cut, credit cards lenders are set to increase theirs. Mortgages and savings rates have fallen dramatically due to government intervention; however, credit card rates have moved up. Even cards listed as “low-rate” are averaging 11.62%, balance-transfer cards are averaging 13.15% and cards with cash returns are at 13.82%.

Good customers are not exempt

These rate increases are happening with all cards and affecting even the best-paying customers. Twenty-year customer Echo Garret of Marietta, Georgia says, “I certainly don’t feel like a valued customer.” The interest rate on her Citi Advantage card was recently raised to 19.99% from its 20-year average of 10.9%. Her husband’s card had an equally painful increase in the form of a tripled interest rate. “We’ve been good, longtime customers and there was never a problem with our accounts. We pay on time and more than our minimum…I just don’t understand,” she added.

Last-ditch revenues for lenders

Many credit card companies see increasing their interest rates as an easy way to bring in more revenue. It also makes them look more financially stable when revenues are up. A lot of companies are also trying to maximize their income streams before the new federal rules governing credit card interest rates go into effect. The new rules will prohibit rate hikes on existing balances unless borrowers fall 30 days behind on payments. The rules take effect in 2010 and right now credit card companies are rushing to maximize interest rates before the deadline.

A game of Russian roulette

Many experts say that these last-minute interest rate increases are potentially detrimental to lenders. They might help the companies in the short term, but in the long term it’s a “game of Russian roulette,” says Jose Garcia, senior researcher of Demos. “They’re playing the [balancing] game of getting people to pay the most they can in interest without going into default—where the issuer gets nothing,” he adds.

Last-resort bankruptcies for borrowers

Robert Manning, research professor of Consumer Financial Services, believes that higher rates force even good customers into default. He believes that credit cards with sudden interest-rate hikes cause minimum monthly payments to reach unmanageable levels. This pushes customers into default and leads to bankruptcy filings.

Neither a borrower nor a lender be

One customer who fell into this trap is Amanda Burnett, recent college graduate. She intended to pay off her $3,500 Bank of American credit card but when the bank raised her APR from 16.99% to 25.99% she was unable to meet even the minimum required monthly payment. She called to close the account and then asked for a better rate. The bank told her that once an account is closed, its terms are fixed. Said Burnette, “I was shocked [because] I had planned on paying off my balance and keeping the credit card for future use, but now I feel misled and betrayed.”

Bank of American spokesperson Betty Riess explains that it is their policy to allow borrowers to opt out if interest rates are too high; however if a borrower doesn’t opt out and instead closes the account, the higher interest rate remains.

Credit cards after 2010

Hopefully, once the credit card reform bill becomes effective in 2010, interest rates will become more manageable. Riess states, “We are hoping that credit cards will work within our customers’ budgets, while still bringing us the revenues we need to offer outstanding lending services.” Only time will tell if credit card companies are able to strike this balance.

This Federal Reserve/Vanderbilt/Penn study tries to connect payday loans to credit ruin, but what they leave out suggests a rosier alternative. (Photo: flickr.com)

Credit cards have proven to be both a useful tool in establishing a credit history and a bane to those consumers who hope to maintain a good credit history. The temptation to “swipe and go” has been actively cultivated by the American media. With the magic plastic in hand, consumption is quick and easy. Those who pay off their credit cards each month may escape the revolving interest trap, but the vast majority of credit card users must not pay their balances in full. If they did, why would credit card companies offer reward programs? If consumers weren’t tied into earning points and paying interest fees, the programs wouldn’t be profitable for the companies.

What about Payday Loans?

According to multiple sources, over 10 million U.S. households use payday loans each year. These short-term loans are paid off over a set period of time, typically two weeks’ time. They fulfill a need and are not a swipeable ticket to impulse purchases. Certainly payday loans CAN be used for impulse buys, but lenders make it clear that this is not advisable. Furthermore, the amount available is finite, typically smaller than the credit limit available on a credit card.

Yet Sources Continually Try to Connect Payday Loans to Financial Ruin

Take the January 2009 interdisciplinary study “Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?” Written by Sumit Agarwal (Federal Reserve Bank of Chicago), Paige Marta Skiba (Vanderbilt University Law School) and Jeremy Tobacman (University of Pennsylvania), this study attempts a statistical correlation between credit card default and payday loan use. In particular, the trio attempts to make the case that consumers consistently make bad decisions by choosing to take out payday loans when they have credit card liquidity.

There must be a reason that consumers make such a choice, however. Agarwal, Skiba and Tobacman do not define such reasons, so I will attempt to fill the crucial gap.

Methodology and Results

Agarwal, Skiba and Tobacman analyze a sample of 102,779 people who took out payday loans from a single lender (this is significant, as I’ll show in a moment) and 143,228 with credit card accounts in states where the same payday loan company operates. They discovered that while credit card issuers used FICO scores as the primary means of determining a consumer’s credit worthiness, the payday lender used Teletrack scores instead, which tend to track borrowing history more on the subprime scale.

According to the study authors, Teletrack scores were eight times more effective at predicting payday loan default than FICO scores. Thus, it can easily be assumed that the more effective credit evaluation device creates more successful payday loan transactions that it would defaults and additional fees. The mainstream media is too often ready to accuse the payday lending industry of wielding such fees like a fire hose on unwitting consumers, but the truth of the matter is much less dramatic.

Payday Loan Customers Have Access to Prime Credit

Even though the authors’ study indicate that on average, consumers who use payday loans have a lower average income compared with those who just use credit cards, the same study indicates that their average FICO score is still in the 620 or slightly lower range. Thus, they can still access prime credit cards.

Why is it then that, as the authors indicate,

Two-thirds of people in the matched samples have at least $1,000 of credit card liquidity on the day they take their first payday loans, much more than the typical $300 payday loan.

It’s an interesting question. A 2001 survey by Elliehausen and Lawrence regarding credit card availability and usage found that 56.5 percent of respondents who used payday loans had bank-issued credit cards with liquidity available, but 61 percent “hadn’t used them in the past year in order to avoid exceeding the cards’ credit limits.”

People Don’t Like to Admit When They Fall to Temptation

The authors show us that there is a steady decline in credit card liquidity leading up to the time when consumers take out payday loans, but the liquidity doesn’t disappear entirely. The authors comment that

This is interesting because it speaks to the question of why people borrow on payday loans. If liquidity were flat until a large drop one month before the payday loan application, we would suspect that a single large bad shock had unexpectedly arrived. Since we find average liquidity falling steadily, impatience, general financial mismanagement or persistent shocks seem more likely explanations.

Perhaps what Agarwal, Skiba and Tobacman define as “impatience” or “financial mismanagement” could include the psychological temptation having a credit card that needn’t be paid off in full each month (advisable, but generally not required). It would be worth studying that factor in greater detail, as I know from first-hand experience that having access to credit, using it and allowing it to revolve month-to-month is an easy trap. In my opinion, such situations are not out of the ordinary. Closer study is warranted.

The Author’s View of Payday Loans is Limited

Obviously, if you only survey financial results based on the clientele of a single payday lending operation, your results will be far from definitive. When the authors claim that credit card holders who take out payday loans are 92 percent more likely to experience credit card delinquency, such a dramatic number indicates to me that the statistical sample is much too small to be meaningful. If consumers evaluated by Teletrack are generally less prone to payday loan defaults, why would credit card defaults be all that different?

It is significant to note here that applying for payday loans does not generally depend upon or impact one’s FICO score. That is one of the major selling points of the product, as consumers with less than perfect credit can take out a payday loan for a set amount when necessary. There is no system of revolving credit at work with payday loans; the balance is paid in full at a set date two weeks in the future. Furthermore, since payday loans obtained after Teletrack reference are generally not recorded in a consumer’s credit history, other lenders cannot use a consumer’s payday loan history against them when they apply for large-scale loans for homes, vehicles, education, etc. If banks could use payday loan information against consumers, they most certainly would. Their track history of penalizing and confusing consumers with credit card terms prompted President Obama to step in with fair credit practice legislation, which in my mind only serves to support my argument that banks will charge whatever they can.

Why Don’t Credit Card Companies Use Teletrack?

You’d think credit card companies would find any subprime information about a consumer to be valuable in their attempts to justify higher rates and limiting practices. The study authors indicate that the reason credit card issuers don’t normally use Teletrack is that the credit bureaus charge them for each credit query. Perhaps the leverage they can glean on a consumer is not valuable enough to counteract the fees?

Temptation Yields to Payday Loans

Considering how much damage a consumer can do to their credit history by allowing revolving interest credit cards to spiral out of control, the set maturity period of payday loans could readily be considered a better option. From a psychological standpoint, not having a tempting credit card in hand when you surf E-commerce sites or drift through the local shopping mall could be advantageous to the consumer. While Agarwal, Skiba and Tobacman have the beginnings of a useful study here, a larger sample of both credit card issuers and payday loan businesses is needed to make a more meaningful assessment of the payday loan’s supposed correlation with credit destruction. Perhaps then consumers can more easily see that the practices of banks who issue credit cards may be the most harmful advice out there. See the video below if you aren’t convinced of that yet…

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People younger than 21 can no longer get credit cards on their own.

When a new piece of legislation takes effect in February, anyone younger than 21 will need a cosigner older than 21 to get a credit card. I believe this is a very positive step that will keep a lot of people from getting deep into debt.

If I hadn’t gotten a credit card when I was 18, I know I’d be a lot better off. I racked up so much debt on my credit card by the time I was 21 it seemed it was already too late to get out. Years later, I am still paying off purchases I made while I was in college.

Start of a credit catastrophe

It’s this type of mentality that keeps people going deeper and deeper into debt. I figured I already owed thousands of dollars on my card, what’s a few hundred more? Many college students and graduates feel the same way, so they keep their cards maxed out and eventually need credit counseling to figure out how they will ever overcome their debt.

I think if I’d had a few years after I moved out of my parents house to learn to live without a credit card, it would have been much easier to go without one or to use one responsibly. But alas, an 18-year-old with a credit card who is on her own for the first time is a dangerous thing with possibly lifelong implications. I am glad legislators see this and passed the new law.

Implications to credit card industry

If my prediction that not allowing people to get credit cards until they are 21 will cause a lot less debt and much more responsible use of credit in general, it could have huge implications for credit card companies. Personally, if I had not been allowed to get a credit card until I was 21 I might have never gotten one at all.

I think and I hope that this will be the case for many young people, who will realize they can survive without using credit and spending thousands on interest alone. I think this new law could greatly reduce the use of credit cards, which is great news for society but could potentially bankrupt the credit card industry.

I guess creditors should start looking for new jobs now.

Will the Federal Reserve create the framework consumers need to experience debt relief? (Photo: flickr.com)

Due to the recession, people are looking for debt relief more than ever.  Credit lenders are no longer as readily available as they once were.  Mortgages are difficult to handle.  The unemployment rate continues to rise.  Because of these problems, the Obama administration is calling for a new “financial rulebook.”  The administration aims to arm the Federal Reserve with increased power to regulate risk of large institutions in the financial industry. The goal is to police banks whose potential failure could cause economic instability to the nation.

The Federal Reserve also wants to create a strong framework of regulations and have a part in coordinating responsibilities within the financial system.  Investors would have increased protection, with the Fed focusing a committee on consumer products such as credit cards and annuities.  Treasury Secretary Timothy Geithner stated that the overhaul will “eliminate gaps in the financial system that encouraged risky behavior leading up to the meltdown [of the recession].” Geithner added, “We had a financial system that was fundamentally too unstable and fragile, and it did a bad job of basic protection of consumers and investors. Those are things we have to change.”

Unveiling the Plan

This week, President Obama is supposed to introduce his overhaul plan to the media. Initially the plan was for an intense restructuring that would consolidate all financial directives into one agency.  Senator Chuck Schumer of New York was a strong supporter of the consolidation, believing that “retaining multiple regulatory entities preserves the regulatory arbitrage that allows institutions to pick the oversight scheme that benefits them the most, often at the expense of consumers and the health of the system overall.”  This plan was ultimately vetoed by the Obama administration.

Another vetoed plan was to merge the Securities and Exchange Commission and the Commodity Futures Trading Commission.  Supporters believe the merging would offer a greater security in investments, bringing debt relief to aging Americans when they most need it, at retirement.

What We Should Expect

The plan to be unveiled will most likely leave the Fed, the OCC and the Federal Deposit Insurance Corp as the largest banking regulators.  In addition, the plan will impose “robust reporting requirements” on asset-backed securities and require banks that sell them to keep a financial involvement in their performance.  As Geithner stated, “We want the regulators to have a financial interest in the development of the products they are selling to ensure they are acting honestly and focused on growth.”

Easing the Strain of the Recession

Consumers are anticipating the new plans, hoping they will offer debt relief and ease the strain of the recession.   Banking Coordinator Susan Largina of Bank of America, stated, “We’re seeing a more hopeful clientele coming in. They want to believe the good news the media is interspersing throughout the daily news… It’s our job to maintain that hope by increasing the benefits and long-term viability of our banking products.”

Consumers Want Answers

With the new financial rulebook coming to the marketplace, consumers are waiting impatiently for answers.  They have suffered through the economy as best they could manage, using credit cards, tapping into savings and budgeting wisely.  With the recession coming to a close, consumers see debt relief as something they can reach in the near future. Hopefully with the new financial changes in the economy, banks and lending institutions will help consumers find their way back to a normal life.

Carrie Fisher, 30 years ago. Image from Flikr.

Carrie Fisher, more commonly referred to as Princess Leia, appeared on “Today” this morning to talk about “Wishful Drinking.” The piece is both a book and a one-woman Broadway show.

You can buy the book “Wishful Drinking” for about $10 for the paperback or $18 for the hardcover. The book was published last year but just became available in paperback this month. You can get used copies for about $7, so avoid using those credit cards if you can.

Hollywood inbreeding

Part of Carrie Fisher’s show and book “Wishful Drinking” talks about Hollywood inbreeding. She discusses her parents, Eddie Fisher and Debbie Reynolds, and the various relationships they entered and quickly exited after Eddie left Debbie for Elizabeth Taylor after Taylor’s husband Mike Todd died.

What follows is a lengthy synopsis of marriages, meant to decipher whether her daughter was related to the grandson of Mike Todd and Elizabeth Taylor. Her conclusion is that they are only related by scandal, not blood, but there are certainly a few near misses.

Show business breeds show business

Somewhat equally dizzying is the fact that Carrie Fisher, who worked in Hollywood, wrote a memoir about Hollywood, and she now performs that memoir on Broadway. This practice of turning celebrity into more celebrity is getting pretty common.

So, Carrie Fisher made a bunch of money playing Princess Leia, and now she makes money talking about the childhood that surrounded that iconic role. Of course, she talks about other things, too, but it all comes back to Hollywood. She talks about doing drugs, being bipolar and views of mental illness in society. And it’s funny!

Comedy of errors

Making people laugh is the main focus of Fisher’s “Wishful Drinking.” She talks about her second husband (yes, she carried on the family tradition of multiple marriages) Bryan Lourd, who left her for a man. She tells Matt Lauer on the “Today” show that Lourd blamed his homosexuality on her drug use.

“I didn’t read that warning on the label,” Fisher says. Watch video of Carrie Fisher on the “Today” show.

Carrie Fisher history

Let’s take a look at the life that lead up to the publication and performance of “Wishful Drinking.” Carrie Fisher had only one small role in the film “Shampoo” in 1975 before she was catapulted to fame through her role as Princess Leia in 1977. She was 19.

She played Princess Leia in the three “Star Wars” movies that were released first. She did some small TV roles back then, and after “Star Wars Episode VI” wrapped, she did bit parts on television, held a few movie roles and did some voice work. She hasn’t had any roles even close to as well-known as her portrayal of Princess Leia, but now she is the star of her own show.

Making a living

Recently, Carrie Fisher has done one-episode stints on TV comedies such as “30 Rock” and “Weeds,” and she has done voice work for “Family Guy.” She returned to her role as Princess Leia, in voice only, for a Star Wars spoof on animated series “Robot Chicken.”