Wednesday, December 31, 2008

Colleges Profit as Banks Market Credit Cards to Students

I'm still here working. And as long as I am, I'll keep blogging. The New York Times looks at the connection between credit-card issuers and colleges. Colleges sign multi-year deals that give card issuers access to students' names and addresses, allowing them to pitch cards directly to students. In some cases, colleges and universities make even more money when students carry balances on their credit cards. Shameful.

From the New York Times:

Hundreds of colleges have contracts with lenders. But at a time of rising concern about student debt — and overall consumer debt — the arrangements have sounded alarm bells, and some student groups are starting to push back.

The relationships are reminiscent of those uncovered two years ago between student loan companies and universities. In those, some lenders offered universities an incentive to steer potential borrowers their way.

Here at Michigan State, the editors of the student newspaper wrote this fall that “it doesn’t take a giant leap for someone to ask why the university should encourage responsible spending when it receives a cut of every purchase.”

The almighty dollar has a way of creating nice conflicts, indeed.

You can read the entire story here (link).

New Year's Message To My Readers

This blog has become way more popular than I ever thought it would. I'm overwhelmed and humbled that all of you find the blog worthy enough to read on a regular basis. I was recently interviewed by a reporter (for an upcoming story), and I told her that I have the best readers extant. LOL. (See my Christmas post for that inside joke.) Anyhow, here is the game plan for 2009.

I plan to blog -- but probably not as actively. In December, I averaged about 4-5 stories a day. Indeed, even with the holidays, this was my most active month ever. That said, I do not see that continuing. I have six classes this spring. I also have an upper-division research paper to write, which will keep me plenty busy.

Following graduation (in May), I will immediately start bar prep. It's going to be extremely interesting to see how I'll maintain this blog. The bar-prep classes are in the morning, from 9 a.m. to noon. That means that I won't be able to comment on the blog during the morning hours. That will suck. My favorite thing about my blog is being able to chat back and forth with my readers. I'll have to rely on my readers to keep the site busy with intelligent discourse. Shouldn't be a problem.

After bar prep, the bar exam takes place (in July). After that, I breathe again. Thankfully. I imagine that I will take a vacation and then start writing a book in August. The goal is to finish the book before I get my bar results in December.

After I pass the bar, I plan to maintain this blog. I don't have any plans to abandon it. I think some people are surprised by that. If you are, you don't know me. My blog has always been about me giving back to the community. I plan to keep paying my knowledge forward.

I hope that you'll endure my sporadic posting style during the next semester. Stick with me. I'll try and keep this site as fresh as possible. I imagine that I will be doing quite a bit of blogging from class, which means that I may not even miss a beat.

One favor: if you see stories that might be of interest to my readers, please shoot me an email. And if you have some newsworthy information for me, please let me know. I consider my blog a collaborative effort.

During the new year, let's make this blog a great place.

Finally, I wish all of you a happy new year. I hope 2009 is a great year for each of you. Also, and this comes from the bottom of my heart, thanks for being great readers. Even you, Sandra (see Citibank/Citigroup reference below).

You're my "extants." (link here)

P.S., I do NOT work for Citibank/Citigroup. One of my readers accused me of that last night. Wow. See the post here (link).

Heaven help us.

Firm Says It Can't Pay Money It Collected For Little Leagues

What an irritating situation we have here. Oh, boy. The Lion is going to be upset when she reads this one. Turns out that the company that handles credit-card processing for the Little Leagues, can't turn over the money that parents paid through its system. What?? The money went toward operating expenses. But, rest assured, says the company, it didn't steal the money. Right. And I look like George Clooney.

From the Los Angeles Times:

Terry Drayton, Count Me In's founder and chief executive, expressed regret Tuesday for his clients' anxiety but said he was in discussions with three possible investors to raise funds to pay back their money.

He acknowledged that the company made mistakes but said all the missing funds went toward operating costs -- primarily the computer software used by the company's clients -- and that none of it was stolen.

"How did we get here? We made some errors with the lack of financial oversight," Drayton said in a telephone interview. "At the end of the day this is my responsibility. I'm the CEO and my job is to fix it."

Criminal charges have not been filed (but they should be). Lawsuits, meanwhile, have been filed in several states.

Hopefully the parents will do charge backs and get the money back. That's about all they can do at this point. You can read the rest of the story here (link). Read More...

What I Learned When Thieves Stole My Identity

Thankfully this has never happened to me (knock on wood). But I did have my BMW credit card compromised in 2006. It was a lousy feeling. I did feel violated, even though it was just one card and even though I was not on the hook for financial losses related to the fraud. Some of us, though, will eventually have our identities stolen wholesale -- and it won't just be a single card that is violated. It will be a nightmare that encompasses many accounts. The Sun-Sentinel's consumer affairs reporter was recently the victim of identity theft. It can happen to anyone.

From the story:

The first sign that something was wrong seemed harmless: A new Dell credit card arrived in my mail one afternoon.

More landed in the mailbox the next day.

Macy's. Bloomingdale's. Crate and Barrel. Radio Shack. Then later: Visa Sony, Toys R Us and Lowe's cards turned up.

I didn't request any of these cards. My first call to Dell revealed what I suspected.

Someone had applied for a credit card using my name.

I felt violated and vulnerable. Then, it hit me: I've become a statistic, a victim of identity theft.

The rest of the story is a checklist of what happens afterward. Read the rest of the story here (link). Read More...

Mortgage 'Cram-Downs' Loom as Foreclosures Mount

How topical. I had to address this very issue on a law-school exam just two weeks ago. As a bonus question, our professor asked us to argue both sides of the issue. Should judges be allowed to engage in mortgage cram downs? Why? Why not? Cram downs, for the uninitiated, are judicial write downs. It would allow bankruptcy judges to rewrite mortgages, thereby reducing the principal, which, theoretically, would allow homeowners to afford their house payments after bankruptcy. Many of us thought the issue was dead, but it looks to be regaining strength, according to a Wall Street Journal story.

From the Journal:

Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn't solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.

"It is absolutely clear that voluntary modification is just not working," says Rep. Brad Miller, a North Carolina Democrat. "Every plan that Congress has passed, we do it and nothing happens."

Mr. Miller intends to introduce a mortgage bankruptcy-reform bill Monday, the first day of the new session. Illinois Democrat Richard Durbin plans to introduce a similar bill in the Senate.

Lenders warn that mortgage cram-downs will lead to higher interest rates and down payments, as banks seek to mitigate future losses from judicially imposed write-downs. They also are concerned that the reform measure would add to the losses they have already sustained from the housing crisis.

As I said earlier, I argued both sides of the issue during the exam. Here, however, I am not constrained. My position is this: I am against judicially-sanctioned cram downs. I'd rather let the free-market work itself out. No one is guaranteed equity in their home. Boo-fricken-hoo if people are currently under water on their homes. In due time, I imagine that they'll get back to even (and then some).

As I argued on my exam, by allowing cram downs you are essentially giving these homeowners a windfall when/if the value of their homes return to pre-cram-down levels.

I understand that one in six homeowners are currently underwater. But five out of six homeowners are not. Sad as it is, life isn't fair. I'd rather allow the free market to work itself out. If lenders want to modify loans that result in write downs, so be it. But I'd like to keep it out of the hands of judges.

You can read the rest of the story here (link).

Related Articles:

Tuesday, December 30, 2008

Bank Of America Says Adios To Affiliate-Marketing Channel

Effective January 1, 2009, Bank of America will no longer offer any of its credit cards through the affiliate-marketing channel. Bank of America joins a lengthy -- and growing -- list of credit-card issuers who have recently abandoned the online channel.

According to a person with knowledge of the situation, Bank of America did not give a time line for a return back to the channel. Bank of America's move, not surprisingly, was prompted by the economic conditions plaguing the industry.

A person that I spoke with at a large affiliate network told me that he has not seen this many card issuers leave the channel at one time. But he does believe that the card issuers will return. I agree with him. Credit-card units are profit centers for banks. There is no way that card issuers will abandon the channel for good. I expect that all of these card issuers will tweak their models, analyze the economy, and return to the market.

In the meantime, though, Capital One looks like the last card issuer standing. It remains active in the affiliate channel and it doesn't look as though it will be leaving anytime soon. Indeed, Internet surfers will likely notice Capital One card offers on a lot more personal-finance and credit-card affiliate sites.

Clarification: Bank of America says that it has not left the channel "completely." In an article published by American Banker on January 5, 2009, Bank of America said that it has discontinued marketing through some sites -- though not all.

Related Articles:

Former Merrill Lynch Executive Pays $37 million For NYC Apartment (With Taxpayer Money)

The Daily Kos has a story out that will really piss The Lion off. Don't know The Lion? She's one of the most opinionated readers I have. And she gets hot when I point to stories like this. Anyhow, it turns out that a former Merrill executive recently plunked down some $37 million for a nice spread on Park Avenue in Manhattan. The executive, Peter Kraus, worked at Merrill Lynch for a whole three months. For his troubles, Merrill paid Kraus a nice $25 million in bonus money. Nice work if you can get it.

From the Daily Kos:

You can't make this stuff up.

Merrill Lynch received TARP funds -- taxpayer money. Lots of our money has fallen into the hands of executives who destroyed and looted their companies and are walking away with huge payouts. Peter Kraus is one such executive.

And he should be publically shamed.

Read the rest of the story here (link).

GMAC to Expand Retail Auto Financing -- Crappy Credit OK Again

So, now that GMAC Financial Services has received some $5 billion in government aid, it will relax its lending standards. During the fall, GMAC was only willing to lend to customers with a FICO score of 700 or higher. Sales plummeted. This morning, however, GMAC said that its new cutoff number has been lowered to 621. Queue up Prince's "1999."

From the GMAC Financial Services release:

"The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers," said GMAC President Bill Muir. "We will continue to employ responsible credit standards, but will be able to relax the constraints we put in place a few months ago due to the credit crisis. We will immediately put our renewed access to capital to use to facilitate the purchase of cars and trucks in the U.S."

At this time, GMAC will not finance higher risk transactions characterized by a credit bureau score of 620 or below. The company will utilize both GMAC Bank and funding from other sources to resume its traditional spectrum of prime-based credit, appropriately pricing for risk and requiring down payments where necessary.

I will say this for GMAC, though. At least it's using the government money for lending. By the way, I don't consider 621 a prime number. Fact is, I think that's what got us into this mess to begin with.

Read the entire press release here (link).

If you're interested in an in-depth article on the subject, I suggest you read the New York Times' piece (link here).

Discover Business Cards To Exit Affiliate-Marketing Channel In The New Year

Let me know when you're sick of these stories (because there doesn't seem to be an end in sight). Previously, I wrote that Chase, Citibank (to some extent), and HSBC had left the affiliate-marketing channel. You can now add Discover's business cards to the group. Discover, as a result of the economic climate, has decided that it will withdraw from the affiliate-marketing channel -- at least temporarily. The move will take effect on January 1, 2009.

In light of the "current economic downturn," writes Discover, "Discover Business Card has taken a look at credit risk and has made a decision to pause online acquisitions of its business products." The company said that its Business Card, Business Miles Card, and Business Card with Cash Back Bonus are all impacted.

Based on a letter sent to affiliates, Discover is reevaluating its performance and credit-risk model. In other words, it's going to tweak its model so that it better reflects the risk that currently exists in the marketplace. "At the turn of the year, the intention is to evaluate performance and the credit risk model so that the cards can once again be offered to online prospects in 2009," Discover says.

Given how brutal this economy is, I am not surprised that Discover has decided to tinker with its marketing strategy. You'll recall that Discover recently changed its underwriting criteria for business cards. At the time, I wrote that the new underwriting requirements would result in more denials for applicants (link here).

I'm also curious about the quality of the applicants that are applying through the affiliate channel. In November, before withdrawing from the affiliate-marketing channel, Chase said that it was concerned about consumers who were applying for "instant approval-decision" cards. "We have found that these categories do not generate quality applicants for Chase," the company wrote at the time. As a result, Chase had affiliates pull all such cards from the marketplace.

I'm wondering if Discover is running into the same kind of trouble. Perhaps, during this credit crisis, Discover is just being deluged with a rash of low-quality applicants -- so much so that it has decided it would be better to simply leave the channel until the "all clear" signal has sounded. It's difficult to know, of course, but I think it's possible.

Finally, Discover says its consumer and student cards will continue to be offered through the affiliate-marketing channel.

Related Articles:

Macy's Owns Up To Debit Card Glitch On Saturday Before Christmas

If you used your debit card at Macy's on the Saturday before Christmas, be sure to check your bank account. Turns out that Macy's suffered a system glitch that impacted customers in two areas of the United States, resulting in accounts to be debited twice.

From the Dallas Morning News:

Macy's Inc. spokesman Ed Smith said a "very small number" of customers were affected, but he didn't know exact figures.

"Macy's had a system issue on Saturday, Dec. 20, from 1 to 2:45 p.m. at stores in Macy's Central and East divisions, which may have caused multiple debits to some customers' checking accounts," he said. "The problem has been identified and corrected."

Macy's central division is comprised of 236 stores while the east division is comprised of 253 stores. In all, some 38 states were impacted. If you were shopping in Macy's -- in those regions, at that time, and using a debit card -- be sure to check your statements.

The rest of the Dallas Morning News story can be read here (link). Read More...

People Pulling Up to Pawn Shops Today Are Driving Cadillacs and BMWs

Really? I wonder how widespread this really is. When a reporter wants to write a story, it's always possible to find enough examples to build a story. But it doesn't mean that the story has legs beyond the immediate subjects that are being highlighted in the story. Maybe I've just been sleeping at the wheel. Perhaps extremely well-to-do people really are pawning their David Yurman jewelry and Tiffany pieces to make ends meet.

From the Wall Street Journal:

Lee Amberg, owner of AA Classic Windy City Jewelry & Loan in affluent Evanston, Ill., said he's been seeing Cartier watches, two-carat diamonds, David Yurman jewelry and pieces from Tiffany's. One client, he said, brought in a fur coat from Saks Fifth Avenue that retailed at $9,000. She told him she needed a loan to help buy private-school uniforms for her child.

Diamond Exchange USA is more of a hybrid store. In addition to selling its own pieces, it makes loans against customers' goods and purchases used jewelry too. Located on a major thoroughfare in Bethesda, Md., it has a constant stream of Mercedes-Benzes, BMWs and other luxury cars pulling into the lot. Virtually all of the clientele are women. Many come to sell their gold or diamond jewelry.

A potential new customer recently strolled in to speak with co-owner Justin Carmody. A resident of Potomac, Md., she owns a small wholesale company and was looking to obtain a $6,000 loan on a 1.91-carat diamond ring given to her by her husband. With a 10% fee, she learned, it would cost her $6,600 to get the ring back. If she failed to resolve her cash issues in a month, she'd be responsible for an additional payment -- $600, or 10% of the principal -- each month until satisfying the debt.

Is it really this bad out there?

Read the rest of the story here (link).

Monday, December 29, 2008

It's Not Enough To Just Use Your Juniper Credit Card Anymore

Even if you are using your Juniper (Barclays) credit card on a regular basis, that still won't protect you from a credit-limit decrease if you aren't using enough of your available credit. That's the takeaway from the letter that Juniper is sending to customers in the mail.

Several of my readers have recently suffered substantial credit-limit cuts on their Juniper cards. Despite regular usage by these folks, Juniper (now called Barclaycard US) said that it was cutting the limits to reflect their spending. "We strive to be proactive in providing you with a credit card that meets your needs," the letter states. But, "based on your spending history and since you are only using a small portion of your available limit, we have lowered your credit line to ...." Juniper adds that the new limit "reflects your previous usage of the card."

This is troubling. My readers tell me that they use the cards on a regular basis -- every month, in fact. But, being responsible borrowers -- and being hip to FICO's scoring model (link here) -- they try not to over utilize their credit limits. As a result, they acknowledge that they are using "a small portion" of their available credit. As a result of these limit cuts, though, they'll have to pare back their spending even further.

Fair Isaac, the creator of FICO, has put such a high emphasis on utilization (it's worth 30% of your score), that it encourages consumers to use but a small portion of their available credit. But with Juniper -- and others -- slashing limits by substantial margins it may be time for Fair Isaac to tweak its current and future scoring models (FICO 08).

Consumers who understand the reality of FICO -- and know that low utilization is rewarded heavily in the scoring model -- could be penalized because of these credit-limit reductions. Worse, if these consumers continue to charge the same amounts to their cards each month, FICO will likely penalize them for too much utilization. Sure, my core reader understands what these credit-limit reductions will ultimately mean (lower spending on the card), but I worry that the average person, who doesn't visit my site or other credit fora, will be hurt by these moves.

The consumer, if she continues to make the same level of purchases each month on her Juniper card (one of my readers saw her limit go from nearly $7,000 to just under $2,000), will look more risky as a result of this credit-limit reduction. The reality, of course, is that she's no more risky than before. Indeed, she's using the same amount of her available limit as she always has. The only difference is that FICO will now see that the utilization ratio has climbed to levels that are no longer optimal. As such, the credit score must come down to reflect the "increased risk" of the consumer.

Credit-card issuers have been extremely busy slashing limits during the past four months. In many cases, limits are being cut to levels that will make FICO think that the customer has become a whole lot riskier. To be sure, the consumer might be more risky. But in other cases -- such as with Juniper customers who are simply not using enough of their available credit -- risk may not be moving higher at all.

In light of this credit climate -- and in light of the number of consumers who have received credit-limit reductions that may not adequately reflect their true risk profile -- I hope that Fair Isaac is thinking about making some last-minute changes to its soon-to-be-released FICO 08 scoring model, especially as it pertains to utilization.

Given what Craig Watts recently told Liz Pulliam Weston, though, it looks as though Fair Isaac is defending its utilization calculation (link here), meaning that I shouldn't hold my breath.

Printing Money –- And Its Price

With the economy in recession, the consumer tapped out, and banks begging for bailouts, now is the time for austerity. Instead, bright minds say that would be the worst thing to do. Indeed, many economists believe that the smartest thing we could do is create more money today and worry about the consequences later. Never mind that our current malaise is the direct result of that kind of thinking.

From the New York Times:

“We got into this mess to a considerable extent by overborrowing,” said Martin N. Baily, a chairman of the Council of Economic Advisers under President Clinton and now a fellow at the Brookings Institution. “Now, we’re saying, ‘Well, O.K., let’s just borrow a bunch more, and that will help us get out of this mess.’ It’s like a drunk who says, ‘Give me a bottle of Scotch, and then I’ll be O.K. and I won’t have to drink anymore.’ Eventually, we have to get off this binge of borrowing.”

Some argue that the moment for sobriety is long overdue, and postponing it further only increases the ultimate costs. “Our government doesn’t have enough spare cash to bail out a lemonade stand,” declared Peter Schiff president of Euro Pacific Capital, a Connecticut-based trading house. “Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover.”

I remember when people used to laugh at Peter Schiff when he'd make those kinds of comments. I doubt they're laughing today. Schiff is correct. My guess, though, is that the economists will prevail. We'll continue to create liquidity in an effort to dig our way out of trouble.

You can read the rest of the Times story here (link). Read More...

Beware the House of Cards

Barron's did a piece over the weekend that focuses on the publicly-traded stocks of credit-card issuers. But before you hit the backspace button, hear me out. To understand why credit-card issuers are reining in credit limits and closing card accounts, you need to read these kinds of stories. What ails these stocks often has a direct impact on you.

From the story:

"We're looking for a pretty material deterioration through 2009," says Donald Fandetti, a specialty-finance analyst at Citigroup.

Charge-offs of bad card debt, or losses, have risen to an annualized 6.6% of balances from 4.6% a year ago and may keep climbing until 2010, when unemployment is expected to peak, according to Fandetti and others. With the housing market in decline and the economy contracting, the charge-off rate is almost sure to exceed the historical high of 7.5% -- and many in the business are bracing for double-digits.

A little housecleaning before you read the rest of the story. At the bottom of the Barron's piece, the author, Sandra Ward, says that Discover Financial Services plans to apply for bank-holding status. She may have missed it, but Discover has not only applied, it's already been granted bank-holding status. I pointed that out ten days ago using my Twitter account (link here).

In any event, you can read the entire Barron's story here (link).

One Hacker's Audacious Plan to Rule the Black Market in Stolen Credit Cards

I pointed to this story on Christmas Eve, using my Twitter account, but I imagine that many of my readers don't follow my Twitter posts (link here). Just FYI, I use my Twitter account to point to miscellaneous credit stories that, for whatever reason, don't make it onto

Anyhow, getting to the story at hand, Wired wrote a nice story about a hacker's attempt to rule the market in stolen cards. The story, and the video (provided below), reminded me of how vulnerable the card issuers are to fraud. After watching the video, meanwhile, I also realized how silly it can be for retailers to ask for identification at the point of sale.

Watch the video first and then read the Wired story afterward (link to story below).

Read the Wired story here (link).

New Threats To Credit Scores; Here Comes FICO 08

Liz Pulliam Weston, one of my favorite personal-finance columnists, is out with a nice FICO 08 primer. The revised scoring system, which was supposed to have been released months ago, looks as though it's finally on track. TransUnion will offer the option to lender next month. Equifax plans to offer the score during the spring; and Experian has not yet committed to a date.

From MSN Money (hat tip, Hanadarko):

Fair Isaac says the new score will do a better job of predicting defaults than the classic FICO, which is used in more than 75% of mortgage lending decisions and by 90% of the largest U.S. lenders.

But FICO 08 is even more sensitive than the classic FICO to how much of your available credit you're using. If your credit card issuer slashes your credit limit -- which is increasingly likely these days -- you could see your scores plunge, regardless of whether you carry a balance.

Another hazard: The new scoring formula responds more negatively if consumers have few open, active accounts. Because more credit card issuers are shutting down unused and unprofitable accounts, that boosts the chances of damage to your scores.

It's a minefield out there, folks. You better not be in the game without the playbook.

Get up to speed on the new rules by reading the rest of the story here (link).

Bank of America To Secured-Card Customers: Beware Too Much Available Credit

Because lenders realize that available credit lines can be charged up quickly, it can be helpful to minimize the number of cards you have, says Bank of America. Indeed, your available credit on credit cards may impact a lender's credit decision, Bank of America concludes. That's the message that one of my readers recently received in his online secured-card statement from Bank of America. The message is reckless.

Without more, a reader is left to his or her own devices. What is Bank of America suggesting here? Should the customer close all but one card? If the customer has $25,000 in available credit, should the customer reduce her available credit limit to $5,000? How much is too much? What's more, just how will the lending decision be impacted? Will a customer with too much credit (no such thing, by the way) -- and a perfect credit history -- be denied new credit?

To be sure, most (but not all) customers who have a secured card will fall into two camps: they're either new to credit, and just establishing their credit history, or they are people who have had trouble in the past and are now reestablishing their credit with a secured card. In that light, perhaps Bank of America is sending a paternalistic message. Perhaps. Regardless, though, Bank of America's message is incomplete. (As a side note, if any of my readers get this message in their regular credit-card statements, please let me know.)

As long as FICO heavily weighs utilization into its scoring model, Bank of America's message is irresponsible. Utilization accounts for 30% of the FICO score. If a customer takes Bank of America's message literally, she could be setting herself up for a fall. Here's why: if this customer slashes her own credit limits, by closing accounts, she will be left with very little maneuverability. (Another worry should be FICO 08, the new scoring model that's getting rolled out soon. It penalizes consumers who have too few cards open (link here). Bank of America's advice comes at the wrong time.)

An example is in order. Pretend that a person has $25,000 in available credit. Imagine, moreover, that this person charges -- on average -- a combined $2,500 a month on all of the cards (always paying in full, though). For now, this customer is using just 10% of her available credit. For FICO-scoring purposes, this person will be rewarded for the low utilization (link here).

Now let's pretend that one of Bank of America's customers takes the "too much credit can be bad" message and runs with it. The customer decides that $25,000 in available credit is too much. Because this customer charges $2,500 a month, she decides that a $5,000 limit will do the job just fine. Bolstered by Bank of America's message, she calls her credit-card issuers (I would imagine that Bank of America hopes that she doesn't close a Bank of America account) and requests that her cards be closed. She decides to leave just a single card intact.

Now the trouble begins. Even though she only has $5,000 in available credit, our customer continues to charge $2,500 a month. Instead of having 10% utilization ($2,500 in purchases with $25,000 in available credit), she is now utilizing 50% of her available credit ($2,500 in purchases with just $5,000 in available credit). This customer, having taken Bank of America's message to heart, has now gone from a great credit risk to a poor credit risk.

What's more, to reflect that higher risk, her FICO score tumbles (FICO would not take kindly to 50% utilization). With the lower FICO score, her only remaining creditor now decides that it must reprice her risk. Her interest rate gets lifted and her credit limit gets cut. Thanks, Bank of America.

Confused, this customer decides to Google "closed credit cards FICO impact." She peruses the first ten listings and sees an article from (a popular personal-finance site). The title of the article is "Closing credit card dings credit score." In it, she reads that Barry Paperno, Fair Isaac product support manager, says it's a myth that having too much credit will hurt your score. "It's just not true that you can have too much available credit. That by itself is never a negative with the score," says Paperno. "Sometimes the things you do to get too much can be a problem, such as opening a bunch of new accounts, but for the most part, that's just kind of an old wives' tale." (Read the entire article here.)

Upset, the customer opens the Bank of America statement again.

Damn, she wonders, did Bank of America mean that I shouldn't run out and get a bunch of new cards? Or was Bank of America really suggesting that I close several of my credit cards? Now that I have 50% utilization, should I even worry about getting approved for new cards? Will banks be willing to lend to me with my FICO score down 45 points? Bank of America's message just wasn't explicit enough, our customer concludes.

On a mission to figure this out, this person does another Google search. This time she searches for "Too Many Credit Card Accounts." Within the first ten listings, she finds an article that's entitled: Too Many Credit Card Accounts -- Bad News? (story link).

The author of the article (a great guy, by the way) argues that having no options is a heck of a lot worse than having several accounts. The article says that "Mom and dad were well intentioned when they gave us tidbits about credit -- but when it comes to credit cards, they missed the boat when they told us that having just one or two cards was all that we'd ever need. Tell that to the guy who only has one card and no options -- and very little available credit. If you ask me, that's the person who is playing dangerously."

Listen. I understand that the credit environment has changed. But Bank of America is doing a disservice to its customers when it includes a three-sentence paragraph that is vague. It's an open-ended message that can be taken several ways. What's more, it leaves the customer guessing.

If Bank of America felt the need to warn its customers about available credit, it should have explained itself. It should have explained that FICO scoring is still important. It should have said that utilization is the second-most important factor when it comes to scoring. It should have said that there are plenty of people out there with a tremendous amount of available credit -- who manage their credit cards perfectly -- and who never worry about being denied for new credit.

It shouldn't have left the job to me.

Related Articles:

•Read More Bank of America Stories Here

Is It Time For Your Annual Credit Check Up?

With the new year fast approaching, it's a good time to remind readers about their free annual credit reports, which you can get through If you have not accessed your free credit report in the past year, this would be a great time to do it.

Because you have access to all three reports (TransUnion, Experian, and Equifax), you can stagger your free reports so that you are doing a check up every four months. On January 1, you could pull your Experian report. On May 1, you could pull your Equifax report. And on September 1, you could pull your TransUnion report. If you aren't one of those people who pulls a credit report more often, this once-every-four-months strategy might be just right.

Also, remember that is the only place where you can get your free credit reports with no strings attached. You can ignore all of the other products out there that claim to offer "free" reports. Indeed, is hardly free. When you order your report at, you are automatically enrolled in a 7-day trial membership for Triple Advantage credit monitoring, which costs $14.95 a month unless you cancel the free trial within 7 days. Unfortunately, lots of people don't read the fine print at, which means they end up with a product that they never wanted in the first place. Once they realize that they've unwittingly signed up for a product that costs $14.95 a month, they cancel the product. It's a waste of time for everyone.

Anyhow, let this blog entry serve as a reminder that it's about time for many of us to check our free annual credit reports. Consumers can access their free credit reports at (link here) every twelve months (assuming you pull all three reports at one time; you can pull one report every four months using my previously-mentioned strategy). You can also request your free reports by calling 877-322-8228.

If you haven't been taking advantage of this no-strings-attached product, you should.

Cartoon Of The Day -- I Need A Subsidy

I'm a big fan of Calvin and Hobbes. Calvin was always clever. What's more, he was a hell of a business kid. Don't quote me, but it's my understanding that this particular cartoon was illustrated by Ben Bernanke (rather than Bill Watterson). Again, don't quote me.

This is a classic cartoon, so I don't know when this particular cartoon was published. If anyone knows, feel free to chime in. (Update: this strip was originally published on February 16, 1992.) Click the cartoon to enlarge. In the meantime, let's have some fun around here this week. It'll be a short week with the New Year ringing in on Thursday, so I'm going to try and keep the site busy until then. Hope you're ready for a busy email inbox (for those of you who subscribe to my blog entries).


Tuesday, December 23, 2008

Happy Holidays To All Of My Readers

I won't be blogging on Christmas Eve, Christmas day, or the day after. In other words, you guys are on your own. I'll be around, responding to comments, but there won't be any new posts. You can use this entry to post whatever you'd like. We'll call it an open thread.

I hope that all of my readers have a great holiday season. Please stay safe. There are a bunch of nuts driving out there on the roads.

I've truly enjoyed blogging for all of my readers this year. It's been a lot of fun. I've got the best readers extant.

Take care.

Retailers Want Their Bailout Too

See? This bailout stuff has no end. Holiday shopping sucks. Solution? Bailout. The retail industry is calling on President-elect Barack Obama to implement three national tax-free shopping holidays in 2009. The industry, if it could get these tax-free shopping holidays, would want them in March, July and October of 2009. Each holiday would last 10 days.


It said the tax-free benefits would apply to all goods subject to a state sales tax from clothing and home furnishings to restaurant dining and automobiles but would exclude tobacco and alcohol.

According to the Census Bureau, state sales tax rates range from 2.9% to 7.25%. By temporarily lifting the sales tax for the three 10-day periods, the NRF estimates that consumers could save nearly $20 billion.

Based on the 112.4 million households in the United States, the figure would amount to almost $175 saved by the average family, the group said. It says that the sales tax holidays would also help millions of U.S. retail workers keep their jobs.

If these national tax-free holidays did go into effect, I would be a beneficiary. I have a car purchase that will be completed in March. Windfall! But what about my fellow citizens who just bought a car last week? Kind of sucks for them.

You can read the rest of the story here (link).

Is 2009 the Year of Credit Card Reform?

I am not counting on it. The recent rule change (link here) may have to do for now. These card issuers are fighting tooth and nail to defeat the bills sitting in Congress. So pardon me if I am not bubbling over with hope.

From the Washington Independent:

Some Democrats want to take additional steps to prohibit companies from hiking rates for consumers having problems (a late payment, for example) with some other card or line of credit, a practice known as “universal default.” Critics of the companies’ marketing practices also want to see more done to prevent banks from targeting youngsters, who tend to be more reckless spenders than other groups.

“The regulations regrettably leave in place many blatantly unfair credit card practices that mire families in debt,” Sen. Carl Levin (D-Mich.) said in a statement. Sen. Christopher Dodd (D-Conn.), chairman of the Banking Committee, agrees, vowing to reintroduce legislation next year to plug the gaps.

Yet additional reforms probably won’t come easily, particularly in this recession. The economic downturn has already forced the federal government to front trillions of dollars to prop up the nation’s sputtering financial institutions, and industry supporters in Washington will likely resist any changes that could further harm the banks’ bottom lines.

We know that's the truth. I'm hoping that the recent rule change doesn't turn into a compromise.

You can read the rest of the story here (link). Read More...

Dear Santa Claus, How About Some Credit

Heck, I thought I was cynical. After reading Dennis Byrne's piece in the Chicago Tribune this morning, I might have to reevaluate my thinking. Byrne does a question-and-answer column this morning in which he pretends to have a conversation with Santa Claus. Dennis is asked what he wants for Christmas, and Dennis says that he'd like credit. It goes from there.

From the story:

Nobody's buying anything because they can't get any credit. Banks aren't lending because they're afraid that they won't get their money back. It started because greedy bankers were giving mortgages to homeowners who didn't deserve credit. Now, everyone is panicked, people 'fraid of getting laid off.

So, the problem is that everyone had too much credit, and the way to fix it is to give everyone more credit? Look, I might be a jolly old fat man, but I'm no fool.

No, seriously. The economists tell us that's the only way to get us out of our depression, figuratively and literally. They say empirical analysis reveals that market disturbances combined with aggregate demand shocks as well as inconsistent short-term interfacing of prices and money supply contribute substantially to rampant economic fluctuations, which in turn produce the credit complications that we're . . .

Dennis, stop with the gibberish.

You can read the rest of the story here (link). Read More...

Bad Shopping, Good Shopping? Well, Good For American Express

Yesterday I highlighted an Atlanta Journal-Constitution story about American Express and its penchant for cutting credit limits -- in part -- because of the shopping habits of its customers. Well, Jim Wooten, writing in the very same publication, says that companies like American Express should employ every resource they have to weed out risk. Indeed, writes Wooten, if a credit card issuer "determines, for example, that people who drive red cars and shop at Joe’s Fruit Stand begin to make late payments when debt reaches $600, it should limit credit to $500."

From the story:

The subprime mortgage debacle that has visited this recession on America, got its start in an effort by politicians and advocacy groups to push mortgage lenders to waive credit-worthiness as the primary consideration in making loans. The financial sector, to its ever-lasting shame, was much too eager to comply, due in part to greed and to a system that held nobody accountable for extending bad loans. That chain of irresponsibility has, as we all know, brought down some of the icons of Wall Street.

The credit card industry has its own money-printing machine. When it extends credit to those who may be swamped by too much debt, it invites a second wave of financial disaster that could turn the recession into Depression. It therefore should employ every legal screen to determine whether it’s printed more credit-money than a consumer can repay.

Yes? No? Read yesterday's piece again (link here). Then read Wooten's piece (link here). Do you agree with Wooten?

Related Articles:

•Read More American Express Stories Here

Monday, December 22, 2008

The Problem With The Federal Reserve's Money-Printing

James Grant has a provocative piece that you should read. The piece appeared in the Wall Street Journal over the weekend. Grant, in the end, wonders who will keep buying all of the greenbacks that the United States is printing. Answer: He doesn't think that any country will continue to sop up the dollar.

From the piece:

Our troubles, over which we will certainly prevail, stem from a basic contradiction. The dollar is the world's currency, yet the Fed is America's central bank. Mr. Bernanke's remit is to promote low inflation, high employment and solvent finance -- in the 50 states. He wishes the Chinese well, of course, and the French and the Singaporeans and all the rest besides, but they don't pay his salary.

They do, however, buy the U.S. Treasury's bonds, which frames the emerging American dilemma. If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them? Who will finance the Obama administration's looming titanic fiscal deficits? Who will finance America's annual surplus of consumption over production (after 25 more or less continuous years, almost a national trait)? Inflation is a kind of governmentally sanctioned white-collar crime. Every crime needs a dupe. Now that the Fed has announced its plan to deceive, where will it find its victims?

In the second half of the piece, Grant says that the U.S. never should have abandoned the gold standard. He takes the opportunity to pine for the good old days.

Whether you agree with his gold-standard thesis, the piece is well written and thoughtful.

Read the rest of it here (link).

City Oafs Take Us For Mugs: Credit Crunch Christmas

That's the headline splashed atop a story at the Daily Express Web site. Turns out that a group of bankers in England has released a song that mocks the economic misery that Britons are facing. In the U.S., of course, the bankers here don't sing songs. Instead, they just take billions in bailout money and refuse to share it with anyone.

From the Daily Express Web site (hat tip, Sean):

The video features drawings of dole queues and Woolworths stores closing down before launching into the unapologetic chorus.

It also shows footage of bankers drinking and urinating in a London pub. Later lyrics include lines about people not being able to meet their Visa interest payments.

The City Boyz, named as Ciarran “The Brawler”, Dave, Jeremy and Marcus, declined to reveal their employers’ names but are City bankers and stock brokers.

One claimed to work for the collapsed investment house Lehman Brothers.

City Boyz spokesman Dave said: “We were down O’Neills, pissed as usual and pissed off that we were getting the blame for the crunch all the bloody time.

Here is the video:

You can read the Daily Express story here (link).

Cartoon of The Day -- Bernanke Claus

It's that time of season. Christmas is just three days away. And, so, it comes as no surprise that the real-estate developers are now looking for a bailout stocking stuffer. The developers are worried about the commercial real-estate market, which looks like it's getting ready to roll over. The Wall Street Journal has the story (link here).

In the meantime, here is the cartoon of the day (click to enlarge):

Gary Varvel -- December 16, 2008

Related Articles:

Being Penalized For Shopping Choices. Consumer profiling?

Sound familiar? It should. I've written about this topic before. Still, some of my new readers may not be familiar with the practice. If you're not, you should read the story that appeared in yesterday's Atlanta Journal-Constitution. Not surprisingly, the story centers around American Express and its practice of penalizing customers because of their shopping decisions.

From the story:

“It’s not a fair practice,” said Travis Plunkett, legislative director at Consumer Federation of America, a consumer advocacy group. “I imagine this person feels this is guilt by association. It doesn’t work in the justice system, and it shouldn’t work when it comes to credit card charges.”

Ed Mierzwinski, consumer program director at U.S. PIRG, a Washington-based consumer organization, said companies are telling consumers that “everything you have known for years is no longer true.”

The companies no longer guarantee customers will be considered low risk if they pay their bills on time and never exceed their credit limits.

“Now you have to watch where you shop, because if you shop where deadbeats shop or live where deadbeats live, we’re going to use that as a reason to lower your limits or increase your rates,” Mierzwinski said.

For American Express's part, it says that a customer's shopping profile will never be the sole reason for a credit-limit reduction. Instead, it's just one factor that gets thrown in with the rest of the risk-management soup.

I've always wondered just how useful shopping profiles really are. I've seen the establishments that some of these customers frequent. Often they're mainstream places like, Walmart, and other well-known, highly-trafficked retailers. I don't know how American Express can effectively assess risk when the customer is shopping at places that are tremendously popular.

American Express could use any number of reasons for slashing credit limits. For whatever reason, though, it keeps trotting out this hot-button shopping excuse. Until American Express scuttles this risk-management tool -- and nothing indicates that it will -- the company should expect people like me to keep focusing, negatively, on the topic.

In the meantime, you can read the rest of the Atlanta Journal-Constitution story here (link).

Related Articles:

Friday, December 19, 2008

Discover, Capital One Shut Dormant Accounts, Cut Risk

Instead of me writing about it (as I've done on several occasions), I'll let Bloomberg do it today. Let this serve as yet another reminder that you must use your cards if you want to keep them open. Card issuers continue to close accounts that are not being used on a regular basis. If you've got inactive cards, and you're interested in keeping them open, do yourself a favor and make a small purchase sooner rather than later.

From Bloomberg:

Discover, the fourth-largest credit-card network, has closed 3 million “inactive” accounts and plans to cut up to 2 million more, Chief Executive Officer David Nelms said in an interview yesterday. “Most of the accounts haven’t been used for years,” he said. “We think it’s a responsible move.”

Capital One, the McLean, Virginia-based credit-card lender and bank, has “very aggressively” closed inactive accounts, Chief Executive Officer Richard Fairbank said last week at an investor conference. The company declined to say how many accounts are affected, spokeswoman Pam Giordano said.

Consider this my public service reminder. I surf around various Web sites during the day. Day after day I see threads that are started by people who have had their cards closed because of inactivity. These people are often shocked.

I'm just making sure my readers are not shocked when it happens.

You can read the rest of the story here (link).

Related Articles:

Auto Makers to Get $17.4 Billion

Phew! Disaster averted. For now. General Motors and Chrysler will be receiving desperately-needed short-term aid. Ford, meanwhile, says that it does not need any aid. General Motors and Chrysler must present a plan by March 31 that shows they are financially viable. If they're not viable businesses, the government will call the loans due -- and the funds will have to be returned. Just one question: does anyone believe that they'd be able to return the money?

From the Wall Street Journal:

"In the midst of a financial crisis...allowing the U.S. auto industry to collapse is not a responsible course of action," Mr. Bush said.

"Under ordinary economic circumstances, I would say 'this is the price that failed companies must pay' and I would not favor intervening to prevent the auto makers from going out of business," the president said. "But these are not ordinary circumstances."

The deal allows the auto makers to stay out of bankruptcy. Personally, I still think that bankruptcy gives the auto makers the best chance at long-term survival. They can restructure under a Chapter 11 bankruptcy and get their financial houses in order.

Bankruptcy is not a kiss of death for the auto makers -- especially when they are not dissolving. I'm advocating a restructuring -- a reorganization. I'm still not convinced that the auto makers can avoid a Chapter 11 filing down the road. I guess I will just have to wait and see.

The rest of the Journal story can be read here (link). Read More...

How Cheap Is Too Cheap?

Come on, guys. The blog has been a little quiet this week. Can we talk about this? Just how cheap is too cheap? I am frugal. Have become a lot more frugal over the last couple of years. My family jokes about my "cheapness." I think it's unfounded, but what the hey. Perception is reality. Which brings me to Neal Templin, the Cheapskate over at the Wall Street Journal, who wants us to take the mourning test.

From the story:

If the question is whether I ever completely forget about money and just do whatever the heck I feel like -- no matter the cost -- the answer, I'm afraid, is no.

We've raised three kids on one salary, and it seemed wrong to me to spend money we don't have. On top of that, I hate waste. And paying too much for something makes me a little ill.

Being cheap isn't always a virtue. My family can tell you stories of the times I've bought bargain steaks at the supermarket that were so tough they were almost inedible. Or when I cast a pall on some outing by fretting about how to do it on the cheap.

Is it close to the point where they won't mourn my death? I sure hope not.

I can tell you right now that I am not that cheap. I know for a fact that my family would mourn my death. I think. Probably. Right?

Are you guys cheap? How cheap are you?

Read the story and come back and tell me exactly what you do that makes you cheap. Also, is there anything wrong with being cheap? Can it be unhealthy? Is it bad for relationships?

Here is the story (link).

Thursday, December 18, 2008

Office of Thrift Supervision Approves Bar on Unfair Credit Card Practices

The Office of Thrift Supervision passed a final rule today that prevents unfair credit-card practices. The rule has also been adopted by the Federal Reserve Board and the National Credit Union Administration as well, which means that all credit cards, regardless of what kind of institution issues them, are covered.

The OTS version of the rule will cover savings associations. The Federal Reserve Board, meanwhile, will cover banks. And the National Credit Union Administration will cover credit unions.

"I am extremely proud that OTS leadership has culminated in this important rule to ensure fair treatment for the millions of Americans who use credit cards," said OTS Director John Reich in a statement. "The rule will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages."

The rule will provide cusumers with a host of protections. "The rule requires that consumers receive a reasonable amount of time to make their credit card payments, prohibits payment allocation methods that unfairly maximize interest charges and, in the subprime credit card market, limits fees that reduce the credit available to consumers," according to the OTS.

The new rule goes into effect on July 1, 2010, but the OTS is encouraging card issuers to "conform as soon as practical, particularly to the provisions related to high-fee cards."

The fact sheet can be found here (link).

The final rule -- all 284 pages of it -- can be found here (link).

What Bank Mergers Mean for Credit Cards

I've wondered about this myself. I took an antitrust class last year in law school. All of these recent acquisitions, with no antitrust scrutiny whatsoever, will ultimately come at a price. Less competition is never good for the consumer. Fewer competitors will result in inferior products and higher prices. So, with so many banks merging recently, what's going to happen with interest rates and fees that are tied to the credit cards these banks issue? The Center For American Progress has a good piece on the subject.

From the story:

Credit cards have become essential to our modern economy. Almost all families have replaced checks and cash with plastic for transactions at the supermarket, gas station, and pharmacy. Moreover, credit cards will be a critical source of credit as other forms of credit have become more costly and less available.

But as numerous congressional hearings have documented at length, the costs of borrowing on a credit card are high relative to other types of credit, due to an overabundance of fees, high penalty rates, and fine print that obscures, rather than clarifies, the terms of borrowing on a credit card. On Thursday, in fact, the Federal Reserve Board will issue a reform rule to limit some of the worst credit card practices. It’s currently unclear how strong its rule will be, but regardless of the outcome a smaller number of credit card issuers puts more pressure on worst practices—a trend that still deserves scrutiny.

In the end, families who use credit cards—already saddled with record-high credit card debt—could see increasing kinds and amounts of penalty fees by credit card issuers. This is happening already. As the economy sputters and banks’ mortgage-related losses increase, banks are stepping up fees and rates to increase their income. Consumers are taking this on the nose—and with prices for every day necessities still high and wages for workers stagnant, they may be forced to take on more debt or default on their current debt.

Read the rest of the story here (link).

Credit Unions Offer Auto Deals

You guys know what I think about credit unions. Love 'em. I have written several stories about credit unions and the credit cards that they offer (link here). Indeed, one of my favorite cards, the cash rewards card from Pentagon Federal Credit Union, has been prominently featured on my site (link here). But credit unions are also an excellent source of auto loans. To that end, the Wall Street Journal has a story that discusses how important credit unions are right now to U.S. auto makers.

From the story:

Credit unions are stepping into the auto-finance gap, striking deals with U.S. auto makers to provide loans for cars and trucks sold at discounted prices.

Anchored by institutions in the Midwest, credit unions from a dozen states have agreed over the past week to make $22 billion in loans available to members to finance purchases of any vehicle.

For U.S. auto makers, credit-union members could become an important lifeline as they struggle to compete against foreign-based auto makers that generally have healthier finance arms. Chrysler agreed this week to give discounts of $500 to $1,000 to credit-union members in 12 states in the Midwest, South and Southwest. Last week, General Motors Corp. agreed to a similar deal, offering "supplier" discounts of roughly 5% plus $250 off the price of GM. Ford Motor Co. isn't in talks on a similar deal, as it believes its finance arm, Ford Financial, can meet buyers' needs.

You can read the rest of the story here (link). Read More...

Wednesday, December 17, 2008

CNN Interview -- Reaction, Comments Regarding Citibank Rate Jack Story (CNN Video inside)

I imagine that some of my readers will have comments about the CNN story and interviews that dealt with Citibank's recent rate hike. Feel free to use this entry for comments.

My interview lasted about 15 minutes, but, as you can see from the CNN segment, a lot of editing goes into a story. That's why I did not appear in the interview. I always knew that was a possibility. However, my blog name was splashed all over the screen. Can't beat that kind of advertising.

Here is the video of the CNN interview:

Anyhow, I thought the segment was good. Drew Griffin does good work.

If you're interested in reading Drew Griffin's interview, go here (link).

What did you think of the segment? Good? Bad? Leave a comment and let me know.

Related Articles:

Citibank coverage -- in one place

Where In The World Is (UPDATE3)

(UPDATED, December 17 -- 8:20 pm eastern): The show should air tonight at 10 p.m. eastern. The segment will air during the Anderson Cooper show (AC360). If I am not cut out of the segment (always a possibility), Drew Griffin will be interviewing me. He'll also be interviewing others who visit my blog as well.

The story pertains to Citibank's recent rate hikes. Should be an interesting segment.

Thanks for reading.

Related Articles:

Your Bailout Dollars Hard At Work -- Citibank Style

Citibank cardholders are being offered a nice deal right now. If they sign up for a Citibank checking account, and fund it with $1,000 by January 31, 2009, Citibank will give them $100. If that's Citibank's way of saying thank you for bailing out its parent company, then I'll take it. You're welcome, Citi. Of course, if you're not a Citibank cardholder, you can't participate in this deal. But rest assured that your taxpayer dollars are going to a great cause. (Is this where I put in my sarcasm indicator?)

Here is a picture from Citibank's Web site (click picture to enlarge):

I give Citibank a lot of grief around here, so I thought it only fair to highlight Citibank's benevolent side as well.

Citibank, if you're crawling around my site today, I thank you. And, though I cannot speak for all of them, I would suspect that taxpayers thank you, too.

Viva la Citibank.

The Growing Threat Of Deflation

This past summer, the Fed was busy worrying about inflation, especially as the cost of oil was soaring. Now, however, the Fed has its eyes on the growing threat of deflation. Says "A widespread drop in prices might seem like a good thing to most consumers, but the Fed and economists see it as another reason to worry." A Fed chairman's job, as you can see, is never done.

From the story:

The biggest problem with deflation is that when businesses need to continually cut prices to spur sales, they eventually respond by cutting production. That results in growing job losses, and could, in the worst case scenario, even cause a depression.

And several economists say they are far more worried about the threat of deflation now than they have been in the past. The Federal Reserve may also be more concerned about deflation as well.

The central bank cut its key interest rates to near 0% Tuesday. In its statement, the Fed said it expects inflation to "moderate further" but it stopped short of suggesting that inflation would drop "to levels consistent with price stability" as it has in prior statements.

Read the rest of the story here (link).

10 Credit Questions and Answers at (December 17, 2008)

As I have said before, I can see how my readers find I don't collect any personal information, but I can see search terms that people use to find the site. This information is like the center of Lifesavers candies. Or doughnut holes. Rather than letting them fall by the wayside, I figure that I should put these search queries to good use.

Here are the rules: I will edit search queries for syntax purposes. Otherwise, I will leave them alone. I'll also phrase queries in the form of a question whenever possible. By request, these Q&As are published whenever I have received 10 questions (through Google and other searches).

Q: What happens to other credit cards when you opt out of an interest rate hike?

A: In a vacuum, nothing. One has nothing to do with the other. However, if you happen to opt out of a card, and close the card immediately, the closed card's credit limit will no longer be factored into the utilization portion of the FICO-scoring system. Utilization is counted two ways: per individual card and overall. Thus, if you have several cards that have quite a bit of utilization, losing one of your credit cards (and its limit) could hurt your overall utilization ratio. If you realize that you'll be hurt by opting out and closing a card, you'd do well to pay off your other credit cards as soon as you can.


Q: Does Amex report charge cards to the credit reporting agencies?

A: Yes, indeed. I have an American Express charge card. American Express reports the balance each month. Just one caveat, though. American Express is well-known for being a bit behind in its reporting. For example, American Express is currently reporting a balance on my card that's nearly two months old.

Q: Does American Express do periodic credit checks on customers?

A: Yes. It reviews my credit report about twice a month. The inquiries are soft, so they don't hurt your credit report. They show up as "American Express Co" and "Amex Account Review." American Express peeks at credit reports so that it can see how you're handling your non-Amex accounts.

Q: How to keep credit card company from closing account for inactivity?

A: The easiest way to keep a credit card from being closed for inactivity is to use the card periodically. If you allow the card to go dormant (because you're not using the card), don't be surprised to see a card issuer close your account for inactivity. I use my cards every other month.


A: Welcome to American Express. At least you're getting the financial review before it issues a card to you. In this particular case, though, American Express likely won't be pleased that your reported income is "way less" than what you've reported on your income tax returns. It's not as though it would matter, though. American Express is notorious for requesting tax returns that are not in line with your current income. That's because American Express is known for asking for tax returns that are often two years old. If you're interested in keeping the card, my suggestion is to provide the tax returns and let the chips fall where they may. At this point, you've got nothing to lose.

Q: What do credit card [issuers] tell credit reporting bureaus when it closes you account due to inactivity?

A: Nothing in particular. Your account will be closed at consumer's request or closed by credit grantor. If it's closed by you, it will say so. If it's closed by the issuer, it will say closed by grantor. However, some card companies, even when they close the account on their own, will say that you requested the closure -- which is cool. Fact is, though, that closed is closed. FICO doesn't care about the notation that accompanies the closure.

Q: Can you change your mind after you opt out of credit card hike?

A: Yes and no. If you opt out of a change of terms but want to opt back in, you can do that as long as you're still within the time frame of when you are permitted to opt out. In other words, let's say that you received a letter from Citibank. It says that you have until January 31, 2009, to opt out. On December 17 you call in to opt out. On December 28, though, you change your mind. You now want to opt back in -- and keep your credit card open. Citibank will allow you to change your mind since January 31, 2009, has not come and gone yet.

If you decide to opt out before January 31, 2009, but don't try to opt back in until after January 31, 2009, you'll be on a case-by-case basis. It's possible that a card issuer will allow you to opt back in. Or there is a chance it won't. You'll simply have to call and see what they say.

Q: Is having too many good credit cards on your credit history bad?

A: I know plenty of people with well in excess of 30 credit cards. Some of these people have FICO scores that are north of 800. Too many credit cards, in other words, has not been a problem.

As for me, I have around 15 cards. My score is just under 800. Thus, I haven't had a problem either. The biggest problem with having too many cards is that it can hurt your credit score when you get a lot of cards at one time. Remember, though, that the impact will eventually eventually fade with age. The more time you put between the applications the better. Time is your friend.

This question is a lot like asking if having too much credit is bad. Here is an article that quoted a FICO representative. He says that it is a myth that too much credit can hurt your score (link here).

Q: Does American Express report monthly balances or just when the balance increases?

A: American Express reports your balance each month (whether your balance moves higher or lower).

Q: What are my rights when a credit card account is shut down due to inactivity?

A: You don't have any "rights" when it comes to this. If a card issuer wants to close your account for inactivity, there is nothing you can do. That's the cold, hard reality of the situation. Use the card regularly and you won't have to worry about this.

READER ALERT: For more credit questions and answers, the entire 10 Credit Questions & Answers index can be found here (link).

The Perils of Consumer Debt on Display in South Korea

I'm looking at South Korea and thinking of the U.S. consumer. If you're strapped with debt it won't matter how low interest rates go. If you're tapped out, you're tapped out. Consider the plight of the South Korean consumer. What's more, imagine what would happen to our own economy if the U.S. consumer one day woke up and decided that it was tired of debt. Yikes.

From the Wall Street Journal:

After the Asian financial crisis hit South Korea a decade ago, the government helped the export-dependent economy recover by pumping out money and convincing people to borrow and spend more.

But this time around, the high household debt that accumulated in the past decade is depressing spending -- an experience that has relevance around the world as governments seek ways to get consumers to help lift their economies.

As exports drop and South Korea's economy slows, a high level of household debt is keeping consumers from spending more and the government -- like others elsewhere -- is wrestling with the question of how much to intervene.

Read the rest of the story here (link).

Putting Your Money Where Your Mouse Is

I know my readers are plugged in when it comes to the Internet. Our finances and our research, is often just a click away. That's why you'll probably be interested in a Wall Street Journal story published this morning. The story highlights a slew of online sites that could make our lives easier. Before this story, in fact, I had not heard of some of them. I'll be taking a closer look at them when I have some time.

From the story:

The recession has also prompted more members of Thrive to seek advice, such as how to accrue emergency funds, says Avinash Karnani, Thrive's chief executive. Thrive lets users aggregate information on their checking, savings and credit-card accounts. Users can also input their earnings, and Thrive will analyze their expenses and set up budgeting goals. A big chunk of Thrive's targeted demographic are people in their 20s and 30s who aren't very financially savvy but want to learn how to be, Mr. Karnani says.

Jenny Rose, a 30-year-old freelance film and television producer from New York, recently signed up for a Thrive account. "I have a history of forgetting to pay my bills," she says. "It hurt my credit report."

Now Ms. Rose says she tracks her spending more closely. And on a recommendation from Thrive, she recently transferred her Washington Mutual Inc. savings account to Citigroup Inc., where she receives a higher interest rate, she says.

You can read the rest of the story here (link).

Tuesday, December 16, 2008

When Paying Your Bill on Time Isn't Enough

Didn't I just write about this earlier today? Higher interest rates choke consumers. Chasing the balance kills FICO scores. Now it's Nightline's turn. The ABC news program takes a look at the credit-card industry and its practices. And, just like the USA Today story that I highlighted earlier, comes away with the same message: card issuers are pushing consumers to the brink of disaster.

While I see the need for some reform in the card industry, I'm not willing to give consumers a free pass. Watch the video and see what I mean. We're a country that relies too heavily on our credit cards for long-term borrowing needs. Credit cards are the worst vehicle for that. The sooner everyone realizes that, the better off we'll all be.

The video can be found here (link).

Changing Credit Card Terms Squeeze Consumers

You know the story. Higher interest rates choke consumers. Chasing the balance kills FICO scores. USA Today has a story in which it details all of the credit-card-industry practices that can push card users over the edge. In some cases, though, customers are fully to blame for their plight. Indeed, pay attention to one gentleman who racked up some $70,000 in credit-card debt -- over a 15-year period -- by using his cards for "emergencies." Someone with a few thousand in debt might be able to say that the cards are used for emergencies. However, when you have $70,000 in credit-card debt, that goes well beyond emergencies and moves right into day-to-day living.

From the USA Today (hat tip, Hanadarko):

Spaulding, 40, says he's a conservative spender who got trapped under $70,000 of credit card debt and high finance charges after 15 years of relying on his credit card for emergencies, such as car repairs. In a letter to the Federal Reserve, a bank regulator, Spaulding complained that "credit card companies are the reason why hardworking Americans like myself struggle for years."

Banks started raising his card rates two years ago, after his utilization ratio — the credit he used compared with his available credit — rose above 50%, Spaulding says. He borrowed $16,000 from his 401(k) to cover the higher monthly payments. Even so, he eventually fell behind, leading to rate increases on three other cards.

The higher card payments made it difficult to keep up with his mortgage. And plunging housing prices provided another reason to stop paying his mortgage. Now, he's trying to sell his house for less than he owes on it.

"More likely, I'd still be managing today if the credit card companies didn't raise their rates," says Spaulding, who plans to file for bankruptcy because he doesn't want to be saddled with high-rate card debt when he and his fiancée, Michelle, have their baby in April.

I feel sorry for the guy. But his own spending did him in. When you spend beyond your means, to the tune of $70,000, this is what happens. You fail. Bankruptcy is the perfect solution for this guy. Hopefully he'll change his ways once he emerges from bankruptcy.

Regarding balance chasing, I did find it fascinating that Fair Isaac, the creator of the FICO score, acknowledged that it is looking at its scoring model in light of the many credit-limit reductions that are taking place.

The potential for consumers' credit scores to fall and their rates to rise — through no action of their own — exposes a serious flaw in the credit-scoring model, some consumer advocates say.

Tom Quinn, vice president of global scoring at Fair Isaac, which developed the FICO score, defends its ability to predict which consumers are more likely to pay their bills. He says, though, that partly because of media inquiries, the company is reviewing how credit-line reductions affect consumers' credit scores.

It will be interesting to see if anything becomes of that.

In the meantime, read the rest of the story here (link). Read More...

How Savvy Fliers Make the Most of Their Airline Miles

I'm blogging about this topic for two reasons. One, I know a lot of my readers have credit cards that generate a lot of frequent-flier miles. And, two, I'm hoping that my readers (who are likely savvy fliers) have their own tips to pass along. In the meantime, The Middle Seat, a Wall Street Journal column, has some tips on how to maximize those airline miles you've been racking up. Most consumers redeem their frequent-flier miles for those cheapy, coach-seat tickets. However, it makes a lot more sense to apply those miles to the most expensive flights instead.

From the column:

For a New York-San Diego trip next month, for example, you can find a coach ticket as low as $319 on AMR Corp.'s American Airlines, and the cheapest first-class ticket is $2,029. Use miles to upgrade instead of buying first-class tickets and, even after paying $100 in fees, you get more than five cents for each mile.

International upgrades pay off even more. For a Chicago-Frankfurt trip next month on UAL Corp.'s United Airlines, you can buy a coach ticket as low as $697 or a business-class ticket for $5,624. Instead of paying nearly $5,000 more for the business-class seat, you can spend 60,000 miles for a round-trip upgrade. The cheapest coach fare eligible for that upgrade is $1,001, so you have to spend $304 more on the ticket. But even after factoring that in, the savings you get through miles work out to nearly eight cents per mile.

If you've got strategies that you would like to share here at, I'd appreciate them. I have a slew of miles that I still haven't used. I imagine my readers have a ton of unexpired miles sitting around as well.

You can read the rest of the story here (link).

Form To Apply For Bailout Money Is Two Pages

And that, my friends, is what we're dealing with. I believe my last car-loan application was at least eight pages. My last mortgage application, meanwhile, made my hands cramp because of the number of signatures that were required. But the loan form to get billions and billions of dollars? Two pages. We're all in the wrong line of business, I tell ya. We should have been bank-holding companies.

From the Associated Press:

That's all the nation's financial institutions had to fill out to request money from the government's $700 billion Troubled Asset Relief Program. In fact, the first page only requires bank contact information.

For some lawmakers and watchdog groups, the simple request form has become a symbol of a government financial bailout plan in need of more accountability and oversight.

"When student lenders and mortgage companies ask more questions in lending thousands of dollars than the federal government does when it injects billions of dollars worth of capital, we should all be concerned," said Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee.

To be sure, there is more to it than the initial form, but the initial two-page form is a joke that represents the trouble with the $700 billion Troubled Asset Relief Program. There is little oversight and no accountability. Heck, banks can essentially do whatever they want with the funds. Bailout? More like a handout. Pfft! See what Elizabeth Warren, chairwoman of the oversight committee for TARP, says about the program (link here).

You can read the rest of the story here (link). Read More...