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Saturday, February 27th, 2010

Shortcomings of Credit CARD Act

This week saw the much-anticipated date (February 22) on which the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) took full effect. And, while it theoretically introduces many new consumer protections, it leaves plenty room for “creativity” from card issuers.

Center for Responsibility Lending Responds

The Center for Responsible Lending released a humorous (though cynical) animated video that highlights some of the areas not addressed by the new act—and illustrates ways in which credit card issuers have adapted their policies to maintain profit levels. These include:

  • Interest rate hikes: To compensate for lost revenue, some card issuers have already raised users’ interest rates. Even users in good standing may be “forcibly eligible” for this, as the video claims.
  • Over-limit fees: If you accidentally exceed your credit limit, your cardholder likely charges a fee. And, with new restrictions in place on other charges they can assess, you might see this fee jump.
  • Inactivity fees: On the other hand, if you use your card too infrequently, you might see a fee for that, as well, because that means you’re less profitable for the company.
  • Increased minimum payments: Another technique some card issuers are using is to up the minimum amount you can pay each month. This could be profitable for those who won’t be able to afford the increased payments and can be charged an under-payment fee.

The Regulation-Creativity Relationship

As the video illustrates with a graph, more consumer protection may seem like a good thing, but in practice, it often means that card issuers just get more “creative” with fees they charge reasons they charge them.

If you’re thinking now is a good time to get out of credit cards altogether, you’re not alone, but, before you cancel your cards, consider this:

  • Your credit score: Part of your credit score is based on age of accounts (older ones are better); another part is based on diversity of credit (so eliminating one type entirely would hurt you).
  • Your reentry: If, at some future time, you decide you want a credit card again, you’ll likely have to contend with uber-high interest rates (above 70 percent) because you won’t have any recent credit card history.

The video exaggerates a little (by mentioning, for example, a “legibility fee” for left-handed users), but by doing so draws attention to the more serious matter of how significantly your credit card could change.

Be sure to read all correspondence from your card issuer, even mailings that seem like junk: some of them might contain important details about the new rates and fees you may have to pay. These statements will also come in handy if mounting fees and interest force you into bankruptcy.

Additional Resources

Credit CARD Act

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Posted in Credit and Bankruptcy | 5 Comments »

Friday, October 2nd, 2009

New Restrictions from the Fed Limit Credit Card Companies

In a press release September 29th, the Federal Reserve introduced rules for implementing the Credit CARD Act of 2009. Specifically, the rules provide strategies for credit card issuers to follow in order to comply with the terms of the Credit Cardholders’ Bill of Rights, which was enacted earlier this year and takes full effect in 2010.

The rules outline appropriate actions for the following areas.

Proof of Income at Application

Currently, most credit card issuers do not require applicants to provide proof of income when they apply for cards. But the Credit CARD Act calls for proof that applicants will be able to make timely payments, so the Fed’s new rules require potential cardholders to show:

  • Income from salary, wages, bonuses, part-time work, military work, self-employment, tips, commissions and seasonal/irregular jobs
  • Income from investment dividends, interest, retirement benefits, public assistance, child support, alimony and other types of maintenance
  • Savings accounts and/or investments
  • Credit reports and/or credit scores

These rules address problems in the credit card industry that also manifested themselves in the subprime mortgage lending industry during the real estate boom that peaked in 2007.

Restrictions on Younger Applicants

Because credit card debt for college students has gotten attention as it has increased in recent years (the average 2008 graduate owed $3,173, according to Sallie Mae), the Fed’s proposed regulations address this issue as well.

Specifically, the Federal Reserve’s guidelines indicate that:

  • Credit card companies cannot lure college students with free items in exchange for filling out an application within 1,000 feet of a college campus.
  • Card issuers can still offer free items to college students, but they may not make receipt of these items contingent upon filling out an application.
  • Potential cardholders younger than 21 must provide proof of income or have a cosigner on their application. According to the Fed’s rules, the cosigner can be anyone 21 or older (broadened from the Credit CARD Act’s specification that this person must be a parent or guardian).

When It All Happens

  • The first changes from the new law took effect on August 20.
  • On February 22, 2010, most major elements of the law (including regulations on rate hikes and younger applicants) will take effect.
  • In August 2010, the remainder of the provisions will become effective.

If you're struggling with credit card debt, bankruptcy may be one way to eliminate excessive financial burden. Consider talking with a local attorney about your options, including filing bankruptcy.

Additional Resources

Federal Reserve’s Proposed Rules for Implementation of the Credit CARD Act of 2009 (PDF)

Sallie Mae Study: How Undergraduate Students Use Credit Cards (PDF)

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Posted in Credit and Bankruptcy | 6 Comments »

Thursday, September 24th, 2009

Does Your Address Affect Your Credit Limit?

A recent report from msnbc.com suggests that your state of residence could affect your borrowing capability. A California man reportedly received a letter in the mail from one of his creditors informing him that his credit limit had been cut – simply because he lived in California

Since the economic crisis began more than a year ago, Americans have seen their credit limits slashed for a variety of reasons – a company’s economic distress, job loss, late payments, filing bankruptcy – but basing limit cuts on where someone lives seems unnecessary.

How It Happens

If you’re like the man in the article, you’ll receive a letter from your creditor informing you that your limit has been lowered. A call to a customer service representative may reveal the reasons why. But there may be no warning signs.

Generally, creditors cut limits for a variety of reasons:

  • Missed or late payments: If you have a history of not getting payments in on time, your card issuer may limit your ability to charge.
  • Universal default: If you default on another (unrelated) line of credit, some card issuers may see this as a warning sign and cut your limit. (New credit laws will end this practice in February, 2010)
  • Approaching your limit: Ironically, if you begin to approach your credit limit, you may be viewed as a riskier consumer and therefore have your limit cut.
  • Your credit score: If your credit report or score reflects risky behavior (missed payments, increased interest rates, other lowered limits), card issuers may cut your limit.
  • Financial struggles: As the recent economic situation has illustrated, your limit may be cut simply because your card issuer wants to cut its risk.

The recently introduced Credit Cardholders’ Bill of Rights may end some kinds of credit limit lowering, but most of the provisions of that law won’t take effect until 2010.

Is My State at Risk?

To know whether or not to be on the lookout for residence-based credit limit changes, you may want to check out the findings of the Corporation for Enterprise Development, which recently released economic data on all fifty states.

The group’s website includes an interactive map that allows you to view economic indicators for your states and compare it to other states to get an idea of where you fall in the national rankings.

The Lesson: Read Your Mail

Whenever you get mail from a credit card issuer, be sure to read it carefully – it could have important information about your credit future or cause you to file bankruptcy!

Additional Resources

Credit Cardholders' Bill of Rights (Summary) (PDF)

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Posted in Credit and Bankruptcy | No Comments »

Sunday, September 6th, 2009

Back to Basics with the AmEx Charge Card

We’ve seen the old is new again trend in fashion, hair styles—even the VW bug made a comeback. So I guess no one should be surprised that American Express is making a bold push for its “new” charge card.

The Original Charge Card

Ever wondered where the idea of credit cards came from?

As the legend goes, a businessman named Frank McNamara took some clients out for a fancy dinner in 1949. At the end of the meal, he realized—to his great embarrassment—that he hadn’t brought enough cash to cover the check.

And so plastic cards were born.

Charge Card Vs. Credit Card

Though the terms are occasionally used interchangeably, charge cards and credit cards are actually two different things.

  • A credit card is a source of revolving credit, meaning that you pay for purchases over time and accrue interest on whatever balance you leave unpaid. You have the option of purchasing well beyond your current means and making payments gradually.
  • A charge card essentially allows you to take out very short-term loans, usually for a month. At the end of each month, you must pay your balance in full. Should you fail to pay in full, you could be heavily fined or have your card canceled.

In other words, charge cards put significant pressure on users to purchase only within their means, where credit cards do not.

American Express’ New Advertisements

Though charge cards have been around for decades, they’ve fallen out of popularity with the rise of credit cards. But now, what with financial responsibility all the rage, American Express has launched a new ad campaign touting the benefits of its charge card.

The ads, apparently already showing up in newspapers, encourage users to spend responsibly. They further suggest to Americans: Don’t take chances. Take charge.

Can Charge Cards Help You?

If you’re trying to build or rebuild your credit (after filing bankruptcy, for instance), charge cards have certain benefits:

  • You can’t spend more than you can repay
  • You’re forced to pay in full each month, which can help with budgeting
  • If you adhere to the rules, you won’t be charged interest
  • Positive payment action can help improve your credit

In short, charge cards may work well for you, but remember that American Express isn’t the only company that offers them. As with any major decision, be sure to research a variety of charge cards before signing up for one.

Additional Resources

Types of Credit and Charge Cards (PDF)

Federal Reserve Bank of San Francisco’s Brochure Credit and Charge Cards (PDF)

If you have problems with credit card debt, consider talking to a local attorney about bankruptcy.

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Posted in Credit and Bankruptcy | 2 Comments »

Monday, August 10th, 2009

Reclaim Your Credit: What to Do When Your Credit Shrinks

As you may already know, credit card companies are responding to the recent passage of the Credit Cardholders’ Bill of Rights by slashing limits, raising interest rates and even closing cards for many customers.

Here’s what you can do if one of your card issuers gives your account the ax (or even the pruning shears).

Ask the Right Questions on the Phone

The most important thing to remember is that you don’t have to take changes to your credit lying down.

As soon as you notice altered terms on one of your cards, take action:

  • Do your homework. Before calling the credit card company, make sure you know as much as you can about your account: how long it’s been active, your former and current limits, your former and current interest rates, your balance. You’ll be better able to negotiate when you prove yourself knowledgeable about your circumstances.
  • Look outside the box for solutions. Be sure to visit www.annualcreditreport.com to get a copy of your credit report before calling. Inaccuracies on your report could lead to changes in your credit card terms and other problems. Take steps to correct any mistakes you find.
  • Get an explanation. When you call your card issuer, ask for the reasons your account was altered. Common reasons include account inactivity, increased credit risk or diminished profitability – regardless, you have a right to know why your terms have changed.
  • Show off what you know. Here’s where all your work will come into play: if you’re in good standing with the company, emphasize that and your other positive credit action (as displayed on your credit report).
  • Bargain. If your issuer is willing to raise your limit OR lower your interest rate, be ready to accept the compromise. A lower interest rate will likely be best for those who carry a balance; a higher limit may work well for those who pay in full each month.
  • Push it a little. If the representative you’re speaking with won’t budge, ask to talk to a supervisor – as long as you have a reasonable case to support your request.

A bankruptcy attorney may help advise you in your credit situation.

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Posted in Credit and Bankruptcy | No Comments »

Wednesday, July 22nd, 2009

Ben Stein and Not-So-Free Credit Scores

The blogosphere has been all over Ben Stein, a financial guru, spokesperson and New York Times columnist, over his involvement with what appears to be a slightly shady "credit-score" site, FreeScore.com.

In advertisements, Stein shills for the group which claim to offer you a free credit score. As several blogs point out:

  1. Your credit score doesn't tell the full story. While your credit score is important, you'll need more information if you want to take action to improve. In order to see what's bringing your credit score down, you'll need to see your credit report, which includes any claims against you.
  2. FreeScore.com isn't actually free. After giving you a "score" for free, they begin charging you monthly fees.

While some people may want to check their credit score monthly, in most cases you don't need this kind of scrutiny. In fact, simply requesting your credit score or credit report can affect your credit score.

You are entitled to a free annual credit report from the government. And the government makes one available at exactly one - and only one! - Web site: Annualcreditreport.com.

Don't be fooled by similar or imitator sites.

If you're in debt and trying to get out, you may become a target of predatory merchants. These groups are looking to make a quick buck off your troubles.

Avoid this by informing yourself, reading the fine print and sticking to reputable, trustworthy sites and sources.

Trying to repair your credit but can't keep up with the bills? Consider filing bankruptcy.

Filing bankruptcy doesn't have to ruin your credit for life. Learn more: Credit After Bankruptcy.

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Posted in Bankruptcy and Predatory Lending | 3 Comments »

Tuesday, July 7th, 2009

Choosing a Lender to Rebuild Credit After Filing Bankruptcy

If you’re trying to build or rebuild your credit after bankruptcy, you probably know that using credit responsibly is your primary goal.

Here’s how to set yourself up for success in borrowing.

Choose Affordable Payments: Before signing loan papers or credit card agreements, you’ll need to do a four-part math problem:

  1. Check your budget. Determine exactly how much money you have left over each month (no generalizing!).
  2. Calculate monthly payments for your loan. Again, make sure you know exactly what you can expect from the life of your loan – no assuming, no generalizing.
  3. Compare the two numbers. If your leftover money is less than the monthly payments, you cannot afford the loan. Assuming you’ll get a raise or a bonus is dangerous, especially in this economy.
  4. Leave a cushion. Remember: part of financial stability is saving money for unexpected emergencies, so if you’d have to spend all your income to cover the loan, you can’t afford it.

Beware of Hidden Costs: Make sure you read the entirety of a loan or credit card agreement before signing it.

If you’re not comfortable interpreting legalese, enlist the help of a bankruptcy attorney. Be on the lookout for the following.

  • Fees & costs associated with the account. Yearly charges, overdraft charges, late charges, early payment charges and others add up quickly and can cost more than you realize.
  • Fluctuating interest rates. Credit card issuers are infamous for advertising low interest rates, but not the fact that many such rates last for only a short period. Make sure you understand what events could lead to your paying more in interest (missed payments, going over your limit, etc.).

Avoid Common Predatory Practices: Unfortunately, some lenders will count on your ignorance about lending practices to trick you into paying more than you should.

Watch out for common schemes like the bait and switch, equity stripping, loan packing and loan flipping.

Bottom Line: There’s No Rush

Many people are eager to reestablish credit after a bankruptcy filing, but don’t let this drive to improve your finances lead to poor borrowing decisions.

Right after filing bankruptcy, you can expect to pay a bit more in interest rates and to qualify for lower loan amounts.

But, if the offers you receive seem too expensive, wait a while.

With a year or so of strong credit practices under your belt, you should be able to get more affordable loans – and improve your chances of improving your credit and staying debt-free.

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Posted in Post-Bankruptcy Debtor Education | No Comments »

Monday, June 15th, 2009

Consumer Credit Fairness Act = Hope for Low-Interest Loans?

As too many Americans know, loans with monstrous interest rates can lead to what seems like endless rounds of debt and bills.

And, in some cases, excessive interest rates can push struggling consumers to filing bankruptcy.

The “Consumer Credit Fairness Act,” a bill now before the Senate Judiciary Committee, would give consumers a little help for dealing with such costly loans.

Proposed Terms of the Consumer Credit Fairness Act

As it now stands, the proposed legislation would do two major things for Americans:

  • Limit creditors’ collection rights in bankruptcy: Lenders whose loans came with excessive interest rates (defined by the bill as 15 percent higher than the current yield on a 30-year U.S. Treasury bond) would come last on the list of creditors to be repaid in bankruptcy court.
  • Improve consumers’ chances of bargaining for lower rates: Because of the above change, consumers would likely be able to negotiate lower interest rates with their creditors instead of filing for bankruptcy.

How the Consumer Credit Fairness Act Could Help You

Imagine this scenario: you’ve got one or more loans with interest rates that are through the roof (credit cards, car loan, payday loan, overdraft loan, etc.).

Unless you can get your creditors to lower their interest rates, there’s no way you’ll be able to continue making payments and you’ll have to file for bankruptcy. So you call up your creditor:

  • YOU: Hello, I’d like you to lower my interest rates.
  • CREDITOR: Why should I do that? That means I’d collect less moola from you, a struggling consumer.
  • YOU: Well, you see, if you don’t lower my rates, I’ll file bankruptcy. And, thanks to the Consumer Credit Fairness Act, your loans will be the last on my repayment list. So you might not get any money at all.
  • CREDITOR: Hm. That doesn’t sound too good.
  • YOU: Exactly.
  • CREDITOR: All right. How does [insert lower rate here] sound?
  • YOU: Excellent.

While the above dramatization may illustrate a slightly simpler procedure than you’ll actually go through should this bill pass into law, it does show the essentials of how the legislation may likely work.

Opponents Predict Tighter Credit

Some have criticized the bill as being too generous to consumers, suggesting that, should it become law, it would limit creditors’ overall ability to lend money.

But supporters contradict this claim, insisting that the bill would more likely push lenders to rely more universally on types of loans with more reasonable interest rates.

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Posted in Bankruptcy and Predatory Lending | No Comments »

Sunday, May 24th, 2009

Filing Bankruptcy Prevention: Techniques for Avoiding Identity Theft

Identity theft is a crime that occurs when someone uses another person’s identification information to make credit transactions.

The severity and specifics of identity crimes vary from case to case, but identity theft victims often face frustrating (if not devastating) setbacks to their credit.

In fact, some people are forced to file bankruptcy thanks to these identity theives.

Although there’s no guaranteed way to prevent identity theft, a new (free) service may help you determine your risk for becoming a victim.

Traditional Wisdom: Check Your Credit Report

Checking your free credit report (www.annualcreditreport.com) is one of the most important ways of making sure your not a victim of identity theft.

By comparing action reported by the three major Credit Reporting Bureaus with action you know you’ve taken, you can see whether anyone besides you has been using your personal information.

But, though such checks can help you discover identity theft before it becomes a huge headache, they can only detect crimes that have already been committed.

Calculating Your Risk

The new service from MyIDScore.com claims to predict how likely you are to have your identity stolen. Here’s how it works:

• Visit www.myidscore.com and fill in the personal information it requests (note: giving your Social Security Number is optional).
• Answer multiple-choice questions to verify your identity.
• View your “identity theft risk” score, which ranges from 0 to 999.

Lower scores indicate a lower risk of identity theft victimization.

How It Works

According to the Washington Post, the service works by identifying warning signs that someone has used all or part of your personal information to take credit action.

The service can reportedly detect suspicious actions before actual purchases are made – for example, if a thief applies for and is issued a credit card using your SSN.

Insiders for the site suggest the service for those who have found out that their personal information was compromised in a data breach (data breach updates).

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Posted in Identity Theft | 2 Comments »

Thursday, May 21st, 2009

The Impact of the New Credit Card Regulations

Earlier this week we reported on the new credit card regulations passed by the Senate that could be signed in to law as early as Memorial Day. This is good news for consumers tired of seeing their rates jacked for no reason and with no notice.

Many banks and credit card companies cried and complained, saying they needed to be able to change rates at will to stay profitable. Abusing your customers is no way to make money, and it seems Mark Gimein over at The Big Money agrees.

He's got a nice read today about why credit companies should take better care of their customers.

For a single bank to raise rates to a sky-high level is a dangerous strategy. When many banks adopt it, however, it gets much worse. Customers who see the rates on all of their credit cards rise become much less able to pay any of them.

We see it all the time: A temporary financial setback can be severely compounded by fees and fines.

Fortunately, the credit companies will have to change their ways.

And for anyone facing the fees and fines, there are other debt relief options available, such as filing bankruptcy.

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Posted in Credit and Bankruptcy | 1 Comment »

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