Credit cards can feed a spending addiction. (Photo Credit: CC BY/Andres Rueda/Flickr)

Once you enter the world of credit cards, it becomes tantalizingly easy to buy today what you can’t afford tomorrow. Swiping magic plastic seems painless, but few things are as damaging to your credit score and financial future as unchecked credit card use. Here are some ideas for how to break the cycle of credit card dependency.

Track your credit card spending

Even if it means writing down every cent you put on your credit card, having documentation of your spending is essential. If your credit card bills are too many and too high due to over-spending, seeing hard evidence can be just the “scared straight” encounter you need. Use a pen and paper or a personal accounting program like Quicken.

Understand marketing messages

As wonderful as credit card companies make it seem, using a credit card won’t spirit you away to a blissful realm of contentment. Be aware that credit card companies aren’t in the business of making you feel better, no matter how many rewards programs or ephemeral references to peace and tranquility are hinted at in brochures and commercials. On the contrary, credit card companies are in the business of creating consumer debt.

Decide to change

Avoiding credit card debt is a logical choice, considering how fast compound interest multiplies. You must approach breaking the credit card cycle of addiction with both your heart and mind. It requires full commitment.

Minimize damage through consolidation

If you have the option to execute a balance transfer at a low APR, take advantage and save yourself cash until it is paid off. This is handy if you have multiple credit cards with smaller balances, too, as one card is generally easier to manage.

Pay in cash, cut the cards

A great way to avoid revolving debt altogether is to pay for everything in cash. If you are deep in the throes of credit card addiction, don’t even use a debit card. Cut up your cards, credit or debit. Once problem credit cards are paid off, keep them at zero balance rather than canceling them, unless again your credit card addiction is severe. If such is the case, cancel them all except for the card of longest standing, but only in the event that you’re applying for a mortgage, Yahoo! Finance advises. Put that one on ice and use it for emergencies only.

Save money for emergencies

If you don’t trust yourself to save that one card for emergencies, open a high-yield savings account that will allow automated deposits from your paycheck. Deposit a portion of your paycheck each pay period until you’ve saved 3 to 6 months of salary in the account.

Seek professional help

Battling credit card addiction alone can be debilitating. Various books can help you tackle addiction and its associated feelings of helplessness. Seek the help of a mental health professional if possible.

Sources

Credit Card Addiction Stories

Psychology Today

Yahoo! Finance

Living in a credit card nation

Compound interest adds up fast. Pay off your credit cards and high-interest loans first. (Photo Credit: CC BY/Dan Foy/Flickr)

When it comes to personal finance, few concepts are as important to understand as compound interest. Many consumer finance products use this form of interest. Knowing about compound interest can save you from a potential bankruptcy.

Compounding snowballs

The process of adding interest to principal is called compounding. Depending upon the type of personal loans, student loans, mortgages or other loans in question, interest is compounded on a regular schedule, be it daily, monthly, etc. Keep in mind that once compounding begins, interest itself earns more interest. This is a credit card company’s bread and butter, an easy way for a consumer to fall rapidly into debt. To understand the true cost of any credit card or loan, interest-related factors like how often the remaining balance is compounded and the annual percentage rate must be considered.

Compound interest should not be confused with simple interest. Simple interest is charged on principal balance only and doesn’t charge interest on accrued interest as compound interest does. Simple interest is quite rare in the field of consumer finance.

Doing the compound interest math

Here’s the math you need to know, using hypothetical numbers:

1. Divide interest charged by the amount you owe to produce the periodic interest rate. If you are dealing with personal loans in the amount of $3,500 and you’re paying $25 monthly in interest, divide $25 by $3,500 to get 0.0071428571428571.
2. Take the answer from the previous step and add 1. Now you have 1.0071428571428571.
3. Raise the result of Step 2 to the exponential power of the number of payments you make on the loan or credit card each year. If you pay monthly, you make 12 payments per year. Using the same figures, the result is 1.089163111.
4. Subtract one from the result in Step 3, which converts the compound annual interest rate to a decimal. Here, you have 0.089163111.
5. Multiply the personal loan compound annual interest rate you changed into a decimal number by 100 to create an easy-to-read percentage. Here, you’d take 0.089163111 and multiply by 100 to produce an annual compound interest rate of 8.92 percent.

Understand interest and avoid bankruptcy

Sources

Compound interest Wiki

eHow.com

JPMorgan Chase has allegedly withdrawn credit card suits because suit documents were "robo-signed." Photo Credit: jebb/Flickr.com/CC-BY-SA

JPMorgan Chase withdrew more than 1,000 lawsuits nationwide against delinquent credit card holders over the past few months, for unknown reasons. However, it is rumored the suits are being dropped because many of the suits were “robo-signed,” or initiated without sufficient review of the paperwork.

Spontaneous withdrawal of credit card suits raises eyebrows

Credit card companies sue people for not paying their credit card debts every day. Any person can look at the court filings section of the local newspaper and see several suits being initiated against a delinquent borrower on any given day of any given week. However, when one of the nations’ largest banks withdraws a large number of suits without explanation, it looks odd.

Recently, according to the Wall Street Journal, JPMorgan Chase withdrew a large number of lawsuits from various courts in several states over the past few months. It is believed that more than 1,000 individual suits were withdrawn from courts in California, New York, New Jersey, Illinois and Florida since April without much explanation. However, it is rumored that the suits were “robo-signed” just like the rubber-stamped mortgage foreclosures that caused a scandal.

Too many potential robo-signings to ignore

JPMorgan is the second largest bank in the United States in terms of assets. JPMorgan is owed $45 billion in the five states where the suits were withdrawn, in delinquent and current accounts. It is said that paperwork in credit card lawsuits, though, is not up to snuff. A New York judge was quoted in the Wall Street Journal as saying that that number of potentially “robo-signed” credit card lawsuits was “significant.” The judge also had dismissed 150 credit card suits in the past year for having large amounts of paperwork signed by the same people.

A lawsuit was filed against JPMorgan in San Antonio last year, according to Fortune, due to large stacks of legal papers having been signed by the same attorney without having done the due diligence on the numbers. Forbes notes that at least one person has been fired for questioning practices of selling off portfolios of write-offs to debt collectors, which are delinquent credit card debts for collectors to try and collect on.

Not unheard of

Banks not following the best practices concerning legal action on bad debts is not unheard of. Earlier this year, no less than 38 state attorneys general petitioned for a class action suit settlement to be far higher in the case where Encore Capital Group was sued by 1.4 million people for “robo-signing” affidavits in debt collection suits, according to Reuters. Encore settled for less than $6 million, which was considered pitifully low by the panel of state lawyers, as it amounts to about $10 per person. The banking industry was infamously found to have signed foreclosure documents regularly nationwide without having done all the legwork to see if the foreclosures were valid, and a debt collection company is not likely to go through a bank’s files to see if they are suing to collect a valid debt.

Sources

Wall Street Journal

Fortune

Forbes

Reuters

Merchants are starting to move away from debit and credit cards, as the interchange fees they have to pay banks to get paid are cumbersome and expensive. Photo: MoneyBlogNewz/Flickr.com/CC-BY

There is a huge showdown going on between banks, merchants, regulators and legislators over interchange fees on credit cards and debit cards. Interchange fees are charged to merchants every time a customer uses a card, and the controversy over the fees is leading businesses to rebel against the way things have been done for years.

Card fees becoming less palatable to businesses

Some people may have noticed that coffee shops, gas stations and other businesses have begun imposing a minimum purchase amount a person has to make in order to use a debit card or credit card, and there’s a reason for it. It’s called an interchange fee, and the bank that a person has their credit or debit card through charges a fee to pay the customer’s charge, and it costs, on average, 44 cents according to CNN. Banks are fighting furiously to keep the fees as they are because they make billions for the banking industry. Merchants are championing the legislation because they are fed up with having to pay banks to get money they are owed. Anthem Blue Cross, according to the Los Angeles Times, is going to start charging customers to make automatic payments from their credit or debit card account.

Credit card companies moving into prepaid cards

Some credit card companies are moving into the prepaid card market. For instance, American Express recently announced that it is launching a new prepaid debit card, according to Time. Visa and MasterCard already offer them, along with companies like GreenDot and others. It turns out there’s a good reason. Prepaid debit cards, which have to be reloaded with cash but don’t have overdraft fees and don’t require a bank account to get, aren’t subject to the same regulations. GreenDot, according to Reuters, derived 30 percent of its income in 2010 from interchange fees and, unlike debit card counterparts from Bank of America or JPMorgan Chase, prepaid debit cards are exempted from the interchange fee cap.

It’s chip to be Square

Not everyone has to accept traditional payments systems or opt to only accept cash. Mobile payment system technology is starting to increase its presence in the marketplace. For instance, the Square mobile payment system has a card reader that plugs into a smartphone, and users can download the Square application to begin accepting payments through mobile devices. It’s compatible with Android phones, iPhones and iPads. Square is also working on a payment network in which merchants using the service can deduct payments from a person’s debit or credit account by simply verifying the customer’s identity and don’t have to swipe a card, according to the Washington Post. There are also Near-Field Communication systems being implemented nationwide. NFC technology uses a chip mounted in a card or a cellular phone that a reader registers and charges the appropriate linked account. South Korea, according to Reuters, plans to have 300,000 NFC equipped merchants by the end of the year.

Sources

CNN

Los Angeles Times

Time

Reuters on Green Dot

Washington Post

Reuters on mobile payment systems

Federal Reserve Chairman Ben Bernanke is being urged to create stronger regulation of business credit cards. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

Members of Congress are urging the Federal Reserve to do more about regulating business credit card marketing, especially regarding small businesses. Currently, small business credit cards are not subject to the same regulations in the CARD Act that apply to their private counterparts.

Small businesses at mercy of banks and card companies

A group of Congressmen are lobbying the Federal Reserve to implement regulations regarding credit cards extended to businesses, especially those marketed to small businesses, according to the Wall Street Journal. A group of Senate Democrats, including Senator Charles Schumer of New York and Senator Bill Nelson of Florida, are urging Federal Reserve Chairman Ben Bernanke to do something about enhancing disclosure requirements on credit card accounts offered to small businesses. Areas of concern include interest rate hikes, fees for going over spending limits and other types of fees that are prohibited for regular consumer credit cards. Credit card companies are not mandated by law to follow the Credit Card Accountability Responsibility and Disclosure Act when it comes to business credit cards.

Clever dodge of CARD Act

Part of the concern over the non-regulated status of business credit cards is that credit card companies are offering the cards to people who aren’t business owners; all a customer has to do is apply for the account just like a normal credit card and start using it once approved. Card issuers don’t have to ask for a business license number or proof that the card is for business purposes, which Chairman Bernanke is being urged to make mandatory. The senators also are concerned that business cards make up a fair portion of direct mailed credit card offers, according to BusinessWeek, as they cite a Pew study that found 9 percent of all credit card offer mail between 2006 and 2010 was small business card offers. The same study estimated that Americans received more than 2.6 billion pieces of such mail in that period. More than 6.7 million went to senior citizens.

Small businesses grapple with credit card companies

Processing credit and debit card transactions can be a hassle f0r small businesses. Many stores have mandatory purchase amounts that customers have to meet in order to use their debit or credit card because of interchange or swipe fees. Merchants are charged to receive funds from the bank or credit card company, and they have to pay to use credit and debit card processing machines. Many simply pay, but some are finding ways around it. For instance, the Square payment processing system that allows someone to use their iPhone, iPad or Android phone as a card reader is getting 100,000 more users per month, according to Entrepreneur. Square charges 3.5 percent of the transaction, far less than traditional methods of accepting credit or debit payments.

Sources

Wall Street Journal

BusinessWeek

Entrepreneur

New American Express prepaid debit card coming next Tuesday. Image: AMERICANEXPRESSONLINE/Flickr/CC BY

American Express will start issuing a new prepaid debit card June 21. The company, previously known for aiming at higher-end, luxury buyers, is staking new ground by targeting the average consumer. Other card-issuers are expected to follow suit.

Building on the PASS card

Lat year, American Express introduced the PASS prepaid card, designed to help parents to keep their children on a financial leash. However, the company soon realized that prepaid cards had a far greater potential. Last year, According to the industry group Network Branded Prepaid Card Association, U.S. consumers spent about $37 billion on prepaid cards.  That is double the amount from last year and quadruple the figure from 2008.

Reaching a large demographic

Dan Schulman of American Express stated, “this card is for everyone. It could be for a parent who wants to give their kid a card, it could be for someone who doesn’t have access to credit. It’s a very large market that spans demographics.”

No bank is required  for the new cards, and there is a built-in safeguard against debt. A consumers can only spend what is loaded onto the card.

A promise of minimal fees

American Express promises to shave the fees normally associated with prepaid cards. The company will charge a fee of $4.95 when money is loaded onto the card, although no fee is charged if money is transferred from an existing bank account. The only other fee is a $2 charge whenever the card is used at an ATM. Card holders, however, are allowed one free ATM transaction per month.

Other benefits of the new card

The American Express card will come with online history and balance checks. In addition, card users will receive the other benefits associated with American Express cards, such as purchase protection and roadside assistance.

Other card issuers likely to follow

Given the growth in the prepaid card industry, other banks and card-issuers are expected to follow in the footsteps of American Express. Gerri Detweiler, personal finance expert at Credit.com, said, “I can’t imagine that every large issuer isn’t looking hard at prepaid cards right now.”

Not affected by credit card legislation

Consumer groups warn that prepaid cards are not covered by the CARD Act, which Congress passed last year to limit credit card fees. Prepaid cards are also exempt from the Durbin Amendment, a law soon to take effect that limits “swipe fees,” the fees that banks charge retailers when customers use debit cards. Banks may see the prepaid card as a alternative source of revenue lost from other card transactions and take advantage of the loophole.

The American Express prepaid card will be available at no cost online and will later be available in drug stores and other retail locations. The card purchase fee will be about $5.

Sources

Huffington Post
CNN
Chicago Tribune

The number of people entering into strategic default has decreased slightly. Photo Credit: Gentle/Wikimedia Commons/CC-BY-SA

Over the past few years, the term “strategic default” has entered into the national consciousness. People who owe more on a mortgage than the home is worth simply stop paying and walk away because it isn’t worth the trouble. This practice had begun to increase since the 2008 housing crash, but now the tide is starting to recede, if only slightly.

Credit bureaus and banks getting wise

Banks, loan lenders and credit bureaus have been perturbed by the rise in the number of strategic defaults on mortgages in the past few years. Borrowers that owe more on a mortgage than the house is actually worth will default on their mortgage when the value of the home has dropped so low that it no longer makes any sense to continue. In order to ferret out which consumers were defaulting because the cruelty of circumstances left them unable to make payments from the ones who were just giving up, Fair Isaac and Company, one of the main credit rating agencies in the United States, devised a way to find out which troubled homeowners are likely to engage in strategic default. According to the Chicago Tribune, an estimated 35 percent of all mortgage defaults were strategic in September 2010.

New car and cards a dead giveaway

People who strategically default usually will use available lines of credit just before walking away from the mortgage. New credit cards will be opened up, personal loans taken out to finance the move and new cars will be purchased. Then the underwater homeowner walks. FICO is also working with loan lenders and banks to help them identify potential defaulters before they walk. However, according to SmartMoney, the number of people walking away when it suits them is dropping. It is estimated by the University of Chicago Booth School of Business that strategic defaults dropped to 30 percent in March of this year, down from 37 percent in January. JPMorgan Chase analysts, according to Mortgage Wire, found that the overall rate was decreasing.

Consequences of default

Fannie Mae conducted a survey some time ago that found 27 percent of respondents, according to the Chicago Tribune, found the idea of strategic default acceptable. Consulting agencies began springing up that would advise consumers about how and when to default to their best advantage, such as the website YouWalkAway.com, according to Forbes. Yet people who do strategic default face potentially stiff penalties, according to MarketWatch. Credit scores can lose up to 200 points, leading to a host of other consequences. Landlords and insurers may be less willing to rent to or insure someone who has defaulted, and Fannie Mae has declared that it will not insure a new mortgage for someone who has strategically defaulted. It is estimated that 42 percent of all homes are “underwater,” or worth less than the amount of money owed on the mortgage.

Sources

Chicago Tribune

Chicago Tribune

HousingWire

SmartMoney

Forbes

MarketWatch

A credit card complaint hotline is the latest battle in the war over the Consumer Financial Protection Bureau. Photo: MoneyBlogNewz/Flickr/CC-BY

The latest fight over the Consumer Financial Protection Bureau involves a credit card hotline. The hotline would essentially take calls from concerned consumers, and the agency would compile complaints about credit card companies. However, banks and card issuers want restrictions placed on the information.

Banks and card companies want to avoid crowd-sourced penalties

The latest issue of contention regarding the beleaguered Consumer Financial Protection Bureau is a credit card hotline that would be used to gather complaints about credit card issuers from customers, according to Daily Finance. Customers can call in to report abuse, and that information would be disseminated by the Bureau to the appropriate state regulatory bodies. Basically, the complaint system would be crowdsourcing; the information would come straight from the people. However, the complaints would also go straight to government officials who could potentially fine card issuers without vetting the complaints. Card issuers and banks, according to Bloomberg, are looking to keep the database private, so only the card issuer, the customer who complained and the appropriate regulatory agency can view information about the individual complaint.

Banks want flow of information stemmed

The idea behind making the information private is that it restricts the flow of raw data, which can be unfairly biased against banks. Currently, the complaint line is set to go live on July 21, when the Consumer Financial Protection Bureau is supposed to begin operations. In its current format, anyone could access the complaint data and see everything said about every credit card issuer that it tracks. Though it may seem that banks and card issuers want to keep this information from the public to keep everyone from seeing the dishonest practices they engage in, there is a fair point to consider; some people are apt to complain about fees regardless if whether those fees were fairly levied. A way to get information straight from the public is certainly admirable, but without restraint it can easily be used inappropriately.

Future of consumer bureau clouded

The CFPB will have authority to regulate, to some extent, virtually all manners of consumer finance like credit cards, mortgages, payday loans, debit cards and so on. However, the existence of the organization has caused a fight in Congress to break out. Three different bills were recently introduced to limit the bureau, according to Reuters, two of which concern who is in charge. One bill would keep the CFPB from taking over regulatory activity from other agencies until it has a dedicated director and another would replace the current structure from having a single director to having a five member panel. Congressional Republicans have made it clear they are not in favor of Elizabeth Warren, the adviser to the White House who is assisting in getting the bureau ready for operation. It does not seem likely that it will begin operations in July as scheduled.

Sources

Daily Finance

Bloomberg

Reuters

Credit card companies are still able to get at college students despite tougher laws. Photo Credit: MoneyBlogNewz/Flickr/CC-BY-SA

Part of the provisions of the CARD Act, the law aimed at taming ethically suspect practices of credit card companies, was restrictions on how credit cards could be marketed to college students. Card companies are now finding ways around that.

Coeds can’t escape copious cadre of cards on campus

The Credit card Accountability, Responsibility and Disclosure Act was a concentrated effort by legislators to restrict credit card company practices that many people felt weren’t ethical. One of the provisions of the CARD Act was to prohibit credit card companies and card issuing institutions from marketing heavily to college students, but they are finding ways back onto campus, according to a recent article in the Wall Street Journal. The law prohibits any free promotional gifts to students, but that doesn’t prevent card issuers from offering other things like the $50 bonus for signing up for a card, as Citibank does. Chase decided to market to students on Facebook and offered “karma” reward points for friending the Chase Facebook group.

No laws broken

Most credit cards are issued by banks, not credit card or finance companies themselves. Banks are still allowed to hand out promotional literature for checking and savings accounts, just not credit cards. However, many people see that as a canard. Most marketing to students by financial services companies appears to be on the level, as a recent survey of college students by the University of Houston Law Center found 73 percent of credit card marketing to students didn’t take place on campus. Students are just as eager to skirt rules in order to get a credit card; the same survey found 29 percent of students who applied for a credit card used their student loan disbursement amounts as the proof of income required for students to get a credit card.

Financial burden of college increasing

The increasing cost of attending a four-year university is an easy inducement for students to get credit cards to experience some comforts, like a meal consisting of more than macaroni and cheese. More students go heavily into debt during college. The Sallie Mae foundation found that 92 percent of college students in 2009 charged an educational expense such as tuition or books and 20 percent of college seniors carried at least $7,000 in credit card debt, according to U.S. News and World Report. The class of 2011, according to Time, carries the highest average college debt ever seen. The class of 2011 carries a $22,900 debt burden on average. That’s an increase of 8 percent from 2010 and a 47 percent increase from 2001.

Sources

Wall Street Journal

Time

U.S. News and World Report

Just because there are new rules for how banks raise interest rates on credit cards doesn't mean Bank of America and others won't still do so. Photo: MoneyBlogNewz/Flickr.com/CC-BY

Just because there are new rules for how banks can raise credit card interest rates does not mean banks will not raise them. Bank of America, for instance, has been reported as raising interest rates to 30 percent for missing a single payment. The increased regulation is making some differences, but may not be as effective as hoped.

CARD Act causes default interest rates to increase

The Credit Card Accountability Responsibility and Disclosure Act of 2009 had a noble aim, which was to make the way credit card companies dealt with their customers and the interest rates on the cards issued to them clearer. One practice in particular was that of default rates, according to Daily Finance. When a customer defaults on their credit card, the interest rate assessed on past and future balances is raised, even if payment is late by a day. In 2009, default rates averaged around 25 percent, but are currently averaging closer to 30 percent. Bank of America is already raising default rates to 29.99 percent on the future balances of customers who are late on payments.

Card issuers have been compliant

Default rates can no longer be charged on past balances unless the account is 60 days in default or more, and banks are complying with laws. However, that is small consolation to card carriers who rely on credit cards to help them cover unexpected expenses. Credit cards are a method for people who don’t have or want to use cash to avoid having to miss payments or resort to other types of short term loans in a pinch, but a 30 percent interest rate makes for a slim margin of error. One missed payment and a car holder won’t be able to afford to rely on their card as a source of credit anymore, which is a common reason for people turning to other lending options such as car title and payday loans. The Consumer Financial Protection Bureau is supposed to begin regulating consumer credit products in a few months, according to CNN, but legislative bickering over the agency may gut it before it opens its doors.

Overdraft fees continue

People are still paying overdraft fees and buying overdraft protection despite the programs having been a cause of customer dissatisfaction, according to USA Today. It is estimated that banks and credit unions will collect nearly $38.5 billion in overdraft fee revenue for 2011. Overdraft fees average about $35 per occurrence when a customer is enrolled in overdraft protection, which not every bank customer wants to. Simply having one’s debit card declined costs nothing, and a transfer of funds from savings to checking in case of an overdraft costs far less than using a line of credit related to overdraft protection.

Sources

Daily Finance

CNN

USA Today

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

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?

Used responsibly, credit cards can help consumers build a credit history. (Photo Credit: CC BY/Andres Rueda/Flickr)

Many consumers looking to establish a credit history are denied credit because they don’t have enough credit to begin with. Even if a person has an excellent FICO score, it’s still possible to be denied something as weighty as a mortgage because the credit report reads more like a leaflet than a book.

Avoid being financially super-responsible with credit

People who are super-responsible can never enjoy their own parties, and the same is true for consumers who are financially super-responsible with their credit. Paying off student loans right out of the gate, avoiding excessive use of credit and generally living debt-free will save money in the long term, but some creditors do not view the credit-phobic kindly. Even for those who use credit but are choosy, an excessive number of credit inquiries can also have a negative impact on the credit score.

Having little credit history and being a serial credit card applicant can impact credit negatively, says Rod Griffin, public education director for the credit bureau Experian. Showing an ability to manage a reasonable number of open, active credit sources over time is paramount in illustrating credit-worthiness to creditors, including mortgage lenders.

Pay off loans, but keep some credit active

Griffin claims that contrary to what some so-called credit experts say, it doesn’t hurt to pay off loans early. Positive marks on the FICO report remain visible for approximately 10 years, whereas negative aspects generally only hang around for seven years. Paying off loans with excessive zeal can lead a consumer into the “No, thank you” zone with some potential creditors, however. If there aren’t at least three open, active accounts on the credit report that have been around for 24 months of more, it’s possible some creditors will pass on a credit application.

Use credit cards, but sparingly

It’s a myth that college students who are just beginning to build credit should take on multiple credit cards. Used responsibly and in moderation, having one credit card or two is a fine path toward building credit.

But the weather may be changing, says Griffin. Credit bureau insiders see the new Credit Card Act established under the Obama administration as a possible hindrance to young people’s ability to build a credit history. By restricting credit card company access to college students, some experts see more limited opportunities for building credit history.

Avoid the cash-only lifestyle if you want good credit

While you won’t rack up revolving debt by living a cash-only lifestyle, you also won’t build your credit. Maintain active credit accounts where you pay more than the minimum each month, and look to such products as installment loans and no credit check loans when emergency funding is necessary. While such products do not traditionally report to the credit bureaus – and hence do not provide an opportunity to record positive marks on a credit report – they will enable you to avoid building up excessive revolving debt on credit cards.

Sources

MSN Money
U.S. News and World Report

Understanding the Credit Card Act

Photo Credit: MoneyBlogNewz/Flickr/CC-BY-SA

Safeguard your credit cards so your experience with them will be a dream come true instead of a nightmare. Many consumers crave expensive fashions or toys purchased the credit card company’s money. This practice is great if you are the lender, but it’s dangerous for customers. However, if you learn to use them to your advantage, credit cards can be beneficial to you and your credit report.

Dangers of doing business with big banks

Financial institutions make a living on the high interest customers pay. Debt can accumulate so fast that the minimum payment will be all that the consumer can afford. The minimum payment may be low, but it’s not to benefit the card holder. Many payment plans are designed to take the buyer more than 30 years to pay it off. Some credit card companies offer the option to skip a payment, but interest still accrues. When a special promotion offers “same as cash” within a certain number of months, all the interest will be added to the bill if a balance is still owed past the due date. These companies are not in business to run a non-profit agency to assist those who have financial needs. Instead, they aim to benefit their investors with huge profits. Don’t become a victim of lawful conduct that borders on unethical and benefits huge financial conglomerates.

Credit traps to avoid

Avoid making large expenses whenever possible on  credit cards. Many doctors offer a credit card to pay for their services. Owing for medical treatment can get you caught in a web of high interest and unnecessary stress. Automobile loans should be purchased through a bank that offers the lowest interest; don’t just automatically accept the dealership’s funding offer. Usually, credit unions offer the best rates and lower monthly payments. Some consumers have purchased homes with a cash advance taken out on several credit cards at one time. This practice does not make financial sense because interest rates on cash advances can be astronomical.

Pay attention to credit card terms

How does one budget and monitor the use of credit cards? Always know when the payment cycle starts and ends. If a payment is made too early, you could end up with a late fee added to the next billing cycle for non-payment. The fee could be enough to take a family of four out to dinner. Pay the bill off each month within each cycle. Note the billing cycle is less than 30 days in some cases.

Avoid bad purchasing habits

Avoid treating  credit cards as a second income. Use them as a convenience and for easy record keeping. Credit cards can offer protection that cash doesn’t. Items purchased with a card can be disputed more easily, and retailers know this. Get one credit card through your bank instead of several department store cards. Shop for the lowest interest rate, and read the fine print on every application. Whenever you get a junk mail credit card offer, call and ask the company to take your name from the list. Protect your personal information. It’s one of your major assets.

Less is more

One to three credit cards with a low limit can be beneficial because it shows stability on your credit history. Keep in mind that whenever a credit card is closed, it shows up on your credit report. You can use credit cards to your advantage. Good credit management practices can build a portfolio that financial institutions will use to approve loans when you want to buy your next car or home.

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

Consumer borrowing rose from non-revolving credit sources, as fewer people are borrowing money by using credit cards. Photo Credit: MoneyBlogNewz/Flickr/CC-BY-SA

An increasing number of people are borrowing money, but more people are getting personal loans rather than using credit cards. The Federal Reserve released data that show consumer borrowing rose by several billion dollars in January, but it was from non-revolving credit sources. Credit card use dropped at the same time.

Debt levels rise as consumer borrowing increases

Americans are borrowing money from loan lenders again, and it is reflected in the recently released report by the Federal Reserve detailing economic activity from January of 2011, according to Business Week. The increase in consumer debts in January was fueled by non-revolving credit sources, such as personal loans or auto loans, instead of revolving lines of credit or credit cards. Non-revolving debt increased by $9.26 billion, but consumer debts increased overall by an estimated $5 billion, in the fourth straight month of increasing numbers of people going to loan lenders for credit. The increase was fueled by strong auto sales, according to MSNBC, as the amount of money lent for auto purchases increased for the sixth straight month.

Credit card use falls

Credit card use has been plummeting for some time, as the amount of debt held by Americans on credit cards declined by $4.25 billion. Credit card debt has fallen in 28 of the past 29 months, but it increased in December 2010 for the first time since December 2008. Credit card charge-offs, or debts written off by credit card companies, declined to 7.45 percent for January 2010. Delinquencies and charge-offs have been declining for the past five consecutive months. Consumers appear to have used their plastic to cover a December shopping spree but paid down the balance quickly. Credit card interest rates have been steadily rising as new regulations prevent banks and card companies from applying fees surreptitiously, forcing them to raise fees and interest rates up front.

Student borrowing increases

Part of the increase in non-revolving debts for the month of January 2011 was a $24.9 billion increase in student loans from the federal government. However, students are likely to begin borrowing more from private lenders than from the government in coming years, as the looming federal budget cuts are likely to decrease available capital. The federal budget recently submitted by the House of Representatives cut more than $5 billion from the Pell Grant program, according to the Christian Science Monitor, though the Pell Grant program is expected to run a $20 billion deficit starting next year. A college education is still viewed as one of the most worthy investments a person can make, though the cost has been rising dramatically for years.

Sources

Business Week

MSNBC

Christian Science Monitor

The Consumer Financial Protection Bureau isn't bankrupt, but its funding could be in jeopardy. (Photo Credit: CC BY-ND/Shirt Fight)

The conservative majority in the U.S. House of Representatives appears determined to rain on Elizabeth Warren and the Consumer Financial Protection Bureau, reports the Huffington Post. Dodd-Frank Act opponents Majority Whip Eric Cantor, Rep. Michele Bachmann and House Financial Services Chair Spencer Bachus have already voted to cut the Federal Reserve-funded budget of the CFPB from $143 million to $80 million. If the trend continues, the CFPB – which is scheduled to open on July 21, 2011 – will be the only federal bank regulator in the U.S. subject to political budget cuts.

The CFPB seeks to heal wounds of banking abuses

Harvard Law Prof. Elizabeth Warren, co-author of the book “Two-Income Trap,” has studied at great length how banking abuses have harmed U.S. families. The middle class sinks ever deeper into poverty, borrowing just to keep up with expanding bills and compensate for stagnant salaries. The Consumer Financial Protection Bureau’s goal is to unify the following seven federal agencies, per the Federal Register:

• Federal Reserve Board of Governors
• Federal Deposit Insurance Corporation
• Federal Trade Commissioned
• National Credit Union Administration
• Office of the Comptroller of the Currency
• Office of Thrift Supervision
• Department of Housing and Urban Development

Until now, none of these agencies had consumer protection as the primary agenda. Warren believes the middle class needs an advocate, and the Consumer Financial Protection Bureau will serve to help stem the tide of personal bankruptcies.

“The numbers are sobering,” Warren said at a Feb. 23 Chicago lecture. “Since the late 1970s, (personal) bankruptcy filings have doubled and doubled again. Women have been hit particularly hard. Over the course of 20 years, the number of women filing bankruptcy petitions increased by 662 percent. By the early 2000s, a woman was more likely to file for bankruptcy than to graduate from college.”

Support the Consumer Financial Protection Bureau

According to the Consumer Federation of America, the CFPB will play a major role in making sure that consumers are not abused by such things as subprime credit cards, which bear high rates and fees; bank overdraft loans, which have astronomical interest rates; military loan companies that attempt to operate outside the boundaries of federal regulation requiring a cap of 36 percent APR; and the most unscrupulous payday advance loan outlets, where fees can become excessive.

As John Wasik writes for Reuters’ Prism Money blog, consumers should be paying attention to what House Republicans are trying to do to the Consumer Financial Protection Bureau.

“I believe everyone with a credit card, bank loan or savings account needs to back Warren now,” writes Wasik. “Contact your senators and congressmen and urge them to leave the bureau’s funding alone, which is tied directly to the budget of the Federal Reserve.”

Sources

Consumer Federation of America

Federal Register

Huffington Post

Reuters

‘I’m not here to support criminal schemes,’ said Rep. Maxine Waters

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.