Friday, February 27, 2009

American Express Cancels Card Right Before Customer Was Supposed To Get $500 Rebate

After this week of American Express coverage, I told myself last night that I would lay off American Express for a while. I don't want my readers to think that we're 100% AmEx coverage all of the time here at But I have to break my unwritten rule to report American Express's latest shenanigans.

From the Consumerist (hat tip Michael):

Andrea, an American Express member for over 20 years, is upset because AmEx canceled her cash-back card two weeks before her $500 rebate check was supposed to arrive, and declared the rebate forfeit.

American Express needs a serious ass kicking. I am absolutely positive that the card agreement allows for this forfeiture (read the fine print), but the timing of this is absolutely suspect. American Express, do the right thing: pay that customer her money!

Read the rest of the story here.

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•Read More American Express Stories Here Read More... Catches Up With Fair Isaac's Craig Watts For A Little Q&A

When it comes to FICO scoring, one can never know enough. Indeed, I like to think that I know quite a bit about the FICO scoring system. But I really don't. I'm constantly learning, in fact, that I only understand the big-picture items. I want that to end. I want to understand the more subtle details of the scoring system. I want you to understand them too.

To that end, I caught up with Craig Watts, public relations director for Fair Isaac, so that I could gain some clarity and understanding of the system. Before we get started, let me lay out the format. I'm going to present what I've heard about certain aspects of FICO scoring. I'll then have Craig Watts tell me what he knows.

Here's what has heard: at some point, FICO ignores particular credit limits for utilization purposes (click here for story on utilization). In other words, if I have a $50,000 credit limit on my credit card, FICO ignores that limit for scoring purposes -- especially as it relates to the utilization calculation. I've heard the number is $30,000. I've also heard $40,000. Would Fair Isaac please clarify?

Fair Isaac's Craig Watts: "How the FICO score evaluates a factor like credit limit will depend on the type of account involved as well as the other information on the consumer’s credit report. Given the complexity of the scoring model, we generally don't try to generalize about such topics for the whole population. For competitive reasons we don't publicize details of our scoring models beyond the extensive information we have already posted on"

My take: I think it's awfully important to know if a credit-card limit is being ignored. Here's why: If I have a slew of high-limit cards that are not being factored into the model, I could be hurt if I happen to use one of my low-limit cards on a regular basis. After all, utilization is calculated two ways. It is measured by individual credit card and by all of them combined. Therefore, if the majority of my cards are being ignored, I could see a score drop because of the few low-limit cards that I use on a regular basis. Knowing that there is a hard limit that eliminates the card from the scoring model would allow me to spread my high-digit cards out.

For example, let's say that I have two Citibank cards. One has a limit of $10,000 and the other has a limit of $45,000. If, for scoring purposes, limits over $40,000 are ignored in FICO's model, then I could call Citibank and get them to move part of my limit on the $45,000 card over to the card with a limit of just $10,000. By doing that, I would be assured that both cards are included in the scoring algorithm.

That said, I understand Fair Isaac's reticence about disclosing the exact figure.

Let's move on to the next question.

Here's what has heard: When closing a credit card account, I know that the biggest worry is the hit to utilization (because the limit is no longer calculated in the utilization calculation). Further, I know that the age of the card that gets closed continues to age (see story here). But what happens if I happen to close my oldest account? Does my length of history suffer? Normally it shouldn't -- because age is still calculated on closed accounts. I'd like to get a little clarity here.

Fair Isaac's Craig Watts: "If you close an account that is in good standing, the length of history will continue to influence your score, whether it’s your oldest account, your newest account or any in between, for as long as the credit bureaus keep that account on your credit report. You're welcome to check with each credit bureau regarding its retention policy. If you leave an account open that is in good standing, so long as the lender doesn't close it for non-use that account can remain on your report indefinitely."

My take: That's good to know. I've seen conflicting information on the Internet; it's nice to finally have that nailed down.

Let's get to the next question.

Here's what has heard: Closed accounts with a balance are included in the FICO scoring calculation. Sometimes card issuers, though, reduce the limit to $0 when the card is closed -- but the balance still gets reported. In that particular case, it looks as though the customer is maxed out on the card. Does FICO do something to mitigate that possibility ($0 limit with balance)?

Fair Isaac's Craig Watts: "Any time that the credit limit is reported as zero, the account is no longer included in the FICO score's utilization calculation, whether the account is reported as open or closed."

My take: Thank goodness. I have been spreading misinformation myself. I apologize. It's always been my understanding that if a card gets closed with a balance, and the limit gets reported at $0, that the customer's card would looked maxed out for scoring purposes. According to Craig Watts, that is not so. If your closed card's limit gets reported as $0 -- even if you have a balance -- the card is ignored by the scoring model. Nice.

Finally, one last question. This one, by the way, has bothered me for some time. And I can tell you that most people got this one wrong (including myself).

What has heard: I recently pulled my FICO score (through In the report that I received, there was a little red flag next to the number of accounts that I have. This is the note I get: "Marks an aspect of your credit that is hurting your FICO score." It's my understanding, though, that the number of accounts is not a risk factor that FICO calculates. If that's true, then why is there a red flag next to the number of accounts (both open and closed) that suggests FICO is penalizing me for the number of accounts I have?

This comes from a story (Oct. 7, 2008):

As for your credit scores, "simply having a large number of credit cards is not going to have a negative impact on your FICO score," says Ethan Dornhelm, a senior scientist in the scoring solutions division at Fair Isaac, the creator of the popular FICO scoring model. In the latest versions of the FICO Classic scoring model, the number of credit cards a consumer holds is not a factor in the calculation, even though it was a factor in some of the previous versions of the model.

I am trying to square those comments with the note that's being offered in my FICO score report.

Fair Isaac's Craig Watts: "Regarding the article you referenced, please note that there is an important distinction between Ethan Dornhelm’s comment and the red flag that can appear on consumers’ FICO score reports. Ethan specifically mentioned “credit cards,” and the flag on the FICO score refers to “accounts.” The statement in the story is correct that simply having a large number of credit cards would not reduce one’s score. The flag on your score is referring to the number of “accounts” which is a broader universe than just credit cards. Accounts can also include loans or other kinds of revolving credit such as retail store cards."

My take: So that's how it works. The number of accounts is a risk factor. The number of particular credit cards is not. Still, at some point, one would think that if you get enough credit cards, you'll reach the number of accounts that is considered negative. I'll follow up with Watts and see if I'm wrong.

For now, I feel a little bit more knowledgeable. Look for more of these stories in the future. I just hope that Craig Watts doesn't think I'm abusing and monopolizing his time. Craig, if you're reading, thanks for your time. Hopefully we'll do this again.

Related Article:

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


Tell Congress: No More Secret Credit Scores

Liz Pulliam Weston is tired of it. She's tired of the spat between Fair Isaac and Experian. She's tired of seeing consumers behind the eight ball. She's also tired of Experian acting as though it's no big deal that consumers only have access to just two FICO scores. But she doesn't end there. She argues that consumers should have a right to see any and all scores that are used by lenders to judge our creditworthiness.

From her story:

Clearly, federal law needs to catch up with lender practices.

Federal law has long guaranteed your right to see your credit reports. Companies that use your reports against you -- to deny your application for credit, insurance or employment, for example, or to take any other adverse action against you -- are supposed to explicitly tell you that's what has happened. They're also supposed to tell you which bureaus provided the reports and give you contact information so you can review your files and dispute any errors.

In 2003, you were also given the right to buy your credit scores from the bureaus. But the law doesn't specify you have to be given the same scores lenders use.

It's time to fix that and extend consumer protections to the other scores that are being used to evaluate you.

Simply put: If a score is used against you for any reason, you should have a right to see that score, know how it was calculated and protest any errors in the data used to calculate it.

I'm with Liz on this one. We're in the dark when it comes to credit scores. I'd love to know about my bankruptcy score (link here). Next month, many of us will no longer have access to our Bankcard Industry Option FICO score (link here). I'll want to know what that score is. What about the application score? How about the usage score? And what about the acquisition score? These are scores that we don't have access to. (See's great story on that here.)

Weston says that it is time to get Congress involved. Read the rest of the story here (link).

Related Article:

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

Thursday, February 26, 2009

Note To American Express: You'll Get Paid -- Stop Harassing Your Customers (UPDATE 1 -- AmEx Neuters Scott's Card)

I'm really not trying to pile on American Express. But the card issuer has been harassing customers for payments lately. We're not talking about customers who are already delinquent, either. Instead, what I am talking about is American Express going after customers when a payment isn't even due yet. I've been aware of this practice for some time but it appears that American Express has recently intensified its efforts to collect payments before they're due. American Express, your customers -- and I -- want to say something: stop it!

A reader sent me a note earlier this week. This single example is representative of the crap that American Express has recently been pulling. My reader, Scott, was pretty shaken up by the incident.

Here's what happened. Scott's employer sent him an email on his day off. Turns out that American Express called the employer and said that it was looking for Scott. No reason was given for the call, but American Express left a phone number where it could be reached. Scott, thinking something was wrong, called American Express right away. A customer service representative asked Scott to schedule a payment that day. Never mind that the payment on his American Express Gold card wasn't due yet (it's not due until the last day of February). What's more, Scott's payment was less than $1,100. "I have never been late with my payment and have no delinquencies," Scott told me. "It kind of took me by surprise and I asked why I couldn't make the payment by myself as I normally do."

That's a fair question. Well? "She mentioned the amount was over $1,000 and she was going to do it (schedule the payment). I tried arguing with her but she insisted that she schedule the payment. I told her I would pay the amount on the due date," Scott says. Not to be denied, the representative asked Scott where he works and what his current salary is. Scott provided the details. "She scheduled the payment for me ... and thanked me for choosing American Express. I was dumbfounded and felt like I had just finished a conversation with my babysitter or worse, big brother." Basically, Scott got steamrolled -- which, I am sure, he'd acknowledge was his fault. "This is very aggressive and borders on harassment. They must be running very scared," Scott guessed. Still, the representative scheduled the payment of nearly $1,100 and that was that.

But the story doesn't end there. Later that day, Scott received yet another phone call from American Express. This time it was calling him on his cell phone. The representative -- a different one -- said that she was calling about Scott's Gold card. Scott raised his eyebrow (have to love his description of the situation) and asked what she needed. Before she could answer, "she mumbled something about noticing on my account that I already talked with them today and that it was unnecessary to continue the conversation," Scott says. "She then thanked me for choosing American Express and hung up." Scott thought that was weird. He actually classified it as "weirdness."

But it's not weird. American Express works from a list. Customer service representatives call customers and harass them for early payments. I have not heard this, but it would not surprise me at all -- at all -- if these customer service representatives are compensated for bringing in early payments. Credit-card issuers have lots of internal contests. At Bank of America, for example, customer service representatives can earn bonuses (prizes) for getting customers to do balance transfers and direct deposits. I've heard that straight from customer service representatives' mouths. So, I would suspect that American Express is no different. Get a customer to pay earlier than scheduled and win a prize.

Scott wishes that he would have handled the situation differently with the first customer service representative. "After the conversation I wished I had been more confrontational and said something like: 'Are you changing the terms of my agreement today? If you want to change my due date, then go ahead, but send it in writing.' Of course hindsight is 20/20," Scott acknowledges. If he had done that, he would have been fine. I've talked to people who have received this "early payment" call. Some of them have told American Express to pound sand. And American Express does just that.

The fact of the matter is that Scott's American Express Gold card has a 15-day payment window. In other words, the payment is due no later than 15 days after the statement closing date. It's not two days; it's not nine days. It's 15 days. It's late on day 16.

You've made it all the way here. You're wondering why American Express is doing this. Here's my theory (at least with Scott): Scott normally has a balance of $400 or so each month. This month, however, his balance was nearly three times his average balance. American Express probably got skittish and decided to grab the payment as soon as possible. But, just like so many things with American Express, that's just foolish. If it was worried about being paid, why did it allow Scott to charge around $1,100 this month? Why approve some of the charges in the first place? It's just another example of American Express not having its "stuff" together.

American Express, give your customers a break. Stop trying to reach into their pockets before the payment is due. You're alienating them. You're annoying them. And -- in some cases -- you're flat-out harassing them. And just think. If you stop pulling these kinds of stunts, I'll stop writing these kinds of stories.

Sounds like a win-win situation for everyone.

UPDATE: Since writing this story, Scott has now been smacked down by American Express in the form of a hard spending limit. He was notified this afternoon that his no preset limit card now has a hard limit. Says American Express: "after a thorough review of your credit profile we have placed a spending limit" on your Gold card. Here is a copy of the letter (click to enlarge):

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Internal American Express Document Used In "$300 To Scram" Program Lays Out Procedures To Handle Customers

Earlier this week, I reported that American Express is paying people to go away (see story here). Turns out that the handling procedures document associated with this particular program has been leaked on the Internet. (Dear American Express employees who read my blog, you should always feel free to leak this kind of information to me first. Grin.) Account reps are supposed to work from this particular document.

From via Consumerist (hat tip Sophia):

Balance Down Initiative

DETAILS: On February 13, 2009, American Express began 3 promotions to entice Cardmembers to reduce their outstanding revolving balance on CCSG Lending products by offering them Pre-Paid Cards or Statement Credits.

Handling Procedures: If you receive a call from a customer concerning the Balance Pay Down initiative, please refer to the Q&As below:

Prepaid card test FAQs

Q: Why was I selected for this offer?
A: We’d like to offer you the opportunity to simplify your finances and pay off your existing balance.

Q: My neighbor/friend received this offer but I did not. Can I enroll?
A: We apologize, but we can only honor this offer for selected cardmembers. However, if you’re interested in paying down your balance, I can help you with that.

Q: Can you help me enroll in the offer?
A: You can enroll in the offer by visiting and using the unique RSVP code provided to you on your mail piece. If you would prefer to enroll by phone, please call 800-794-1308 and use the code: 138580001. Please note that your account will automatically be cancelled when you enroll in this offer. You will need your account number to enroll in the offer.

Q: I don’t have access to the Internet; how can I enroll?
A: If you would prefer to enroll by phone, please call 800-794-1308 and use the code: 138580001. Please note that your account will automatically be cancelled when you enroll in this offer. You will need your account number to enroll in the offer.

Q: I lost my mail piece that has my unique RSVP code; can I still enroll?
A: Yes, you can call 800-794-1308 and use the code: 138580001. Please note that your account will automatically be cancelled when you enroll in this offer. You will need your account number to enroll in the offer.

Q: I missed the enrollment period but am still interested in taking advantage of this offer?
A: We apologize, but we can only honor this offer for cardmembers who enrolled during the stated enrollment period. However, if you’re interested in paying down your balance, I can connect you with a Customer Care Professional who can assist you with that.

Q: I would like to pay off my balance, but keep my account open. Can I do that?
A: By enrolling in this offer, your account will automatically be cancelled. If you do not enroll, but pay off your balance by April 30, 2009, your account will remain open but you will not qualify for the Prepaid card offer.

Q: I enrolled in the offer, but I can’t pay my balance in full. What happens?
A: As communicated in the enrollment letter, your account will be cancelled. You must continue to make at least your minimum payments until your balance is paid off. However, you will not receive the prepaid card.

Q: My payment is due prior to March 1, 2009. Should I wait until then to pay so it qualifies for the Prepaid card (officially called Encompass Card)?
A: To avoid any late fees, you must pay at least your minimum payment by the due date. As long as you make another payment for the remainder of your account balance between March 1, 2009 and April 30, 2009, your account will qualify for the Prepaid card (officially called Encompass Card).

Q: Where can I use the Prepaid card (officially called Encompass Card)?
A: Your card can be used at select merchants that welcome American Express® Cards. The Card cannot be redeemed for cash and is not transferable. Card terms and conditions, usage restrictions and guidelines apply; please see your card carrier for details.

Q: How long will it take for the Prepaid card (officially called Encompass Card) to arrive?
A: Your Prepaid card (officially called Encompass Card) will arrive 4 weeks after the end of the promotional period (April 30, 2009).

Q: I enrolled in the offer and paid off my balance, but didn’t receive a Prepaid card (officially called Encompass Card)?
A: I apologize for the inconvenience. Please give me a moment to review your account and confirm if the payments have been reflected on your account.

If Cardmember has not received there offer connect to a TSC CCP to complete the request

Q: I submitted a payment prior to April 30, 2009, but I see it did not post to my account until after the end of the offer period. Will I still receive the Prepaid card (officially called Encompass Card)?
A: All payments must be reflected on your account by April 30, 2009 to qualify for the Prepaid card (officially called Encompass Card) offer. We apologize for any inconvenience.

Q: Is my account considered closed at my own request, or at American Express’s?
A: Your account will not be reported in a negative manner to the credit bureaus, however it will be reported as “closed at consumer request.”

Q: How will the account closing be reported to the credit bureaus?
A:Your account will not be reported in a negative manner to the credit bureaus, however it will be reported as “closed at consumer request.”.

Q: Will I receive a confirmation of the account cancellation?
A: Your statement will reflect the account cancellation in the month following the account cancellation. Please note that depending on your account billing date, it is possible that you may not see the cancellation on your statement for up to two months.

CCPs: If the Cardmember asks for a confirmation letter connect the Cardmember to TSC.

Q: How long will it take for my account to be cancelled?
A: It may take up to 2 weeks for your account to be cancelled after enrolling in the offer.

Q: I enrolled in the offer, but my account still looks active. Why?
A: It may take up to 2 weeks for your account to be cancelled after enrolling in the offer.

Q: How long is my prepaid card valid for?
A: The prepaid card will expire May 31, 2010; unused points will be forfeited the first day after the valid thru date, subject to applicable law. For additional information about your prepaid card, please see the full terms and conditions enclosed in your card carrier.

Q: What do you mean by a $300 value prepaid card? How is the card denominated?
A: The Card is point based with 1 point = $1 in purchasing power. Terms and conditions apply. Please see your card carrier for details.

Q: I enrolled in this offer, but would like to reinstate my account? Can you assist?
A: Let me direct you to the appropriate person who can assist you submitting that request. (CCP: Connect the Cardmember with an existing Customer Service CCP)

Q: I am a Blue from American Express® Cardmember or Optima® Cardmember. What happens to my Membership Rewards Express® points now that my account is cancelled?
A: Any points accrued in your Membership Rewards Express® program will be forfeited upon account cancellation. See Membership Rewards Express® program details for full terms and conditions.

Q: I am a Blue Cash from American Express® Cardmember. What happens to my rebate now that my account is cancelled?
A: You will forfeit your entire Rebate for the Rebate Year if your account is cancelled before the Rebate posts to your account. See your Cardmember Agreement for full details.

Q: I received the offer for the prepaid card, but I would like a statement credit instead?
A: We apologize, but your account qualifies for a $300 value prepaid card, and we cannot offer you any other incentives at this time.

Q: I took advantage of the offer you sent me, but received a letter saying that my account was cancelled by American Express/for a credit reason. Why?
A: Let me direct you to the appropriate person to discuss this with you. (CCP: Dial-transfer CM to RLA team).

Q: If my account was cancelled prior to enrolling in this offer, can I still enroll?
A: We apologize, but you are not eligible to receive the $300 value prepaid card if your account was cancelled by American Express prior to enrolling in this offer.

Q: I enrolled in the offer, but subsequently received notification that my account was cancelled by American Express for credit reasons. Am I still eligible for the prepaid card if I pay down my balance?
A: Yes, as long as your balance is paid down, you will be eligible to receive the $300 value prepaid card.

Q: What does the footnote regarding taxable income mean?
A: Any income provided by American Express may be considered taxable income to you. Please check with your personal tax advisor with any questions regarding tax implications.

Here is the original thread over at the forum (link here).

Here are the terms and conditions for the Encompass Card (link here)

And here is the Encompass home page

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•Read More American Express Stories Here

Citibank Hacking Lines Of Credit -- Again

In September, I reported that Citibank was shuttering a bunch of inactive lines of credit (link here). The accounts were closed "due to the length of time that has passed since it was last used," I wrote at the time. Now hear this: Citibank is, instead of closing accounts, now slashing limits across the board. A reader of mine was kind enough to share the contents of the letter he received.

Before getting to the letter, it's important to first explain the nature of these consumer lines of credit. These lines often have higher interest rates. They don't -- and shouldn't -- get used very often. However, they can serve as convenient bridge loans in a pinch. When Citibank rolled out its Citi Flex line of credit product a couple years ago, I applied for the account. I figured that it would be a nice complement to the rest of the credit products that I had. Turns out that I never used it. Never ran into the proverbial "pinch." Citibank, after about a year of non-use, shut my account down.

Here's what I wrote about the CitiFlex account when it got closed last year:

Frankly, I don't think Citi knew what it was doing when it rolled out this product last year. From the beginning, it's been a subpar product. There was no online access, you had to request checks over the phone, and, I believe, the checks always had an expiration date on them. Worse, it often took weeks to receive new checks.

Citibank has now stopped offering the CitiFlex product altogether. Existing CitiFlex accounts will continue to get serviced. This weekend's round of closures, though, makes me think that Citi would rather this product go away completely (including all of its customers).

And, so, fast forward to today. My reader received a letter from Citi yesterday. This is what Citibank had to say:

"As always we appreciate your business and want to let you know about a change to your account. Based on your spending history and since you are currently only using a portion of your available credit line, we have lowered your credit line to $X,XXX." I redacted the amount to preserve the privacy of my reader. His previous limit was in the mid 5 digits. "We value you as a customer and look forward to continuing to serve you in the future," Citibank concluded. I always chuckle when they tell customers that they're looking forward to serving them in the future.

So what should my reader do? Very simple. I understand that Citibank is willing to reinstate limits if you call them up and ask (hat tip Creditboards). The last phone number that I had for CitiFlex was 866-720-2495. You can always refer to the phone number in the letter -- if it's different from the one above.

At this point, Citibank should just do what I proposed the last time we went through this. It should discontinue the product (which it has) and it should close all of the active accounts that remain.

Clearly, this product has been a regret for Citi. It was an ill-conceived product. And it's been an unmitigated failure.

In the meantime, see all of my Citibank coverage here (link).


New Fed Rules Don't Cover Business, Corporate Credit Cards

I missed this one yesterday. I shouldn't have. Connie Prater over at has a story about the impact that the new Fed rules, which are slated to take effect in July 2010, will have on business and corporate cards. The new rules, as the headline makes clear, will not cover business and corporate cards.

From the story:

"They apply to consumer credit cards, accounts for personal use," Benjamin Olson, an attorney for the Fed, said Tuesday during a teleconference on unfair credit card practices jointly sponsored by the Fed, NCUA and OTS. Olson was one of three representatives from the agencies who spent nearly two hours answering questions from credit unions and other lending institutions about what the new rules do and don't cover. The briefing was designed to get card issuers that haven't already done so to begin making plans to implement the rules.

According to The Nilson Report, a monthly payment industry newsletter, commercial cards include corporate (or travel and entertainment) cards, small business debit and credit cards, fleet cards, purchasing cards and prepaid commercial cards. Many small business credit cards have been canceled or their limits drastically cut back in recent months as issuers move to reduce their risk.

Olson warned those on the conference call that although the new rules apply to consumer credit cards, the standards of unfairness outlined in the FTC Act "still apply in this situation" to commercial cards.

For those of you with business cards, you're just ass out (as you've always been). Business cards have never offered all of the protections that consumer cards offer. By not covering business cards, the Fed is just preserving the status quo.

There is one thing that I would like to point out, though. Some business card accounts are starting to show up on personal credit reports. One of my readers, Scott, posted a note on my blog last night. This is Scott's message:

Just spoke with a supervisor in credit management for Discover.

News Flash: This is going to be an industry standard! Yes, that's what she told me ... that corporate/business cards unilaterally will be showing in personal reports shortly because of the economic mess the banks are in.

I did get an address to write letters presenting the business owners side of the story for this policy:

PO Box 3004
New Albany, Ohio 43054

I informed her that if all businesses that have lines of credit and credit cards were to be reflected on the owners personal reports, there would be no lending in this country. Basically everybody's scores would tank and show HUGE debt to income ratio's and therefore the cc companies and banks would have NO business at all.

She said that they have been getting many complaints/phone calls and that she totally understood and agreed with my point. Once again, the power of the pen will come into play. I encourage anyone having business cards to re-evaluate their situations and write to this address.

So, business cardholders get none of the new protections, but they do get the downside of having all of their business expenses showing up on their personal credit reports, which will very likely translate into lower credit scores. Doesn't sound like a very good deal.

We now know that Discover plans to report all of its business cards to personal credit reports. I've also heard from quite a few readers that some of their other business cards (not issued by Discover) have started reporting too. But it's not widespread enough for me to claim that it's across the board yet. Indeed, Bank of America, Chase, and Citibank have not implemented this change. Until they do, I'll chalk up the Discover comment as pertaining only to Discover. The supervisor can't speak for the rest of the industry at this point.

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


Wednesday, February 25, 2009

Houston Backs Off 'Credit Enhancement' With Tax Dollars

Normally I just update my previous blog entries if there is a subsequent development in the story. However, I've decided that it makes more sense to do a separate entry for this one. You'll recall my earlier blog entry this week on Houston's proposal to use taxpayer dollars to help some citizens get better credit scores, which would ultimately help these people qualify for a mortgage (see story here). The latest development is that Houston has backed off the plan.

From the Houston Chronicle:

Housing Director Richard S. Celli said that the plan would only have been able to help applicants pay off installment debt like student loans, and not revolving debts, such as credit cards.

“This program was never intended to pay off someone’s flat-screen plasma TV,” Celli said. “This program was intended for hardworking, credit worthy low- to moderate-income individuals who needed a helping hand in paying off some debt like a medical bill or a student loan.

The city has provided down payment grants and closing costs for 872 families since 2005. Only one family has ever had a foreclosure, Celli said.

Pay particular attention to the first paragraph. The housing director says that the payments would only have applied to installment debt. If that's the case, then the city of Houston really is being led by a bunch of idiots.

Here's why: installment debt accounts for very little in the FICO equation -- especially in regard to utilization (see story on utilization here). The $3,000 grants would have been a total waste of money. They would have amounted to a nice gift to the recipient and nothing more. Scores would have been minimally impacted -- if at all. There was no way that scores would jump 10 to 20 points (the goal of the program) by paying down installment debt. FICO simply doesn't reward that kind of repayment (not even when the debt is completely satisfied and paid in full).

In the end, it's a good thing this plan died. Would have been pretty embarrassing when the accounts got updated and consumers checked their credit scores -- only to find out that their scores, if they did move, were modestly impacted by the debt repayment.

Anyhow, here is the rest of the Houston Chronicle story (link). Read More...

3rd Circuit Deals Blow To Class-Arbitration Waivers

Good news for credit-card users. Bad news for the credit-card industry. The 3rd Circuit Court of Appeals held that arbitration clauses may be struck down -- as unconscionable -- when they prevent the use of class actions in cases where a large group of consumers have claims that would normally yield small sums of money for individuals litigating on their own.

From The National Law Journal:

The unanimous three-judge panel concluded that state courts (as well as federal courts applying state law) are free to declare that such class-arbitration waivers are unconscionable -- even if the contract included a choice-of-law provision that called for applying the law of a state that is decidedly amenable to such pro-business provisions.

The ruling is a victory for attorney F. Paul Bland Jr. of Public Justice in Washington, D.C., and Gary S. Graifman of Kantrowitz Goldhamer & Graifman in Montvale, N.J.

Bland hailed the ruling as a major victory for consumers and said it clarified an important area of 3rd Circuit law by underscoring the power of state courts to reject arbitration and anti-class action provisions they deem unconscionable.

In the suit, a proposed class of New Jersey consumers claim that American Express cheated them by falsely promising rebates of up to 5 percent of purchases made with the Blue Cash Card, and that, in reality, the rebates proved to be much smaller than originally promised.

The 3rd Circuit remanded the case. On remand, the district court judge will have to decide whether New Jersey state courts would deem such a class-arbitration waiver provision unconscionable. "We hold that, if the claims at issue are of such a low value as effectively to preclude relief if decided individually, then ... the application of Utah law to the class-arbitration waiver is invalid and the class-arbitration waiver is unconscionable," U.S. Circuit Judge Franklin S. Van Antwerpen wrote.

Given that most of these credit-card disputes involve relatively low-dollar amounts, not worth a single individual's time, money, or effort, I'm hopeful that the district court judge will find these class-arbitration waivers unconscionable.

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


Tuesday, February 24, 2009

The Day After American Express -- Where To From Here? (UPDATE 1 -- Adds Citibank Offer)

Suffice it to say that I have a lot of new readers. This American Express story (link here) has been picked up by almost every major news outlet. And many of those stories led to American Express's decision to offer some customers $300 to go away has captured the attention of a lot of people. What I want to know is this: Where does the card industry go from here? Is American Express's offer an isolated event, peculiar to it -- and it alone?

During yesterday's deluge (traffic was phenomenal here yesterday), I received quite a few emails. Several emails indicated that American Express's $300 offer may be just the beginning. Indeed, one reader passed along a letter that he received from Majestic Visa. The deal goes like this: if my reader pays $1,503 or more of his balance, he'll be eligible for a credit of $27. The more he pays, the bigger the credit. Here is a copy of the letter (click for full size):

I'm also told that General Electric's Money Bank (GEMB) is offering something similar. (I have not seen a letter; if anyone has one from GEMB, please send it my way.)

UPDATE 1: In the meantime, a reader received an offer from Citibank earlier this month. The nice thing about the offer, from the customer's perspective, is that the account does not get closed. From the offer: "Pay at least $150 above the minimum amount due on any of your next 4 monthly billing statements and you'll earn a statement credit equal to 10% of the amount you paid over the minimum amount due. You can earn up to $250 in the program." So, more credit-card issuers are getting in on the action.

Here is the offer (click for full size):

To be sure, American Express is getting all of the press because it's, well, American Express. But rest assured that American Express is just moving to the head of the line. If someone is going to get paid, American Express wants to be that "someone." And it wants to be there first. But look for others to join American Express.

Credit card issuers are desperate for cash. What's more, they're worried about rising charge-off rates, which have ballooned during the past year (story link here). American Express's offer, though targeted to a specific group of customers, shows just how difficult it has become for lenders. The market for asset-backed debt -- which used to be a huge source of liquidity for the card issuers -- is terrible (see story here).

American Express has done a host of things to get its risk down. It's lowered credit limits on customers (link here), it has raised interest rates across the board (see comments section of this story), and it has conducted financial reviews and closed accounts (story here). Nothing has worked.

Now it's turning to these $300 prepaid cards. Will it work? Your guess is as good as mine. But it has to do something. Nothing else has worked. May as well give this a try. American Express, Majestic Visa, Citibank, and GEMB (allegedly) are already on board with this tactic. They're the first. I'm guessing that they won't be the last.

Stay tuned.

Related Articles:

•Read More American Express Stories Here

Public Funds To Pay For Private Debt -- Must Read

This is getting crazy. Apparently city officials in Houston are thinking about using public funds to pay off car loans, credit card debts, and other loans, for Houston citizens -- so that these people can qualify for home mortgages. Wow. Apparently, some citizens are just below the minimum credit scores necessary to qualify for home mortgages. By paying off these debts, the thinking goes, citizens would be able to realize their dreams of home ownership. Houston, we have a problem.

From the Houston Chronicle (hat tip Bob Wang):

The “Credit Score Enhancement Program” will give up to $3,000 in grants to individuals who are trying to qualify for mortgages through the city’s homebuyers assistance program. City officials say some applicants fall short of eligibility by only 10 or 20 points on their credit scores, and paying off some debt balances can quickly improve their numbers.

The proposal has aroused critics who say the city should not use public funds to help people pay down car loans, credit card balances, or other debts — even if the slight credit bump would help them realize the dream of home- ownership.

“We just can’t give away government money to help people with their credit scores,” Councilman Mike Sullivan said Monday. “You’re giving them other taxpayers’ money to pay off the bills.”

This plan is ridiculous. Goosing scores to get people into homes? Where have I heard that before? (Grin.)

Read the rest of the story here (link).


Bank Of America Heiress Blasts Bank Leaders As 'Idiots'

I had to read this story twice. Frankly, I'm not sure which is worse. The "idiots" or the heiress complaining about the idiots. Virginia Hammerness is the granddaughter of A.P. Giannini, the founder of Bank of America. She says that she's repulsed by the current state of affairs at the bank. She's so repulsed, in fact, that's she's done exactly nothing with the money that sits in her account(s) at BofA. Why? She's "just too lazy to move it somewhere else," she says. (Shakes head.)

From CBS 5 in San Francisco (hat tip Danielle):

"I think it's totally repulsive," Hammerness said when asked what she thinks of Bank of America now. "What idiots, what kind of idiots are running that bank?"

Hammerness directed some of her criticsm at the bank's decision to go ahead with the purchase of the near-bankrupt Merill Lynch brokerage, even after learning that huge bonuses were paid out to Lynch employees right after the deal was announced.

"They bought it and then, you know, they found out before the deal was consumated that the head of Merrill Lynch paid all those bonuses to people. Bank of America should have said forget it," said Hammerness.

Ms. Hammerness does not come off as a sympathetic figure to me. And her comments at the end of the story are silly.

Read the rest of the story here (link).

Related Articles:

•Read More Bank of America Stories Here

Monday, February 23, 2009

American Express Wants To Help You 'Simplify Your Finances' -- Will Pay You $300 If You'll Close Your Account

Well, this sure is a different kind of deal. Instead of paying you a bonus to join, New York-based American Express will give you a $300 American Express prepaid card if you agree to say goodbye. American Express says that it is making this "deal" so that customers can "simplify" their finances. Sure. The offer, which isn't available to everyone, requires a 14-digit RSVP code. Customers are receiving this offer via U.S. Postal and email.

Let's get something straight here. If you receive this offer, American Express is telling you something: please leave. Note also that in order to get the $300 prepaid card the customer MUST pay off his or her entire balance by April 30, 2009. If the balance is not paid off by April 30, then you will not receive the $300 card. But your card will still get closed. That's a heck of a deal.

Here is a picture of the offer from American Express's Web site (click to enlarge):

You can read the fine print here (click to enlarge):

You may be wondering why American Express doesn't just close the accounts of these customers, which would save American Express $300. Here's why: the $300 prepaid card is acting as an incentive for the customer to pay down the balance in an expeditious manner. The customer has exactly two months to get that balance paid off; if he or she does, the $300 card is theirs. Not a bad strategy by American Express.

The "we want to help you simplify your finances" language is a joke, of course. But, hey, this is American Express. It has never really been good at this sort of thing.

Anyhow, be on the lookout for the offer. If you receive the offer, be sure to let me know. I'd like to see what kinds of balances are being targeted here.

Here is a direct link to American Express's offer (link).

Related Articles:

Homeowner Affordability and Stability Plan -- Butterworth Style

One of my readers, Heather, has a real-estate blog that I check out from time to time. Her partner, Chris Butterworth, has an interesting blog entry out today. President Obama unveiled his Homeowner Affordability and Stability Plan last week. It doesn't go far enough. Chris Obama, er, Butterworth, though, has a plan that might be worth looking at.

From the blog:

How can we use the government’s willingness to help (and their bazillions of dollars) while still letting a free-market economy run its course? Rather than trying to stave off foreclosures on the front end, I propose the government let the foreclosure process happen, but then help these people on the back end, with the creation of a Federal Real Estate Investment Trust & Property Management Company. (FREITPMC would be a good federal acronym.) Rather than demand banks refinance certain borrowers, the government could buy these houses back from the banks, at today’s foreclosure-depressed prices, and rent them back to the former homeowners.

If you don't like the plan, you can send lots of notes to Chris. I'm sure he'll enjoy them.

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

Observers Say That The "Average" FICO Score Has Most Certainly Dropped In The Past Year

Last week I was going through some of my old blog posts. I do that on a periodic basis. I mostly do it because I'm interested in seeing how some of the stories panned out. Indeed, the headline from today's blog entry comes from a Time Magazine story that I pointed to in January (blog link here). In its story, Time said that even though Fair Isaac had calculated an "average" FICO score a few years ago, observers agreed that the score had "most certainly dropped in the past year." I wondered if that was true. I decided to contact Fair Isaac so that I could find out.

Before getting to my interview, though, let's clear something up first. Fair Isaac does not publish an "average" score, despite Time's use of the word in the story. Where Time writes average, it means median. Besides that faux pas, I was still curious to find out if the number had, in fact, "most certainly dropped" during the past year, as observers claimed.

I had two questions in mind when I contacted Fair Isaac. One, had the median score fallen during the past year, as the economy grounded to a halt? And two, why doesn't Fair Isaac publish an average FICO score?

This is my verbatim question to Fair Isaac: "As far as I know, Fair Isaac has been publishing -- and continues to publish -- a median FICO score of 723. It has been reporting this number for years. Clearly, given the last year, the median can no longer be 723. Or is it? What is the current median FICO score?"

Here's what Craig Watts, public relations director for Fair Isaac, had to say: “The median score is about 720 on [a] FICO scale of 300-850. Generally, the median national score has changed little over time. Fair Isaac does not track it that closely, as we aren't a credit bureau and don't calculate scores for lenders," Watts said. "As context -- we estimate things like the median FICO score and its national distribution using large samples of depersonalized credit reports that each of the three big credit reporting agencies occasionally share with us."

But, given the economic upheaval of the last year, the median can't still be 723, right? "Though there has been a large focus on at-risk consumers since the onset of the recession, the majority of the people in the United States continue to pay bills as agreed. Consequently, when looking at [the] entire distribution, FICO scores are remaining relatively stable," Watts said.

Here's the thing. I realize that Fair Isaac's FICO scoring model has come under attack during the past year. Some experts, according to Time's article, believe that FICO scores "have not proved as effective in ferreting out bad borrowers as many lenders had anticipated." So, when Craig Watts tells me that the majority of people have paid their bills as agreed, and that the distribution of scores has remained relatively stable, I realize that he's protecting and defending the integrity and value of Fair Isaac's scoring system. Still, Watts has always been a straight shooter. I've got no reason to distrust his comment. That said, I recognize the tension (and want my readers to know that I understand it).

Moving on, why hasn't Fair Isaac ever published a mean (or average) FICO score for public consumption? "Fair Isaac is an applied math company and understands how misleading an 'average' figure can be to the public," Watts said. "That's why we have provided the median FICO score to consumers. A median is a number dividing the higher half of a sample from the lower half." Watts then cited a article to drive home his point. It should be noted that Watts was referring to a Wikipedia article that has been edited. The quoted material below appeared in a previous version of an article that no longer includes this example.

The big difference between the median and mean (or average) is illustrated in a simple example. Suppose 19 paupers and 1 billionaire are in a room. Everyone removes all money from their pockets and puts it on a table. Each pauper puts $5 on the table; the billionaire puts $1 billion there. The total is then $1,000,000,095. If that money is divided equally among the 20 persons, each gets $50,000,004.75. That amount is the mean (or "average") amount of money that the 20 persons brought into the room. But the median amount is $5, since one may divide the group into two groups of 10 persons each, and say that everyone in the first group brought in no more than $5, and each person in the second group brought in no less than $5. In a sense, the median is the amount that the typical person brought in. By contrast, the mean (or "average") is not at all typical, since no one present -- pauper or billionaire -- brought in an amount approximating $50,000,004.75.

I agree with Watts. Using the median figure makes sense. By the way, Watts gets bonus points for being the first public relations person to ever send me to a Wikipedia article in an attempt to make a point. That's no small feat, either. I've easily -- easily -- conducted more than one thousand interviews during my career. Craig Watts. Winner.

Finally, even though scores have remained relatively stable, according to Fair Isaac, when does Fair Isaac plan to issue a new median score? "We would like to be in a position to update our estimate of the national median FICO score, but we would first need data samples from all three major credit reporting agencies that we could use for that purpose," Watts said. "We don't know when they will provide us with such samples."

In late 2006, Fair Isaac filed a lawsuit against Equifax, Experian, and TransUnion alleging, among other things, that the agencies -- as it relates to the rollout of their VantageScore product -- are engaging in unfair competition and antitrust violations (see Fair Isaac's press release here). Equifax has since settled (see VantageScore Litigation disclosure). TransUnion and Experian, meanwhile, remain committed to litigating the case. The trial is expected to begin in mid-2009, according to Fair Isaac's most recent quarterly report, which was filed with the Securities and Exchange Commission about two weeks ago.

Given that backdrop, it could be some time before the credit-reporting agencies provide Fair Isaac with the data samples it would need to calculate a new score. For now, the best median score we're going to get is an estimate of "about 720." Read More...

Nigerian Accused In Scheme To Swindle Citibank

I receive Nigerian Scam emails about every three hours. They're all the same. The scam artist is a civil servant who needs my help. He (or she) has access to a boatload of cash, but this person can't take possession of it in his name. That's where I come in.

It turns out that these civil servants (the person who contacts me often works with a group) will share part of the loot with me if I'll become a partner in the deal. After a while, I'll eventually be asked for a relatively small sum of money to help get the ball rolling. I'll also be asked to offer up details about my bank account. The upshot (after I've given cash to these folks a few times) is that I'll be ripped off and the scam artist will be long gone. That's how it works on the consumer level.

Now check out the scam that a Nigerian citizen -- and his conspirators -- pulled on Citibank.

From the New York Times (hat tip Tom):

Rather than trying to dupe an account holder into giving up information, he duped the bank. And instead of swindling a person, he tried to rob a country — of $27 million.

To carry out the elaborate scheme, prosecutors in New York said on Friday, the man, identified as Paul Gabriel Amos, 37, a Nigerian citizen who lived in Singapore, worked with others to create official-looking documents that instructed Citibank to wire the money in two dozen transactions to accounts that Mr. Amos and the others controlled around the world.

The money came from a Citibank account in New York held by the National Bank of Ethiopia, that country’s central bank. Prosecutors said the conspirators, contacted by Citibank to verify the transactions, posed as Ethiopian bank officials and approved the transfers.

Read the rest of the story here (link).

United States Eyes Large Stake In Citi

Looks as though the stock price wasn't lying. Citing people familiar with the situation, the Wall Street Journal is reporting that the United States and Citigroup are in talks that could result in the U.S. owning as much as 40% of Citi's common stock. While the bigger stock position wouldn't cost taxpayers additional money, Citi shareholders would see the value of their stock diluted.

From the Wall Street Journal:

When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions. The potential move at Citigroup would give the government its biggest ownership of a financial-services company since the September bailout of insurer American International Group Inc., which left taxpayers with an 80% stake.

The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

Read the rest of the story here (link).

Friday, February 20, 2009

The Credit Crisis Visualized

Two YouTube videos are making the rounds. In total, they're about 11 minutes long. Watch the videos; give me your thoughts. The videos are described as "short and simple." They are. I'm hoping that the videos, though, will spur discussion here at my blog. Are there any redeeming qualities in the videos? Is it all hogwash? What's missing from the videos?

Video 1 (hat tip Consumerist):

Video 2: (hat tip Consumerist):


Citigroup, Bank of America Spiral Further Downward

Citigroup shares haven't traded this low since 1991. Bank of America, meanwhile, hasn't seen its shares this low since 1984. It would appear that investors are worried that Citi and Bank of America will ultimately be taken over by the U.S. government. Some worry that it could happen as early as this weekend, which is why Citigroup is down 20% and Bank of America is off by nearly 15% this morning.

From Reuters:

"Right now, people are looking at the worst-case scenario, which is either a complete nationalization or Bank of America and Citi having to raise so much common equity that they dilute shareholders. It seems to me either one is a possibility," said Keith Davis, a research analyst at Farr, Miller & Washington.

"There's just so much uncertainty about what's going to happen to these two companies ... No one wants to get involved with these banks," he added.

Bank of America Chairman and Chief Executive Kenneth Lewis told executives at a senior leadership meeting on Thursday that Washington policymakers have assured him that the possibility of nationalizing the bank was not on the table, the Wall Street Journal said, quoting a person at the meeting.

Remember the American Visa Signature card that my reader, azntg, conjured up (link here)? That fictitious credit card is starting to look more and more possible each day, no?

Click for full-size picture.

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

Related Articles:

•Read More Bank of America Stories Here

Thursday, February 19, 2009

"Currently We Have Two Types Of Credit Scores"

See that headline? Someone actually wrote that in a story. The two types, this person wrote, are FICO and VantageScore. Wrong. There are many, many types of scores. Those are just two types. They're not the only two types. Still, I have a point. Some consumers -- as well as the writer who claimed there are only two types of credit scores -- are confused about the various scoring systems in place today.

I've been approached twice this week by law-school colleagues. Both colleagues told me that they pulled their free credit reports at (taking my advice to stay on top of their credit). And both told me that they bought their FICO scores through My response? "No you didn't." You possibly bought one FICO and two VantageScores, I told them. Both of my colleagues looked confused. They didn't know that there was anything other than FICO.

Let's end the confusion. When you get your free credit reports through, you're also offered a chance to buy credit scores at the same time. If you get your Experian and TransUnion reports, you'll be offered the VantageScore. Equifax, meanwhile, will offer you a true FICO score. As I've written before, the VantageScore is a bit player in the scoring business. FICO is the score that most lenders rely on. In other words, use the VantageScore for educational purposes -- and nothing more.

With that out of the way, let's talk about that headline for a second. There are more than two types of credit scores (scoring models). There is the FICO score, which was developed by Fair Isaac. There is the VantageScore, which was created by the three credit bureaus, Equifax, Experian, and TransUnion. There is the PLUS score, which was developed by Experian. There is the TransRisk score, which was developed by TransUnion.

What's more, Fair Isaac has a plethora of scoring products that it offers to lenders under the FICO brand. There is the Auto Industry Option FICO score. There is the Bankcard Industry Option FICO score. There is FICO 08. That's three types of scores right there. In the meantime, Experian and Fair Isaac offer the Experian/Fair Isaac Bankruptcy Score. Additionally, some lenders have internal scoring models -- that are built in house. My point is that there are a lot of credit scores and models out there. There are certainly more than two types.

The writer who thinks there are only two types of scores (story here) is the very same writer who said that FICO scores can be "greatly" lowered if a lender reports that your account was "closed at credit grantor's" request (story link here). Note, since first pointing to this story, the author has edited the story. It no longer says there are only two types of scores; it now says that these are the "main" two scores. Whatever. I wouldn't normally hammer away at a particular writer, but this person is an author and personal-finance expert who gets paid for her advice. She's even written a book. I haven't read Harrine Freeman's book. However, if her stories are indicative of what I might find in the book, I'm probably better off avoiding it altogether.

To be fair to Ms. Freeman, I acknowledge that it's a tough job being a writer. Readers are constantly scrutinizing your work. If you make a mistake, you'll be called on the carpet for it (trust me, I know). Still, if you are going to be a writer -- especially a writer who gets paid -- you need to get it right a lot more than you get it wrong. If you don't, eventually people will stop buying what you're selling.

Things I See While Looking For Credit News

I read lots of stories. Only a small percentage of those stories ever gets mentioned at my blog. The stuff that doesn't make the cut here often ends up on my Twitter feed (link here). Still, I find some stuff that never makes it here or there. And for good reason. Some of it is just a mess.

Take, for instance, this little nugget that I found in a story this morning:

"This will prevent your credit score from being impacted as much. This will prevent the credit card companies from closing your account and reporting this on your credit report. In some cases, credit card companies will report "closed by creditor,” "account closed by credit grantor,” "closed at creditor's request" or something similar. This greatly lowers your credit score (see story here)." Update: Ms. Freeman had the story killed after I pointed to it, so now I am pointing to a cached version of the article.

Say what? The reporter says that a consumer's score will be "greatly" lowered if a creditor closes the account and leaves a notation of "account closed by credit grantor" and the like. Uh, no. That's not how it works. Whether the consumer or the credit grantor closes the account, it doesn't matter. Closed is closed. Somewhere, someone is currently running around telling all of their friends that this particular notation harms credit scores. Sigh.

Bank of America, American Express, Others, May Suffer On Card Defaults

These are the kinds of stories that I like to read. Bloomberg's big-picture story is informative. Card issuers are -- seemingly -- doing some strange things out there to customers. Rates are soaring, limits are being pulled in, etc. When you read the story I pointed to yesterday (here) and you read this Bloomberg story, card-issuer behavior doesn't seem so strange after all.

From Bloomberg:

Charge-offs may reach the “mid-teens” in a worst-case scenario, Moody’s Investors Service analysts led by William Black said in a Feb. 4 note. Issuers would have to bolster their securities to prevent them from hitting early payment-triggers and lower-rated securities could be downgraded, Moody’s said.

Sustained defaults at 10 percent could force a major issuer to seek a rescue or sell its credit-card division, said David Robertson, president of the Nilson Report, the Carpinteria, California-based trade newsletter.

“There’s never been a lender of that scale in this predicament,” Robertson said in an interview. “Portfolios that have been required to sell themselves to a lender because they’ve gone underwater have been far smaller.”

Read the rest of the story here (link).

Wednesday, February 18, 2009

Trouble In Plastic As Alarm Bells On Credit-Card Bonds Go Off

If you want to know why credit-card interest rates continue to rise -- and why the cost of borrowing continues to move higher for card issuers -- then you'll want to read the story written by MarketWatch earlier today. The market for asset-backed debt is terrible. Until this market thaws out, consumers should expect to see rates rise. What's more, card issuers are likely to remain tightfisted with borrowers.

From MarketWatch:

Rising defaults on credit-card payments, fueled by rising unemployment and a bleak economic outlook, are triggering clauses in these securities, underscoring the worsening quality in the underlying credit-card loans. This means the freeze in the asset-backed debt market, in which these securities are bought and sold, is unlikely to thaw soon.

Tepid demand in the asset-backed market, a primary source of funding for credit-card issuers, hurts in two ways. It raises the borrowing costs for these companies, translating into higher rates for consumers. It also forces the companies to keep more loans on their balance sheets, thus locking up funds they could have extended to credit-card users.

In 2008, issuance of credit-card asset-backed securities fell 37% to $56.5 billion from $89.2 billion in 2007, according to Dealogic.

Read the rest of the story here (link).

Loophole Lets Credit Card Rates Rise

David Lazarus is on a little roll over at the Los Angeles Times. Earlier this week he hammered Citibank for mailing a terms-and-conditions disclosure to millions of California residents, which allows Citibank to hike rates to 30% if a customer is late -- even by a day -- on a single payment (link here). Today he's talking about the laws that allow card issuers like Citibank to impose those 30% rates.

From the Los Angeles Times (hat tip LANoir):

First, a defining of terms. The Merriam-Webster dictionary defines "usury" as "the lending of money at exorbitant interest rates" or "an unconscionable or exorbitant rate or amount of interest."

Usury laws vary from state to state. In California, according to Article 15 of the state Constitution, the interest rate for loans "primarily for personal, family or household purposes" can't exceed 10% annually.

Waitaminnit, I hear you saying, my bank just jacked up my credit card rate to nearly 18%. This happened to Los Angeles resident Mary Iroz, who recently heard from Capital One that her annual rate was jumping to 17.9% from 9.9%.

"I pay my bill off monthly, have no late payments and have an excellent credit score," she said.

"If this is being done to my account given my history, I wonder what they are doing to people who have lost their jobs, are relying on their credit cards and are having difficulty making payments."

In letters to cardholders, Capital One blamed the higher rates on "changes in the credit environment."

The story reads like a history lesson. At the end of the story, meanwhile, Lazarus gets a bit too biblical for me, though. Just a heads up.

Read the rest of the story here (link).


White House: Housing Plan Could Help Up to 9 Million People

On Wednesday, the White House laid out plans to help up to nine million people refinance or modify their mortgages. The plan is designed to "give millions of families resigned to financial ruin a chance to rebuild," President Obama said.

From the Wall Street Journal:

The Obama administration's plan has three main elements: an effort to help homeowners refinance; another effort to help stabilize the housing market through a $75 billion initiative aimed at reaching up to four million at-risk homeowners; and a third element that aims to drive down mortgage rates.

"The effects of this crisis have also reverberated across the financial markets," President Obama said. "When the housing market collapsed, so did the availability of credit on which our economy depends."

The administration pledges government money to separately entice homeowners, mortgage companies, and mortgage investors to rework loans. It would help a variety of homeowners, including those whose mortgage is more than the value of their home.

Read the rest of the story here (link).


New Foreclosure Defense: Prove I Owe You

Want to foreclose on me? Prove that I owe you. Produce the documentation that proves you are the mortgage holder that has the power to boot me out of my home. Otherwise, pound sand. More and more, that's exactly what homeowners are saying after they receive their foreclosure notice. Put up or shut up. It's often not easy for the mortgage holder to come up with the proper documentation -- at least not right away.

From the Associated Press (hat tip rhl):

During the real estate frenzy of the past decade, mortgages were sold and resold, bundled into securities and peddled to investors. In many cases, the original note signed by the homeowner was lost, stored away in a distant warehouse or destroyed.

Persuading a judge to compel production of hard-to-find or nonexistent documents can, at the very least, delay foreclosure, buying the homeowner some time and turning up the pressure on the lender to renegotiate the mortgage.

"I'm going to hang on for dear life until they can prove to me it belongs to them," said Lovelace, a 50-year-old divorced mother who owns a $200,000 home in Zephyrhills, near Tampa. "I'll try everything I can because it's all I have left."

I have a lawyer friend who handles these kinds of cases (for homeowners). He tells me that even when the proper paperwork can be produced, that's only half the story. The reality is that the original paperwork -- held by the homeowner -- is often riddled with violations (especially Truth In Lending Act violations). Some of these TILA violations carry severe remedies (including right of rescission). If you know an attorney, and you're in mortgage trouble, I'd recommend that you have the attorney take a look at your documents. There's no telling what kinds of violations he or she might find.

Read the rest of the story here (link).

Beware Of The Text-Message Phishing Scam That's Going Around

A friend sent an email to me last night warning me about a text message that he and his girlfriend recently received. The text message asked him to call a number so that he could reactivate his ATM card. It was a scam. The scam is not new. It's been around. Still, the scam has been dormant for a while, which means that, because people may not be on guard, it could snare new victims. It won't be snaring any of my readers, though.

Here's what the text message looks like (click for full-size photo):

Like so many phishing scams, the criminals still haven't learned how to write. Note that the scammer doesn't understand that it should be "an automated message." Dopes.

Anyhow, the message prompts the cell-phone user to call the number. If the user does, a request is made for the customer's ATM card number and PIN. The same scam is used to get credit-card numbers as well.

It should be noted that my friends, San Diego, California, residents, do not do business with the Point Loma Credit Union (located in San Diego) or the USE Credit Union (also located in San Diego). As a result, this attempt was ineffective. Still, occasionally the scammer does hit pay dirt, naming a bank or credit union that a customer does do business with. Those are the people who are most at risk.

I haven't received any of these text messages, but if I did (and wasn't experienced enough to recognize that it could be a potential scam), I'd still feel uneasy about responding to this message. I'd likely get the direct number -- independently of the cell-phone message -- to the credit union or bank that I do business with and call to find out what's going on. But that's me.

I can't assume that everyone is like me, though. Which is why I am warning you about the text-message scam that's currently making the rounds.

Heads up.


Tuesday, February 17, 2009

Need Help With Debt? Card Companies To Launch Web Site And Toll-Free Number Aimed At Helping Consumers

Beginning Wednesday, consumers will be able to access a toll-free number and log on to a Web site designed to help them dig out from under their burgeoning credit-card debt. The program, called "Help With My Credit," is being funded by Bank of America, Capital One, Citi, Discover, Visa, and MasterCard.

From the Associated Press:

"We want to make sure people understand the assistance and options that are available," said Joe Ganley, a spokesman for Help With My Credit.

Callers to the toll free number, (866) 941-1030, will be given two options.

The first is to be transferred to a customer service representative at their card issuer. This will help bypass confusing phone trees and connect callers with the right person, Ganley said.

For more complicated cases involving multiple credit cards, callers will be referred to local credit counselors.

Depending on the person's situation and the bank, callers might be able to negotiate lower fees, extended payment plans or other agreements, Ganley said. Such options already exist, but the Help With My Credit campaign is intended make more consumers aware of them.

The ONLY way that I'd call this number is if I was already in deep trouble -- and could not get out on my own. I see adverse action written all over this one. This could serve as an early-warning system for card issuers. They get the heads up that a customer is in trouble and take the necessary precaution to reduce risk -- by slashing a customer's credit limit or closing the account.

Read the rest of the AP story here (link).

You can access the Help With My Credit Web site here (link).

You can read the press release announcing the program here (link). Read More...

Companies Turning To Pay Cuts To Avoid More Layoffs

Would you take a pay cut to save your job? A pay cut of 10%? Of 25%? Of 50%?! The Chicago Tribune has an interesting story out this morning. The Trib uses a Chicago company to make its point: layoffs, in some cases, may be the more preferable thing to do (both for the business and the employee).

From the story:

There are, in fact, two sides to the argument. A salary cut is an instant boost to a company's balance sheet, but it's not as effective a money-saver over the long-term savings that a company realizes from ridding itself of an employee's salary and benefits costs.

Also, a layoff allows management to remain in control of who has a job and who doesn't, rather than keeping some employees who possibly aren't pulling their weight. That could further deflate morale among more productive workers.

For a wage cut to work, it's got to be handled just so, experts say. Employees have to know that their shared sacrifice is really saving jobs. And the sacrifice has to be felt throughout the organization: In other words, executives' pay has to be cut, too, and the cuts shouldn't come before the cancellation of any business trips or other expenses that are viewed by some employees as boondoggles.

"It has to be believable," Bewley said. "And it's pretty hard to fool employees. They're taking the orders. They know what's going on in the company."

As for me, I'd likely take a small pay cut to preserve my job. Not sure where my pain threshold is, but I'm guessing that it would be around 20%. Anything beyond that and I'd walk.

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

Credit-Score Pitfalls of the Wealthy

Yes. Credit scores, believe it or not, matter even when you're rich. The Wall Street Journal has a story that drives home the point. Even if you have a lot of money, credit still matters. Late payments and reckless habits can come back to haunt anyone -- including the rich.

From the Journal:

The credit crisis has raised the bar for people of all economic classes. Everyone needs higher scores now to qualify for loans and keep the cost of borrowing down.

"We think the limit is at least 760 to qualify for the best rates," says Scott A. Beaudin, a financial adviser with offices in Burlington, Vt., and Atlanta, Ga., who likes his clients to always be "credit ready."

"People don't know how to build credit, and they don't know how to keep it," he says.

And ignorance isn't bliss when applying for a mortgage or buying insurance.

Mr. Beaudin says one client, who plans this year to buy some property, was shocked to learn his credit score was only 740 despite a $1 million income. Fortunately, the number shot up by 60 points after incorrect information about a family member was removed from his credit report.

For the most part, the Wall Street Journal message is good; unfortunately, there were several misstatements and errors that detracted from the overall message of the story. Indeed, I was distracted by several comments the author made.

For example, the author said that 35% of the FICO score is based on payment history (it is); 30% is based on utilization (true); 15% is based on length of credit history (yep); and the "remaining" 10% is based on credit mix. Of course, that only comes up to 90% of the score. The author forgot to mention the other 10%, which is "new credit." New credit consists of recent inquiries, time since most recent inquiry, number of recent accounts, proportion of recent accounts by type, and time since recent account opening by type of account. An editor should have caught this.

The author also referred to Fair Isaac's recent scoring tweak (FICO 08). The new model is more sensitive to high utilization while a missed payment doesn't hurt as much. That's true. What the author should have explained, though, is that FICO 08 is being used by a single credit reporting agency (TransUnion). What's more, even though FICO 08 is now available, most lenders won't adopt that score for years. Therefore, people should ignore the comments about the new scoring model -- at least for now.

The reporter also says that employers use FICO scores for hiring purposes. That's not so. Employers use credit reports -- not scores -- for hiring purposes.

In the "Improving Your Score" portion of the story, we're told that we should not transfer balances to other cards unless the "interest rate is significantly lower" than the debt we plan to transfer. I have no idea what that has to do with improving your score. Fact is, a balance transfer could lift or lower your score -- depending on the credit limits involved. Interest rates have nothing to do with the score; not sure why that statement is included in that part of the story.

When talking about the preferred amount of credit utilization, the reporter uses the word "balance" when she means "limit." This is her sentence: "If you don't pay off your card debt every month, pay it down to less than half the maximum available balance." She meant credit limit where she said "maximum balance." An editor should have caught this, too. Anyhow, I'd advise that borrowers get their utilization ratio to levels that are below 30%. "Less than half" of the credit limit isn't good enough.

You'll also notice that the reporter cited advisers who recommend that the affluent use their credit cards at least once a year (and then pay it off immediately). Not sure who these advisers are, but clearly they haven't been paying attention. Using the card once a year is a recipe for account closure. A better plan would be to use the card at least once a quarter (and pay the balance in full).

Another nit: the reporter says that a consumer's score can be hurt when multiple lenders request credit reports for mortgages and auto loans. The reporter doesn't understand how mortgage and auto-loan inquiries are handled by FICO. First, the score ignores all mortgage and auto inquiries made during the 30 days prior to credit scoring. Moreover, "the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score," according to the Web site. For older versions of the FICO formula, the shopping period is reduced to a span of 14 days. Newer scoring models use a shopping period that spans 45 days.

Finally, at the very end of the story, the reporter admonishes people to avoid using credit cards for groceries and other payments (purchases?) if there are plans to seek credit in the near future. To be clear, the reporter is saying that a person getting ready to shop for a loan should not use credit cards at all. We don't want unnecessary balances showing up on our credit reports right before we apply for big-ticket items.

Now that I've cleared that up, you can read the rest of the story here (link). Read More...