Friday, January 30, 2009

American Express Will No Longer Use Spending Patterns To Slash Credit Limits

Anyone who has read my blog for any length of time knows about American Express's penchant for using "spending patterns" to justify credit-limit reductions (see stories here, here, here, and here). Now hear this: American Express has decided to drop this risk-management tool from its underwriting arsenal.

From the New York Times:

In some instances, if it didn’t like what it was seeing, the company has cut customer credit lines. It laid out this logic in letters that infuriated many of the cardholders who received them. “Other customers who have used their card at establishments where you recently shopped,” one of those letters said, “have a poor repayment history with American Express.”

It sure sounded as if American Express had developed a blacklist of merchants patronized by troubled cardholders. But late this week, American Express told me that wasn’t the case. The company said it had also decided to stop using what it has called “spending patterns” as a criteria in its credit line reductions.

“The letters were wrong to imply we were looking at specific merchants,” said Susan Korchak, a company spokeswoman. The company uses hundreds of data points in making its decisions, she said, adding that the main factor in determining credit lines “has always been and still is the overall level of debt, relative to the card member’s financial resources.”

I've railed long and hard about this metric. I've argued that American Express doesn't even need to rely on this tool to make credit decisions. Seems American Express has finally acknowledged what I -- and others -- have been saying for some time. It's about time.

This still doesn't address some of the other things that American Express uses to gauge limits: who originated your mortgage and where you live. But it's a start. One day at a time, I guess.

Read the rest of the story here (link).

Related Articles:

•Read More American Express Stories Here

It's Time For Fair Isaac and TransUnion To Modernize The FICO Score They Sell To The Public

Now that TransUnion has officially adopted Fair Isaac's FICO 08 score (see story), I have a suggestion for Fair Isaac and TransUnion: move into the 21st century on the FICO score that's provided to consumers.

For now, consumers who pull their TransUnion FICO scores through Fair Isaac's or TransUnion's Consumer Solutions site (link here) are getting scores that are based on Fair Isaac's 1998 scoring model, or Classic 98. Not only is the score based on a model that's long in the tooth, lenders are mostly working from Fair Isaac's Classic 04 model now. As such, consumers are essentially pulling a score that is -- putting it mildly -- fairly useless.

Indeed, as of right now I consider the TransUnion FICO consumer score about as useful as any number of scores that I often -- and derisively -- refer to as FAKO. Indeed, it's about as useful as the scores that TransUnion peddles with its TrueCredit credit monitoring product. And you know how useless those scores are (see story here).

Given how outdated the consumer version of the TransUnion FICO score is, and given the fact that creditors have been using Classic 04 to make lending decisions for some time, I've been wondering why TransUnion and myFICO haven't pushed for a transition to Classic 04. "myFICO and TransUnion do plan to tap the '04 model for scores provided to consumers, and for the reason you indicated," Barry Paperno, consumer operations manager for Fair Isaac, told me. "We expect that transition to take place soon." I don't know how fast "soon" is, but it can't come soon enough. It's silly for consumers to rely on a model that most lenders aren't using.

In the meantime, until Fair Isaac and TransUnion update the consumer version of the score they sell to the public ("soon"), I will admonish my readers to refrain from pulling their TransUnion FICO scores. After all, a score that's based on a 10-year-old scoring model isn't exactly helpful for my readers. Worse, the score, which myFICO sells to the public for $15.95 a pop, isn't relevant when you consider that most lenders aren't even working from that model any longer.

Perhaps the TransUnion FICO score that's sold to the consumer should come with a warning label: "This score may vary widely from the score that lenders use. As such, this score should be used for educational purposes only." I'm certain that consumers won't see that message anywhere on TransUnion's or myFICO's site but they're getting it here.

Until further notice, of course.

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Few Ways to Recover Bonuses to Bankers

I've recently pointed to a few stories (here and here) pertaining to Wall Street bonuses. I'm sure some people have been wondering if there is any way to get this bonus money back -- especially if it turns out that taxpayer money was used to fund these bonuses. Alas, there probably isn't.

From the New York Times:

Some suggest that the easiest way for Congress to recover the money would be to impose a substantial tax on 2008 Wall Street bonuses retroactively, but that would hurt New York and other financial centers.

While bankers earn far more than people in many other fields, pay experts also noted that bonuses account for a large portion of total compensation on Wall Street. Within the industry, many see bonuses as a kind of deferred salary, rather than simply a reward for good performance. And some bank employees may have done their jobs well, even though their employers lost billions.

Despite the current outcry in Washington, some compensation experts said Congress missed a chance to impose strict limits on 2008 bonuses last fall, when the government embarked on its rescue plan.

“The time to say ‘no bonuses’ has come and gone,” said Brian Foley, an executive compensation consultant in White Plains. “The horse is out of the barn and over the horizon.”

Earlier, I said that there likely isn't a way to get the bonus money back. Of course, what I should have said is that no one is going to insist on having it returned. Plus, some of it has been spent too.

Read the rest of the story here (link).

Consumers Cut Credit Payments, Struggle To Pay Bills

I'm not surprised. It was only a matter of time before consumers started cutting back on payment amounts. This behavior, meanwhile, will only lead to more debt. The credit card payment rate for November fell by some 2.5 percentage points to 16.1%, according to USA Today. The decline represents one of the largest ever.

From USA Today:

"It's kind of shocking," says Robert McKinley, founder of "It indicates that there are fundamental changes in the way that consumers view and use credit."

The credit card payment rate is a widely watched indicator of consumers' financial health. Its plunge comes as consumers have become more reluctant — and less able — to take on debt. Revolving debt, much of it on credit cards, dipped at a 3.4% annual rate in November to $973.5 billion, after flattening in October, preliminary numbers from the Federal Reserve show.

Even with less debt, consumers are struggling to pay their card bills. The average household with at least one credit card owed $10,728 in 2008, nearly the same amount as in 2007, according to

Read the rest of the story here (link).

Thursday, January 29, 2009

New FICO Credit Score Debuts

It's official. TransUnion is the first credit bureau to adopt Fair Isaac's FICO 08. Yawn. I'd be more excited if I thought that lenders would adopt the score in the near future. Alas, it could be years before that happens.

From the Wall Street Journal:

The new score is supposed to do a better job of predicting borrower defaults, be more forgiving of one-time slipups and take a harder line on repeat offenders. The score, which will still range from 300 to 850 -- the higher, the better -- is fine-tuned to do a deeper analysis of subprime borrowers or those with "thin" or young credit histories, according to Fair Isaac. More consumers with accounts in good standing should also see their scores increase slightly, says Tom Quinn, vice president of global scoring solutions at Fair Isaac. Overall, Fair Isaac predicts FICO 08 will improve the accuracy of lending decisions by as much as 15%.

In the meantime, consumers shouldn't expect to see their FICO 08 scores made available through for a long, long time. Indeed, as far as I know, myFICO is still using the 1998 version of its scoring model with TransUnion. In other words, even though most lenders pull the classic 04 version through TransUnion, myFICO is only providing classic 98 scores to consumers through its Web site. In a lot of ways, then, the TransUnion FICO score we get through myFICO is fairly irrelevant. When we finally get access to classic 04 scores through myFICO that will be nice.

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

You can read Fair Isaac's press release here (link).

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Fannie Mae IT Contractor Indicted For Planting Malware; Mortgage Giant Didn’t Revoke Server Privileges

This story should appeal to all of the information technology aficionados among us. Turns out that a former IT contractor planted a virus that could have destroyed Fannie's computer system. The contractor allegedly targeted the system after he had been terminated. Turns out that even though Fannie had terminated him, his server access privileges had not been revoked. Doh!

From Between The Lines (hat tip Clutch Cargo):

The tale of Makwana malware bomb plot is a warning shot to all security teams and IT departments. Given the level of layoffs we’ve seen lately the ranks of disgruntled former employees is likely to grow. Is there any company NOT lopping off a big chunk of its workforce? And some of these workers may even have Makwana’s access privileges and knowledge of the corporate network.
Indeed, Makwana had intended to do some serious damage such as “destroying and altering all of the data on all Fannie Mae servers.” That quote puts it mildly. According to the initial complaint against Makwana, the former contractor’s virus “would have caused millions of dollars of damage.” Anyone that logged into the Fannie Mae network on Jan. 31 would have seen a message “Server Graveyard.”

Fannie Mae must have really pissed this guy off.

Read the rest of the story here (link).

Time To Go: Bank Of America Must Fire CEO Ken Lewis

Not sure how successful the union will be, but I wish them well. The Service Employees International Union says that it's time for Ken Lewis, Bank of America's CEO, to go. It wants Bank of America customers to go to bank branches today and talk with employees about why Lewis should be fired.

From the union's blog (hat tip Sean):

It seems Bank of America CEO Ken Lewis forgot about the 247,000 people who make his company successful. In 2006, Lewis took home $99 million, more than 4,000 times what his average employee makes. In some states, Bank of America employees take up large portions of public health care because they don't earn enough money.

Someone needs to stand up for Bank of America employees, because the company sure isn't. It's time for Ken Lewis to go.

Read the rest of the blog post here (link).

Related Articles:

•Read More Bank of America Stories Here

What Red Ink? Wall Street Paid Hefty Bonuses

How do you like that? Despite the fact that Wall Street got hammered in 2008, bonuses flowed. Indeed, 2008 marked the sixth-highest payout on record for bonuses. Nice work if you can get it, eh? The New York State comptroller, which bases its estimate on personal income tax collections, says that it doesn't know if taxpayer money was used to fund bonuses, writes the New York Times. The comptroller, though, says that the Obama administration should investigate the issue closely.

From the Times:

The state comptroller, Thomas P. DiNapoli, said it was unclear if banks had used taxpayer money for the bonuses, a possibility that strikes corporate governance experts, and indeed many ordinary Americans, as outrageous. He urged the Obama administration to examine the issue closely.

“The issue of transparency is a significant one, and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else,” Mr. DiNapoli said in an interview.

Echoing Mr. DiNapoli, Professor Bebchuk said he was concerned that banks might be using taxpayer money to subsidize bonuses or dividends to stockholders. “What the government has been trying to do is shore up capital, and any diversion of capital out of banks, whether in the form of dividends or large payments to employees, really undermines what we are trying to do,” he said.

I'd be surprised if an investigation is not launched. We shall see.

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

Dimon Says Banks Gave Consumers ‘Weapons of Mass Destruction’

What in the hell is JPMorgan Chase's Jamie Dimon saying? When you read the Bloomberg story tell me if you don't walk away wondering what Dimon is smoking. Whatever it is, I'm sure a lot of people are looking for some. Banks, it turns out, gave us weapons of mass destruction to borrow too much. Consumers, Dimon says, are not to blame for our current situation -- banks are.

As I read the story, I kept thinking about that Sprint commercial where the CEO talks about sticking it to the Man:

Dimon does realize that he's a CEO, right?

From the Bloomberg story:

Losses and writedowns from the credit crisis that started with the collapse of the subprime mortgage market in the U.S., have surpassed $1 trillion, forcing governments across the world to inject cash into banks and tighten controls on the financial industry.

“To policy makers, I say where were they? They approved Basel II that didn’t work,” referring to rules governing how much capital banks hold to back their loans. “They approved all these banks. Now they’re beating up on everyone, saying look at all these mistakes, and we’re going to come and fix it.”


Read the rest of the story here (link).

New Bank Bailout Could Cost $2 Trillion

Whatever it takes. Whatever. It. Takes. I'm referring to the new bank bailout plan that will cost between $1 trillion and $2 trillion, according to the Wall Street Journal. Consumers and businesses need access to more credit (debt). And, dang it, we're gonna make sure that happens. That's how I read the situation, at least.

From the Journal:

The administration is also seeking more effective ways to pump money into banks, and is considering buying common shares in the banks. Government purchases so far have been of preferred shares, in an effort to both protect taxpayers and avoid diluting existing shareholders' stakes.

A Treasury spokeswoman said that "while lots of options are on the table, there are no final decisions" on what she described as a "comprehensive plan." She added: "The president has made it clear that he'll do whatever it takes to stabilize our financial system so that we can get credit flowing again to families and businesses."

Read the rest of the story here (link).

U.S. Moves to Bail Out Credit Union Network

On Wednesday, federal regulators backed some $80 billion in uninsured deposits at the institutions that serve as the backbone for credit unions. These so-called wholesalers provide much of the financing and check-clearing duties for retail institutions.

From the Wall Street Journal:

The vast majority of regular credit unions -- the bank-like cooperatives familiar to millions of account-holders nationwide -- are considered financially sound. Wednesday's moves affect only these wholesale credit unions, which number 28 and operate in the background to service regular credit unions.

In general, credit unions are considered to be among the most conservatively managed financial institutions. Nevertheless, they have been hurt by losses on mortgage investments.

The National Credit Union Administration, the industry's federal regulator, announced the steps late Wednesday after a special board meeting called at short notice. "We are trying to institute confidence in the system, and we think this will do so," said Michael E. Fryzel, NCUA's chairman, in an interview.

Read the rest of the story here (link).

Wednesday, January 28, 2009

1 Family Gets 445 Credit Card Offers In A Year

After years of being opted out, I opted back in toward the end of 2008. I can tell you that I haven't received much mail at all. I figured with FICO scores of nearly 800, I would be inundated with offers. No dice. If anything, I have seen a drop off in mail. Go figure. Gary Silbar wishes he was that lucky. His family received some 445 card offers from November 2007 through October 2008, according to the Chicago Tribune. For good measure, card issuers sent offers to Silbar's children, ages 8 and 11, as well.

From the story:

When the economy soured halfway through the year, he expected the barrage of direct mail to slow to a drizzle. It did no such thing.

The reason, experts say, is that Silbar and his wife, Karen, have good credit histories. He runs a public relations firm, Gary Silbar Communications, from his home and banks with Chase. That company, alone, sent 110 solicitations.

Silbar wondered if his family was an anomaly and why banks continued to spend a "boatload" of money on people like himself who don't respond.

I would love to know how many offers Silbar received after October 2008. My guess is that the offers dropped off substantially.

Read the rest of the story here (link).

5 Tips For Talking To Elderly Parents About Credit Card Debt

For many of us, this day is coming. At some point, we'll have to address the credit-card debt that our parents hold. has a how-to piece, which offers some advice on how to approach the situation. Seniors, 65 and over, represent the fastest-growing group when it comes to rising debt. Better to tackle the conversation earlier rather than later, I say.

From the story:

For some senior citizens, credit card debt is a way of life that gets more difficult to handle as they get older. Julie Murphy Casserly of Chicago spent her whole life watching her parents struggle to pay the bills. By the time she was old enough to take a peek at their financial issues, they had $72,000 in consumer debt, including unpaid credit cards and old orthodontia bills. Even after Murphy Casserly, the author of "The Emotion Behind Money: Building Wealth From the Inside Out," helped her parents tap a home equity line of credit to pay off debt, bad health and poor money management skills soon created another mountain of debt in its place. "It was a chronic problem," she says.

Many older people, even frugal ones, are simply unable to make ends meet on a pension or Social Security check, so they turn to plastic to pay for daily living expenses, like groceries and gas. Other seniors plunge into debt when their health takes a turn for the worse. A stroke, a heart attack or a bout with cancer can create thousands of dollars in medical bills, which elderly patients may be pressured to pay with a credit card.

By the way, the kids might have something to do with elderly parents -- and rising debt levels. I wrote a story last year about children moving back in with their parents. You can read that story here (link).

Read the rest of today's story here (link).

Insurers’ Credit Score Use Criticized

This is definitely a topic that raises the ire of consumers. What in the heck does a credit score have to do with insurance? That's what consumers often ask. In North Dakota a bill is making its way through the Senate that, if passed, would prevent insurers from using credit scores to set premiums.

From the INFORUM:

Sen. Tracy Potter, D-Bismarck, introduced the bill. He said that for insurance companies to raise rates for people who have trouble paying their bills “is just piling on.” People’s car insurance rates should be based on their driving record, he said.

“There’s no redress for this,” Belisle told the Senate Industry Business and Labor Committee. “There’s nothing to be done unless you change the law.”

The insurance industry, of course, opposes the legislation. What's more, if the legislation does pass, insurance companies say that premiums would go up for most people. But of course.

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

Tuesday, January 27, 2009

Students Need Personal Finance Basics

That's what officials are saying in Maryland. And it's what they're saying in New Jersey, too. A task force will meet with Maryland school board officials today and recommend that students be required to study personal-finance issues before graduation.

From the Baltimore Examiner:

"We view it as a basic life skill," said Del. Dana Stein, D-Baltimore County, a co-chairman of the task force. "Given the current economic downturn, the problems in the mortgage market, we feel it is especially important that all students graduate with some financial literacy."

Many students fall into credit card debt when they enter college. According to a 2008 survey from the U.S. Public Interest Research Group, 80 percent of students reported receiving mail from credit card companies and 20 percent said they got an average of four phone calls a month from the companies.

It will be interesting to see what happens with this. I'd love to see this be a requirement. One thing that I would push for: that schools get to these students well before their senior year. I'd target students during their tenth-grade year.

As an aside, I'm not surprised that this is taking place on the east coast. From what I can tell, credit scores tend to be higher on the eastern side of the United States. In fact, and this isn't something I usually mention much, my traffic here at is east-coast heavy. Indeed, about 75% of my traffic comes from east of Texas. I'd say that a large majority of that group comes from the eastern seaboard. Not sure what it is, or how it happened, but it just appears that east-coasters are more interested in this stuff.

If someone has an explanation, I'd love to hear it.

In the meantime, here is the Maryland story (link here).

And here is the story detailing New Jersey's plan for personal-finance education (link here). Read More...

House Of Cards: Charging Mortgages Idea Fails

Seemed like a great idea. Pay your mortgage using a credit card -- and earn rewards at the same time. Except it didn't work out that way. The fees were prohibitively expensive, outstripping any rewards that you'd get from the credit card. In the end, then, these kinds of services -- I would argue -- catered to people who were barely making ends meet. Many of the companies that offered this service no longer exist today. But a few do. And they're defending their services.


"It's not surprising that these types of services are struggling," says Jim Campen, executive director for the consumer awareness group Americans for Fairness in Lending. "Either no one signed up for it, or no one is making the payments due to cutbacks and the current economic condition."

Experts also attributed the service's downfall to lack of incentives. In order to divert your mortgage payments to a credit card, most companies wanted about 2.5 percent of the payment plus a flat fee per transaction. For most people, the extra fees weren't worth the additional rewards and convenience.

"Even if you're financially stable, I have a hard time believing that reward points and other incentives offset the fees these programs charge," says Gail Cunningham, senior director of public relations for the National Foundation of Credit Counseling. "I can't say financially speaking that it would ever be a good idea to use a service like this."

I'm with the experts. It makes little sense to use one of these services. I wouldn't mind if they all went out of business.

Read the rest of the story here (link).

Monday, January 26, 2009

Trust Fund Teens Toilet Paper Madoff Mansion

Proof that Madoff's Ponzi scheme reached many people. The trust-fund kids are now getting their revenge. With their parents' permission, children in Palm Beach toilet papered Madoff's now-empty mansion, reports the Palm Beach Post. Retaliation is a biattch. I can only imagine what might have happened if Madoff had scammed a bunch of cub scouts in this Palm Beach neighborhood. (Gulp.)

From the story (hat tip, Sean):

Tidbits of toilet paper twisted in the wind at Bernard Madoff's Palm Beach home Monday morning - possibly the work of some ticked off teens who lost their trust funds.

Some teenage boys called The Palm Beach Post newsroom Sunday evening to take credit for the prank - one they said was sanctioned by their parents. They said they were acting in retaliation after they lost their trust funds to the accused swindler.

Looking at the pictures, the teens didn't do a very good job of papering the house. Maybe they have backup funds to the trust funds that were tied to Madoff. Bottom line, though, is this: you don't mess with trust-fund babies. Let this serve as a reminder.

Read the rest of the story here (link)

Conundrum in Credit Cards as Chain Folds

When retailers go out of business, card issuers need to move smartly. Take Circuit City, for example. The retailer recently declared bankruptcy, saying that it would shutter all 567 U.S. locations. Chase, which issues the Circuit City credit card, now needs to decide how it will handle customers who carry Circuit City plastic. Chase's decision to board -- or strand -- Circuit City customers is an important one.

From the American Banker:

The banking company said last week that it plans to convert some of the accounts to general-purpose cards. It would not say how many would be switched or how many it intends to close.

Observers said such conversions can help stem an issuer's losses. "When a retailer goes out of business, the loss rates go up because the customers no longer have utility and those people who are on the edge" have less incentive to make payments, said Steven Jacowitz, a former credit executive at Saks Fifth Avenue, Bloomingdale's, and Filene's and now the director of alliance development at Auriemma Consulting Group Inc.

For stretched consumers, a card that can only be used at a bankrupt retailer "really comes down to the bottom of the list of which account is going to get paid first," Mr. Jacowitz said. An issuer must "be more aggressive on the collections side" for the accounts not deemed worth converting.

Read the rest of the story here (link).

Understand Your Opponent In The Credit-Card Game

I was reluctant to use that headline. I don't want everyone to think that we have an adversarial relationship with out card issuers. That said, I do think it's important to understand what they're thinking. After all, they're trying to understand us. Makes sense that we should be doing the same thing. Which is why I am pointing to a newsletter from MasterCard.

MasterCard has a service called MasterCard Advisors. It's a consultancy that helps clients understand the payments business. What's more, these consultants help clients (card issuers) understand the end user (us) of their plastic. MasterCard, in fact, puts out a report, called MasterCard Advisor, that's chock full of information that my readers should be reading. I want to keep my readers at the top of the food chain. I want them to understand what lenders think of us ($$).

This passage comes from a recent issue of MasterCard Advisor (hat tip, Cookie -- a reader of mine):

These indicators all point to a sizable number of borrowers who took advantage of the excess liquidity in the system to make small down payments on non-traditional mortgages that were larger than they could handle. Many of these homeowners have the capacity to pay some of their obligations but not all, so they opt to default on debts deemed non-critical. These Won't Payers may not make up the majority of current defaulters, but they represent a growing and newly significant segment—one that many risk analysts have failed to detect and take into account.

That's because Won't Payers behave differently than expected, making them harder to spot and manage. Unlike past borrowers, who made large down payments and needed to keep the roofs over their heads, these debtors are not inspired to fight vigorously to keep their properties. Their monthly payments have risen precipitously, while the value of their properties has plummeted. They simply cannot meet the higher monthly payments and it is easier for them to walk away from their debt. Unlike the Can't Payer—who loses the ability to pay their bills but would rather not default—the Won't Payer makes a deliberate decision to cease payments on some debts in order to preserve the ability to pay other, more critical obligations.

The most recent issue had five articles, all of which I found valuable and useful. My goal is to stay on top of the industry. Articles contained in the MasterCard Advisor allow me to do that.

Here is a link to the most recent issue (link here).

Picture of The Day -- Traffic Jam On The Race Track

Several months ago I pointed to a story about automobiles piling up at a Long Beach port (story here). Sagging demand is leading to stock pileups. The Long Beach story illustrated that well. But take a look at today's picture, which shows what Nissan is doing with its unsold cars.

Click the photo to see the other 12 pictures (from the Guardian). You'll see that Nissan is not alone. Hat tip, Chris.

The pictures put the auto slump into context. It's a buyers market. (Big grin with teeth showing.)

Yes, You Can Live With Less Plastic

And if you don't have the discipline to handle credit cards, maybe it's not a bad idea. I've been blogging here for about seven months. I've heard from a lot of readers (see my email inbox). Generally (generally!), people get in trouble with plastic because they can't handle the temptations that come with using it. It's easy to spend more than you earn when you use a credit card. The trick, then, is to use the credit card as a tool. Establish some rules. Pay it off each month. Used intelligently, it's tough to go wrong with a credit card.

From the Wall Street Journal:

"It seems that people spend less when they don't have a credit card available," says Paula Peter, an assistant professor of consumer behavior at San Diego State University. "With cash, your spending ability is limited."

According to eBillme, the cash-based payment alternative, its fourth-quarter online spending index found that 46% of customers said they would step up their use of such methods to finance purchases. The first-quarter index released this past week reported that 42% of consumers have used their credit cards less in the last 90 days in favor of noncredit payment options.

"The shift from credit toward cashlike options is the desire for consumers to control their financing," says Marwan Forzley, chief executive of eBillme. He sees "a clear shift in attitude" to pay as you go.

As you can see, some of the people in the article may not agree with me. Of course, Forzley has every reason to encourage cash use, since his company benefits from that shift.

At the very end of the article, there are things listed that you can do in regard to your plastic. One of them is trash your plastic (get rid of it). The last one says to keep the plastic but pay for purchases in full every month.

Trash plastic at your own peril, I say. And pay in full is the way to go.

Read the rest of the article here (link).

Friday, January 23, 2009

WaMu Cardholders Won't Be Orphaned: Can Convert And Combine Existing WaMu Cards With Chase In March

After Chase takes full control of WaMu credit-card accounts in March, WaMu cardholders who also have Chase cards will be able to combine their limits, according to sources with knowledge of the situation. I was able to confirm this with several customer-service representatives at Chase. Additionally, I've also confirmed that WaMu cardholders, who don't have a Chase card, will be able to convert their WaMu cards into other Chase cards.

The only catch, according to one source, is that one of the credit cards cannot have a balance on it. Thus, if you have a Chase Freedom card, with a balance, and a WaMu Platinum MasterCard with no balance, you'll be able to move your WaMu credit limit over to your preexisting Chase card.

A hypothetical situation would look like this: You have a $10,000 limit WaMu card with no balance. You also have a Chase card with a $15,000 limit. If your WaMu card doesn't have a balance, you can move the WaMu limit over to your Chase card, which would turn into a $25,000 Chase card. At that point, you would close your WaMu card, which would leave you with a single card. If there were balances on both cards, a combination would not be allowed.

Update: as of March 9, 2009, you can now combine and convert your old WaMu cards. See the story here (link).

In addition to the credit-limit combinations, WaMu cardholders who do not have preexisting Chase cards will be able to convert their WaMu cards into a Chase card. For example, if you have a WaMu Platinum card (or an ESPN card) you'd be able to convert it into a Chase Freedom card. All WaMu cards that are brought into the Chase fold will be eligible for consolidation and conversion.

After a number of recent setbacks (FICO being discontinued -- link here -- and WaMu's secured card getting the ax, link here), this is good news. Many WaMu customers worried that they'd be treated like second-class citizens once their WaMu cards were transitioned over to Chase. Since customers will be able to combine their cards, WaMu customers won't have to worry about being treated like orphans.

It's expected that cardholders will be able to start combining and converting their WaMu cards as soon as March 9, 2009.

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The Case For Including Bankruptcy Reform In The Stimulus Package

I recently said that I would try to find a counterpoint to a story I previously pointed to (link here). Here you go. Mike Calhoun, writing for the American Banker's BankThink blog, says that judicial cram downs are a great idea. The sooner this is implemented, the better.

From the blog entry:

For nearly 18 months we’ve listened to the banking industry promise that lenders will voluntarily modify mortgages, a process they agree is the only real solution to curtailing the economy’s tailspin. But voluntary modifications alone have not worked. Economists on both sides of the political aisle agree that, for many reasons, industry’s efforts have helped too few too late to make a difference.

The root cause of losses at financial service companies—losses that have forced the federal government to pump hundreds of billions of dollars into these firms—are mortgage foreclosures. Likewise for the battered economy, foreclosures fuel the ongoing slide in home values. Examine the current crisis any which way, it always come down to foreclosures and the need to stop as many as reasonably possible. The multitrillion-dollar taxpayer rescue of banking and insurance giants is bailing water from the boat. To plug the hole that’s sinking the boat in the first place, we have to stop the foreclosures.

Read the rest of the story here (link).

The World Won't Buy Unlimited U.S. Debt

Peter Schiff, writing in the Wall Street Journal's op-ed pages, says that we're asking other countries to sacrifice for our stimulus. But, argues Schiff, these countries won't -- won't they? -- fund our country's debt binge indefinitely. Indeed, when these countries finally say that they've had enough, our situation in the United States will end badly.

As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.

But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. Thanks to projected huge deficits, the U.S. government is severely raising the stakes. At the same time, the global economic contraction will make larger Treasury purchases by foreign central banks both economically and politically more difficult.

Peter Schiff is well known for being a doom-and-gloom kind of guy but he's been right a lot over the past couple of years. He's made more than a few skeptics look foolish. I enjoy his contrarian leanings.

Read the rest of the opinion piece here (link).

Cartoon Of The Day -- John Thain, Anyone?

This cartoon made me think of John Thain -- the ousted Bank of America executive. Of course, the cartoon is really about folks who have simply been displaced. But thinking about Thain, holding up a sign on the side of the road, brings a smile to my face nonetheless.

Click cartoon to see Gary Varvel's entire collection of cartoons.

Related Articles:

Thursday, January 22, 2009

Looking For A Great Rewards Card? Pentagon's Cash Rewards Card Is For You (UPDATE 1 -- Adds Red Cross Information)

The Pentagon Federal Credit Union (Penfed), which serves nearly 750,000 men and women of the armed services, has a great card that will help you combat the high cost of fuel. The card will also help you save money on supermarket purchases as well as everyday items.

The Platinum Cash Rewards (link here) card offers 5% back on gas, 2% on supermarket purchases, and 1.25% on everything else. Best of all, there are no caps on how much you can earn in cash-back rewards. Better still, the rebate is credited to the account each month.

In California, where gas prices were nearly $5 a gallon (for premium) during the summer, the 5% cash back turned that same gallon of gas into $4.75 a gallon. This card makes it unnecessary for me to carry a branded credit card that is geared toward a specific gas chain. The card's interest rate is 13.99%, which means this is not a card that you should carry a balance on.

While Penfed is geared toward military personnel -- and department of defense employees -- non-military folks can still become members of this great institution. Even if you don't fall within the regular field of membership, non-military folks are still eligible by virtue of being a member of the National Military Family Association. Click here (link) to find out how to do it. The reason for today's update, though, is that you can now also gain eligibility by being an employee or volunteer in the American Red Cross. (Thanks to the readers who tipped me off to the Red Cross eligibility.)

Once your Penfed membership is set up, you can immediately apply for a credit card. Here's what to expect from the application process. Penfed will pull your credit report when you apply for a membership (and open a savings account or checking account). You'll be required to fund the account with a minimum of $5. Penfed typically pulls Equifax. What's more, Penfed will use that same credit report for other credit products that you apply for. Penfed's standard practice is to use the same credit report for between 60 and 90 days (of late, 60 days seems to be a safer assumption). After you've applied for the card -- and if you're approved -- expect to have Penfed verify your income before they ship the card to you. They often request your last two pay stubs. You can fax those in.

I've been a member of Penfed for about two and a half years. This is one of the best credit unions around. The maximum combined limit with Penfed's credit cards is $50,000. That means that you can get any combination of credit cards through Penfed, but they won't total more than $50,000 combined. Many of my friends only apply for one Penfed card, which allows them to get a single card with a $50,000 limit. Once you've established yourself with Penfed, the credit union is very good about offering generous limit increases.

Which reminds me. When you apply for the card, you get to request your credit limit. Many of my friends request $30,000. Some times Penfed counters with a lower number. The process, though, is painless. The haggling (your request and Penfed's counter) is all done online.

If you think this card might be for you, then head over to Penfed's Web site (link here) and do some homework.

This is one of the most highly-used cards in my wallet.

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John Thain Resigns From Bank of America

John Thain is out at Bank of America. Last night I pointed to a story about Merrill Lynch accelerating bonuses (link here). I figured that alone might irritate Bank of America's CEO Ken Lewis. Turns out that it might have been the straw that broke the camel's back.

From the New York Times:

The relationship between the two men soured over the past month as Mr. Lewis grew increasingly frustrated that Mr. Thain did not have a good grasp of the firm’s operations, according to an individual who is aware of the tensions between the two men but who does not have authorization to speak.

The final straw for Mr. Lewis may have been the decision by Mr. Thain to make an earlier-than-usual bonus payout to Merrill employees, just three days before the merger closed on Jan. 1.

John Thain has been demonstrating incredibly bad judgment of late. Ken Lewis is not known for tolerating this kind of stuff. If Thain had not resigned, I suspect he would have been shown the door regardless.

Read the rest of the story here (link).

Related Articles:

•Read More Bank of America Stories Here

Can The Feds Uncrunch Credit?

That's what Nicole Gelinas, writing in the City Journal, aims to figure out. During the coming months and years, we'll see just how successful the expansion of money and credit (assuming that occurs) turns out to be. I'm hopeful (always) but I'm also realistic. Call me cautiously hopeful. Ha!

From the story:

To understand why credit is so important, you need to understand money. Unless we want to barter for everything—I’ll write you this article, and you can cut my hair in return—we need a stable, objective store of value to exchange: in America’s case, the dollar. As the economy naturally expands—the result of both a growing population and increased productivity, through technology and the like—the money supply, too, must expand.

The Federal Reserve, an independent body created by Congress, plays a vital role in this task. If the Fed thinks that money is too “tight”—that a lack of money growth is squelching economic growth—it can cut the interest rate that it charges banks to borrow directly from the government, and it can also use its own immense reserves of dollars to buy bonds in the market, thus flooding money into the economy. If it deems money too “loose”—when too much money chasing the same amount of goods and services around threatens to increase inflation, raising the price of a hat from $10 to $20, say, and eroding the dollar as a reliable store of value—it can raise interest rates and sell bonds to absorb dollars back into its coffers. The goal is to keep prices generally steady. In practice, the Fed considers itself to be doing a decent job of regulating the money supply if prices expand just a little—say 2 percent—each year.

Read the rest of the story here (link).

What if Uncle Sam Takes Over Your Bank?

What happens if your bank collapses? And what would happen if we nationalized banks? The Wall Street Journal deals with these issues in an article today. Jane Kim, one of my favorites, and Heidi Moore provide a bank-nationalization primer. They don't cover everything but it'll serve as a nice starting point in your research.

From the story:

The latest wave of banking problems has investors worried that the government will nationalize deeply wounded institutions, such as Bank of America Corp. and Citigroup Inc.

Such a dramatic step could make it easier for some bank customers to get a loan. And customers with deposits will still be protected by federal insurance, just as they are today. Still, consumers could see more branch closings, more standardization across bank products and a deterioration in customer service. Common and preferred shareholders, meanwhile, will likely get wiped out in a bank nationalization.

Bank nationalization would lead to easier loans? That's one of the things that got us here. No thanks. And a deterioration in customer service? Good luck. I don't think that's even possible. And for the record, I don't see the banks getting nationalized.

Read the rest of the story here (link).

FICO Scores 50% Off

If you're interested in taking advantage of this promo, the offer is supposed to end on Thursday night (now expired). You can get your scores and other FICO products for 50% off. FICO scores normally cost $15.95 a pop. With the discount code, they're yours for just $7.97. What's more, other products are available for 50% off as well.

If you are interested in the monthly ScoreWatch product, for example, you can get the monthly service for $4.42 for the first month and $4.48 for the next 11 months. It's normally $8.95 a month. The annual price (if you paid $8.95 a month) would be $107.40. With the discount, and signing up for the monthly product instead, the price works out to $53.70 for the year. Indeed, with the exception of the ScoreWatch product that offers a 30-day free trial (ignore that one), you can use the 50% discount code.

Here's what I ended up getting. I got the ScoreWatch product (monitoring of EQ FICO score). And I got the Quarterly monitoring, which works out to $6.25 for each of the four TransUnion FICO scores (and credit reports) that you get throughout the year.

The 50% discount works with FICO Quarterly Monitoring, Suze Orman's FICO Kit Platinum, FICO Standard Score, FICO Credit Complete, and Monthly ScoreWatch (not the 30-day trial version). Hat tip Oprah Winfrey, CreditBoards, and Suze Orman.

Once you get to the home page, choose the "Products" tab, which will bring up the menu of products that sells. If you just want to check your FICO score, choose the FICO Standard option. That's it. Doesn't get much easier than that.

At checkout, apply this discount code: 50FICOKIT (expired). You can still get a 20% discount by using CPPSAVINGS at checkout instead.

If you use my link (here) to buy your products, I will receive a small commission as well. Thanks for supporting the blog.

Wednesday, January 21, 2009

Merrill Lynch Delivered Bonuses Before Bank Of America Deal

It's nice work if you can get it, I guess. Turns out that Merrill delivered bonuses to employees just days before its deal with Bank of America closed. The timing, says the Financial Times, was also notable because losses were mounting at Merrill. No matter. Bonuses, which are usually paid in January and February, were accelerated and paid on December 29. I'll never understand why people don't trust these bankers. Sarcasm/

From the Financial Times:

Last week, BofA said it would be receiving $20bn (£14.3bn) in Tarp money, in addition to the $25bn that had been earmarked for it and Merrill last year. It was then revealed that Merrill had suffered a $21.5bn operating loss in the fourth quarter.

Despite the magnitude of the losses, Merrill had set aside $15bn for 2008 compensation, a sum that was only 6 per cent lower than the total in 2007, when the investment bank’s losses were smaller.

The bulk of $15bn in compensation was paid out as salary and benefits throughout the course of the year.

A person familiar with the matter estimated that about $3bn to $4bn was paid out in bonuses in December.

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

Related Articles:

•Read More Bank of America Stories Here

Credit Card Issuers Are Going To Give Us The Next Blow To Our Collective Stomach

I was reading a story at this morning and came across an interesting paragraph. The author was writing about de-leveraging versus deflation (story here). But in the middle of that story, he took a breath and talked about credit scores and consumers. The author wrote that "consumers have to be thinking about defaulting."

After all, the author wrote, Americans protect their credit score for one reason: to obtain future credit. If credit is tight, and there is little hope of getting more credit in the future (because limits have been slashed and because lenders aren't offering as much credit), why shouldn't the consumer just default? The author left it at that and said that he'd revisit the question in the future. But I think it's a good question -- worthy of exploring today.

From the story:

Credit card companies are tightening limits prodigiously. Teaser rates are all but gone. Home equity has dried up. The consumer has driven two-thirds of our economy for at least the last few decades, and now the consumer is dead. There's another aspect to this that I won't go too deep into: the American consumer protects his or her credit score for one reason -- to obtain future credit. But the consumer also knows that loans have dried up -- not just today, but for the very distant future as well. You know these consumers have to be thinking about defaulting; if they can't get loans anyway, why would they not default on thousands of dollars in unsecured credit card debt? I plan on writing more about this in future articles, but suffice it to say, I think credit card companies are going to give us the next blow to our collective stomach, and it's going to hurt.

I think the author is on to something. If the consumer is tapped out (spending), and the consumer is maxed out (borrowing), why not default? There are millions of consumers who fit that description. Indeed, if your credit cards are maxed out, your score has already taken a big hit. Your utilization ratio, for example, is already through the roof. There may not be much of a credit score to protect.

Still, the author said that consumers protect their credit scores so that they can get more credit in the future. The word "protect" typically indicates that you have something worth preserving. I'd argue that those who have a score worth protecting are not likely going to default. In fact, those with a score worth protecting are probably those who have developed good borrowing habits. I'd argue that these aren't the people we should worry about.

(Amendment: I should have mentioned this in my first draft, but didn't. Having good credit is also important for job seekers and house hunters. Try to land an important job with a trashed credit report. You'll see just how important it is to protect your score.)

I haven't talked to the author of the article, but my guess is that he's specifically talking about the consumer who is maxed out and tapped out. These borrowers are probably very close to throwing in the towel. And when that happens, the "credit card companies are going to give us the next blow to our collective stomach, and it's going to hurt," which is just what the author wrote.

Is there any way out of that scenario? I don't think so. Even if the consumer had access to capital today, we'd just be putting off the inevitable. More borrowing would just lead to more debt, which would only delay the timing of the pain. At some point, the consumer will have to pay the price, which is when the banks will pay the price, too.

On Monday, I wrote about a two-tier recovery (story here). That's where banks only lend to the most creditworthy and everyone else gets shut out. That seems to be happening now. If millions of consumers are thinking about throwing in the towel, then a two-tier recovery makes a lot of sense. It's the safest play for the banks. And it limits the amount of bad debt that will ultimately be written off.

If it's inevitable that the credit-card issuers are going to get hammered (and I think it is), the only thing left is the timing. The banks seem to be doing their part: they are slashing limits and extending credit cautiously. All that's left is for the consumer to do his or her part: grabbing the towel and throwing it in.

What Electronic Payments Reveal About You To Lenders

After I wrote my story this morning about where you shop (link here) -- and the credit risk that it could represent -- I realized that I missed a story that I should have pointed to last week. I only found the story, though, after I published my piece this morning. Turns out that did a great piece on the topic. And I think it's worthy of a separate blog entry.

From the story:

Increasingly, issuers tightening lending standards are using purchasing data as a basis for increasing interest rates, reducing credit limits or both on customers considered more risky by virtue of where they shop or what types of goods and services they buy.

Experts say cardholders concerned about keeping purchasing habits private or avoiding credit score dings should consider using cash or gift, stored value or prepaid debit cards. Shopping at large supermarkets or wholesale clubs -- which offer a variety of product lines -- may also keep some purchases private. Other tips: Spread purchases that may indicate risky behavior over several credit cards to avoid triggering an alert for a single issuer.

"Cash is the ultimate privacy protector," says Stephens. "It's kind of hard to trace. Most other payment mechanisms there is going to be a trail."

The story is well written. Give it a read (link here).

Merchant Codes Make It Easier To Rate Credit Risk By Where You Shop

In August I wrote a story (link here) about shopping choices hampering someone's ability to get a credit-limit increase. Because American Express is well known for employing shopping choices in its risk-management model, I used an American Express example to make my point. Many readers, not surprisingly, were angry that American Express would use this metric to assign credit limits. Which brings me to today's story.

When I wrote my story back in August, I was only talking about credit-limit increases. Since then, American Express has been using shopping habits to whack credit limits (story link here) as well.

A reader of mine, Sean, sent a list of merchant category codes to me this morning. When you look at the codes, you can see just how easy it is for card issuers like American Express to keep track of our spending. Some of the categories, as Sean pointed out to me, are quite granular. Indeed, there are plenty of subcategories, within one industry, to give card issuers plenty of information about our shopping choices.

Take, for example, some of the codes associated with medical treatment. There are codes for doctors (8011), dentists and orthodontists (8021), osteopaths (8031), chiropractors (8041), optometrists (8042), opticians (8043), chiropodists (8049), nursing/personal care (8050), hospitals (8062) and so on and so forth. It's easy to segregate our spending when the merchant categories are chopped up that fine.

Indeed, have you ever been arrested? Ever posted bond? Did you use a credit card to make the bond payment? The bond company used merchant code 9223 when you swiped the card for payment. After getting arrested you felt like unwinding? Headed to a massage parlor, did you? Well, if you didn't use cash (but instead used your card), the massage parlor flagged your purchase under the merchant code of 7297. You get the picture. Some of these codes are quite specific.

Merchant category codes can be used to tell American Express and other card issuers a lot about us. I imagine that card issuers are pretty good at interpreting the data. Given what they have to work with, though, it wouldn't surprise me if some decisions are easier to make than others.

Take a look at the merchant category codes (link here). Notice the particularity that some of them have. I was intrigued by the entire list, quite frankly.

Tuesday, January 20, 2009

Cable Bill High? Phone Costs Up? Now, Let's Talk

I mostly cover credit here at But I also point to stories that I know will be of interest to my readers. This is one of those stories. The Wall Street Journal (online) is out with a story that will appear in tomorrow's newspaper. With the economy sputtering along, cable and phone companies are eager to retain customers -- even if it means offering a hefty discount to keep them.

From the Journal:

Mr. Weinkrantz is among a number of savvy customers who realize that while times are tough for consumers, they are also tough for cable and phone companies. Under intense pressure from Wall Street to keep subscribers as the economy sags and competition intensifies, many carriers are bent on retaining customers even if it means offering big price breaks.

"The key is to hang on to every possible customer right now," says Alex Dudley, a spokesman for Time Warner Cable, the country's second-largest cable operator by subscribers, after Comcast Corp. "They are our lifeblood." Mr. Dudley says that Time Warner Cable is also more receptive to giving stretched customers a discount during these tough times.

Times are tough. If you're interested in shaving some dollars from your bills, you might want to get on the phone. Dialing for dollars. That's what I call it. I ask for the "retention" department. These are the decision makers.

Read the rest of the story here (link).

Payment Processor Breach May Be Largest Ever

I Twittered about this earlier (link here), but now figure that it's too important to ignore here at Heartland Payment Services, a payment processor, is reporting a data breach that resulted in the theft of more than 100 million credit- and debit-card accounts. If the figures are accurate, this would be one of the largest data breaches ever.

From the Washington Post:

Robert Baldwin, Heartland's president and chief financial officer, said the company, which processes payments for more than 250,000 businesses, began receiving fraudulent activity reports late last year from MasterCard and Visa on cards that had all been used at merchants which rely on Heartland to process payments.

Baldwin said 40 percent of transactions the company processes are from small to mid-sized restaurants across the country. He declined to name any well-known establishments or retail clients that may have been affected by the breach.

UPDATE: Just wanted to make it clear that I question the timing of this information. Of all days to release the information, Heartland chose inauguration day? Maybe they were hoping to slip through with as few news publications as possible catching on. Didn't work, of course. The Washington Post, which is right there in the capitol, was one of the first papers to report it.

Meanwhile, read the entire story here (link).

And here is the Wall Street Journal's take (link here). Read More...

Are You A Bankruptcy Risk? Enigmatic Score May Tell Lenders

We're all familiar with credit scores. FICO scores, for example, range from 300-850. The score is used to gauge the risk that a particular applicant represents. But are you familiar with the bankruptcy score? does an excellent job of explaining what this score is and why it matters.

From the story:

Although they attempt to predict different outcomes, credit scores and bankruptcy scores have much in common. "Fair Isaac's bankruptcy scoring models use consumer credit reports as input, just as the FICO score does," says Fair Isaac's Watts. Other bankruptcy scores also incorporate information from the credit bureaus. BankruptcyPredict, which became commercially available as a subscription service in early 2008, uses a "combination of credit reporting agency attributes and trending data, as well as transactional behaviors such as credit card transaction amounts, merchant category codes and cash advances," according to Experian's Web site.

Read the rest of the story here (link).

Wall Street Voodoo

Paul Krugman's opinion piece in the New York Times is interesting reading. Krugman talks about what should be done with our banking system versus what will likely be done instead. He uses a hypothetical scenario to make his point and the fictional entities look quite familiar.

From the piece:

What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Read the rest of the op-ed piece here (link).

Should We Force Banks to Lend?

Should we? We've been bailing these banks out with taxpayer money for months. Shouldn't they be made to lend money to us now that they've been saved? In Britain, the government announced a new round of bailouts but only if banks agreed to increase lending. Should we do the same thing in the U.S.? "Ordering the bankers to make loans is both simple and satisfying," says Floyd Norris. "But it will not fix the economy or the financial system."

From Norris' story:

Once that takes place, the newly risk-averse bankers must be willing to lend money — not to anyone, but to those who are likely to be able to repay the loans. The supply of such borrowers depends in part on getting the economy moving again.

It was foolishly easy credit that got us into this mess. A government-mandated return to such lending is not a viable solution.

I don't think that banks should lend willy-nilly, without standards, but they should relinquish (lend) some of the funds that were used to bail out their insolvent butts.

Read the rest of the story here (link).

Monday, January 19, 2009

Retailers Struggle With Credit, Debit Card Fees

I was intrigued by this story. The story, written by Foster's Daily Democrat, looked at the cost of doing business when it comes to debit and credit cards. Some retailers, as a result of the high cost of accepting plastic, decided to go cash only. Others, after grappling with the decision, continued to accept credit and debit cards. My preference is to use plastic. I don't carry much -- if any -- cash on me. It's an inconvenience to stop by an ATM.

From the story:

Every time he swipes a credit card or debit card, Hendrickson said he pays fees that range from a percentage for insurance for his processing machine to guard against security breaches, up to 5 percent for each card transaction. He said he also pays $15 a month just for the paper he uses to print receipts from the processing machine.

Also, "the fees, trust me, they go up every year," he said.

Last year, he said he paid $1,700 in fees for $50,000 of credit card sales. He said it costs him $5 in fees to process a $100 credit card or debit card charge compared to 10 cents to process a $100 check.

"As a business, I envy the ones that try (to go with cash or check payments only), but they are going to end up cutting their throat," he said. "You have to play in their ballpark now."

A little housecleaning here. The reporter should have done a better job of cleaning up the math. If the retailer paid $1,700 in fees for the $50,000 in credit card sales, that's 3.4%. In the next sentence, though, the retailer says that it costs $5 in fees to process credit and debit cards. That's 5%. The reporter should have pointed out the math to the retailer or explained the math to us. I'd hate to think that the reporter didn't want the math to get in the way of a good story.

Anyhow, you can read the rest of the story here (link).

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Two-Tier Recovery: Where Do You Stand?

Last week I pointed to a story in the New York Times. In that story, Floyd Norris, the author, said that we risk a two-tier recovery when we only lend to the most creditworthy companies and consumers (story link here). The most creditworthy get loans at cheap rates. The rest find it almost impossible to get loans.

If there is a true two-tier recovery, where only the most creditworthy get loans, then we have a problem. I say it's a problem because I believe that less creditworthy people should have access to credit. But they should pay a higher interest rate to compensate the bank for the risk it's taking on. In a two-tier recovery, this second group of people would find it difficult to get a loan, even though they're considered pretty good risks.

On the other hand, I know plenty of people -- including some of my readers -- who would be just fine with a two-tier recovery. Credit is a privilege. Not a right. If you don't have outstanding credit, and you represent more risk, too bad. Lending to people who aren't good risks is what got us into our current situation in the first place.

Still, even if we are in the middle of a two-tier recovery, it can't last. Low-risk borrowers don't generate as much interest as those who are bringing up the rear (vigorish at this end). Banks need lower-quality customers. That's where the money is. And I am convinced that banks are addicted to this income stream. Sure, these banks are currently on the wagon, but eventually they'll fall off. They always do. No?

I'm for the traditional three-tier system. The most creditworthy get cheaper rates. The middle group pays more. And the lower-tier group -- subprime -- is charged even more, though I'd argue that 30%+ interest rates are way too high.

Where do you stand? Should only the most creditworthy have access to loans? Should everyone else be locked out? Do you think that subprime customers should be denied access to capital? Should only the first two tiers in my three-tier system have access while the third is excluded?

I'd be interested in hearing your thoughts.

Free FICO Score -- Once Every 12 Months

I was just messing around on's Web site. I noticed a frequently-asked-questions (FAQ) area. In the FAQ, it says that we are entitled to one free FICO score each year. If you have received your free score -- using that site -- during the past 12 months, you won't be able to use the service. If you haven't used the service, you should be good to go. UPDATE: it looks as though the score offer is dead.

When you go to the site, it says it's available to the first 10,000 visitors. But when you read the FAQ, it looks as though many more should be entitled to it.

The FAQ (click to enlarge):

Notice that you will only be entitled to your Equifax FICO score. You will not be entitled to a report. If you're curious about your score, though, this link should do the trick.

Here is the link to site (link here).

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Friday, January 16, 2009

It's Now Official: WaMu FICO Score Is Dead

One thing I hate is when a flack contradicts something I have reported. Not familiar with the word "flack?" It's what journalists call a public relations person hired to spin and disseminate corporate information. On January 13, 2009, I reported that WaMu would no longer offer free FICO scores to its credit-card customers. I cited unnamed sources. Now hear this: Chase has confirmed my story, despite the fact that Chase, through its spokesperson, was publicly saying that a decision had not yet been made as recently as yesterday.

Thursday, wrote a story titled "Chase drops WaMu secured card, FICO score." In the story, a Chase spokeswoman, Stephanie Jacobson, confirmed my story about WaMu's secured card being axed, but refuted my story on Chase's decision to kill free FICO scores. Chase told that a decision to kill FICO had not yet been made. Chase is "still evaluating WaMu products and services, including WaMu's FICO Score program," Jacobson told See story here (link).

That's a direct contradiction to what I have reported (story here). Indeed, my sources said that the decision had been made and that the score was officially gone as of March. What's more, Chase's denial is also a contradiction to what WaMu's customer-service reps were telling customers through its online message service. And, of course, it's now contradicted by Chase's Web site, which says this (link here):

You'll recall from my previous reporting that one of my sources said that Chase's decision to kill FICO could be a temporary one. Chase seems to be confirming that as well, which is evident from the language on its site. Still, my best source says that Chase will not resurrect this feature -- even though Chase would like customers to believe that there is still a chance.

A reader, curious as to why his FICO score (also called PFICO by some of us) had not yet updated this month, sent a note to WaMu through WaMu's online message system. He asked if the FICO score is being continued at WaMu. WaMu, in response to the query, sent this response back: "After the transition to the My Credit Profile and FICO score will no longer be provided at no cost." No more free FICO scores. However, the rep wrote, a service called "Chase Identity Protection" could soon be available to WaMu customers -- at a cost of $9.95 to $11.95 a month, depending on the level of service that a customer chooses. The scores provided through Chase Identity Protection, meanwhile, are not FICO scores, which makes them all but useless. We call these scores FAKO. Read my story on the topic here (link).

See online message from WaMu here (click to enlarge):

All I can say is this: My WaMu sources, all of whom have been spot on regarding other aspects of the WaMu/Chase integration, nailed this story. Next time you hear a Chase flack talking be sure to take their words with a grain of salt.

In the meantime, WaMu's FICO score for January updated today. That's right in line with what I've been reporting. January and February scores will be available to customers. Scores will no longer be available beyond that.

Chase, thanks for playing. You lose.

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Credit Markets Showing Some Signs of Revival

Floyd Norris, one of the best New York Times writers, says that there are signs of a revival in the credit markets. He cautions, though, that we still have a long way to go. No doubt on that. But he also makes a comment, midway through his column, that made me pause. He says that we risk running a two-tier recovery. My guess is that we're in the middle of one of those now.

From the story:

“The grand deleveraging of consumers has to take place,” said Robert Barbera, the chief economist of ITG.

One way for that to happen is for people to simply stop buying anything they do not absolutely need. The retail sales figures for December make it look as if a lot of that is happening.

“Alternatively,” Mr. Barbera said, “households can reduce debt service without having to slash spending. They can do that if they can refinance, and use some of the tax cuts to lower debt payments.”

It must be acknowledged that we risk running a two-tier recovery, in which the most creditworthy companies and consumers find loans cheap and the rest find them almost impossible to obtain.

The haves and the have-nots. I see anecdotal evidence of this in consumer lending. If someone put a gun to my head, I would bet that we're right in the middle of a two-tier recovery. Agree? Disagree?

Read the rest of the story here (link).

Some Ask if Bailout Is Unconstitutional

Where is the money going? Are banks using the bailout funds to make new loans? Should the banks be forced to be more transparent with the use of taxpayer dollars? The New York Times gets even more basic: Is the bailout constitutional?

From the story:

Some conservatives have argued that the law creating the program, the Emergency Economic Stabilization Act of 2008, which Congress passed hastily in October, violates constitutional principles that limit the amount of power that lawmakers can delegate to the executive branch.

They also maintain that the enormous bailout plan has illegally grown beyond its original focus on the financial services industry to include a bailout of the auto industry and more.

Read the rest of the story here (link).

Bank of America Receives $20 Billion From U.S. Government

Bank of America and the Treasury reached a bailout deal Friday that will help Bank of America digest its Merrill Lynch acquisition. In addition to the $20 billion investment that Bank of America will receive, the government, as part of the rescue package, will backstop some $118 billion in toxic assets, most of which were assumed by Bank of America when it acquired Merrill Lynch earlier this month.

"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the government said in a release Friday. "As was stated in November when the first transaction under the Targeted Investment Program was announced, the U.S. government will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks."

As part of the plan, Bank of America will issue preferred stock with an 8 percent dividend to the Treasury. Bank of America, meanwhile, must also comply with executive compensation restrictions and create and implement a mortgage-loan modification program.

You can read the press release here (link).

The term sheet can be read here (link).

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Democrats Reintroduce Legislation to Limit Credit-Card Abuses

Here we go again. Round two. Yesterday, Congressional Democrats reintroduced legislation that goes further than the rule passed by the Office of Thrift Supervision last month (link here). The first time around, the legislation, called the Credit Cardholders Bill of Rights, easily moved through the House but stalled in the Senate. This time, Democrats think they have a better shot of getting the legislation passed.

From Bloomberg:

The legislation, endorsed by Financial Services Committee Chairman Barney Frank, is part of an effort in Congress to bolster consumer protections after the collapse of the subprime- mortgage market. Maloney introduced a similar measure last year that passed the House and died in the Senate.

“We have more senators who are much more favorable to this legislation,” said Schumer, adding that Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, has said he wants to act on credit-card legislation soon.

And from Reuters:

Maloney, who chairs the House Financial Services Subcommittee on financial institutions and consumer credit, said she was unhappy with the July 2010 implementation date and wanted Congress to act sooner.

"Cardholders have lost the ability to say no to unfair interest rate hikes and fees," Maloney said.

She is seeking to have the rules go into effect 90 days after enacted instead of a full year as the bill previously stated.

You can read the Bloomberg story here (link).

You can read the Reuters story here (link).

Thursday, January 15, 2009

FICO Score Benefit To Be Discontinued At WaMu (UPDATE 1 -- Includes Chase Comment)

Original story posted January 13, 2009

The FICO-score perk that many of us have enjoyed as Washington Mutual cardholders for years is being discontinued, according to sources with knowledge of the situation. Chase decided that it would not bring the score onboard as part of the WaMu transition. The phase out will take place in March. WaMu customers will be notified -- via letter -- later this month.

It's now official: the FICO score is dead at WaMu. Read the story here (link).

The loss of this particular perk is a blow. Many WaMu customers, believe it or not, had the card exclusively for the FICO score. The score has also been referred to as PFICO, because the score was originally made available to Providian card members; Providian was ultimately acquired by Washington Mutual in 2005. I would suspect that a good number of customers will end up canceling their cards once they receive the letter from Chase later this month. No explanation was given for Chase's decision to kill the perk.

I hear that there is a chance (though small) that Chase's decision could be temporary -- with Chase eventually bringing the score back -- but I am not counting on that. Indeed, I double-sourced this story. My second source wasn't as sanguine about that possibility. Chase doesn't offer a free FICO score to its customers and, from what I hear, this decision is going to be permanent.

UPDATE, January 15, 2009: In the meantime, contacted Stephanie Jacobson, a spokeswoman for Chase Card Services, who says that a final decision has not yet been reached regarding WaMu's free FICO score. I continue to stand behind my reporting, but wanted to include Chase's comment. You can read the story here (link).

The score, called the Bankcard Industry Option FICO, was useful (story link here). It's especially useful if you're going to be applying for a credit card anytime soon, since the score heavily weighs credit-card usage in the model. I imagine that quite a few credit-card companies use this particular scoring model when assessing risk.

That's the latest information that I have. I probably know more than any customer-service representative, so don't expect any answers from WaMu if you call and ask them about the score discontinuance. They won't know anything yet.

If something changes, I will provide an update.

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