Tuesday, March 31, 2009

Senate Panel Approves Bill Limiting Credit-Card Rates

A Senate panel committee approved a bill today that would limit credit-card rates. The panel's vote, though, was close. It passed narrowly, 12-11 -- with every Republican voting against it. The bill now heads to the full Senate. The House Financial Services Committee will vote on its version of the legislation tomorrow.

From Bloomberg:

Senate Banking Committee Chairman Christopher Dodd said the measure was needed to protect consumers from having their interest rates raised on previous balances, unless certain conditions are met. The legislation would prevent credit-card companies from unilateral changes to the terms of an agreement.

The bill, known as the “credit card bill of rights,” also would require the signature of a parent for a borrower under age 21, unless there’s proof of independent income or completion of a financial education course. Universities that forge marketing deals with card companies would be subject to the rule.

“The list of troubling credit-card practices is as lengthy as it is disturbing,” said Dodd, a Connecticut Democrat. The measure passed on a 12-11 vote, with all the panel’s Republicans opposing it. The bill now goes to the full Senate. The House Financial Services Committee has scheduled a vote on its version of the legislation tomorrow.

Read the rest of the story here (link).

How I Gather News And Operate GlobCredit.com

This blog entry is prompted by a reader who posted a comment early this morning at GlobCredit.com. In that comment, the reader asked me why I did not acknowledge a Washington Post article or a post over at an online forum when I published my story yesterday about American Express (see comment here). The reader's point is that, if my story was prompted by outside sources, I should have acknowledged them. In other words, I should have given credit where credit was due. Let me explain why I did not credit either source.

Many of my stories are reported and written well before they ever get published on the site. Although my story about the change in American Express's membership rewards policy appeared on my site on Monday (story link here), I started working on that story on Sunday morning. A reader tipped me off to possible changes in American Express's policy. I did a quick search on the Internet to see if anyone had already written a story about a change. I did not find anything. I immediately shot a note (an email) to American Express's Desiree Fish -- an American Express spokeswoman that I have access to -- on Sunday morning.

I'm not sure how most bloggers report the news, but that's how it's done here. You get a tip from a source or a reader and you see if there is any truth to what they're telling you. Sometimes you nail a story down quickly; other times you do not. Most of the time, though, there is no story at all. In this particular situation, American Express did not get back to me for nearly 24 hours. That's not surprising. I sent my inquiry over the weekend. As for my reader's suggestion that I should have given a tip of the cap to the author who posted a story about American Express's rewards policy at creditboards, from where I allegedly "gleaned [the] info from," I most assuredly WILL NOT be giving that person a tip of the hat. That person posted a link on Sunday night -- well after I had already started my news gathering.

Here at GlobCredit.com I imagine that 95% of the stuff I blog about is in response to something that someone else has already written. I write an introductory paragraph, setting up the blog entry, and then I provide an excerpt from the story that I am blogging about. I then provide a link to the original story. It doesn't get any easier than that. It's the simplest kind of blog post that I do here. (Here's an example -- link.) If the story I point to is prompted by a reader, I give a tip of the hat to the reader. (See examples of that here, here, here, here, and here.)

Meanwhile, sometimes I do find stuff at online forums. When I do, I am diligent about giving a tip of the cap to those sites. (See hat tips here, here, here, here and here.) If my inspiration for the American Express story had come from the author at creditboards, I would have given yet another tip of the cap to the site (as I always do).

The more difficult thing that I do here is write original stories. They take more time and they require more homework. Take this American Express story, for instance. I had to formulate questions for American Express. I had to take the quotes that I got directly from American Express and weave my own story around those quotes. Often, it takes more than one attempt to get the story nailed down. My original questions -- and subsequent responses -- often result in more questions. That back and forth is very common. And it's time consuming. Given my busy schedule these days, I have been pointing to a lot more stories written by others. I don't have a lot of free time to create my own. You can see why.

As I said earlier, many potential stories that readers and sources give me the heads up on turn out to be nothing at all. Let me give you an example of that. About two weeks ago, a reader sent me a note saying that JPMorgan Chase may be removing all of its credit card applications from Chase.com. If true, that would have been a great story. Since Chase.com had removed all of its business cards from Chase.com (see story here), I did not discount the possibility that Chase might yank all of its cards -- even though I thought the possibility was remote. I kicked tires on that story for several days. I talked with four separate sources, all of whom told me that there was no truth to it. End result? No story. That's the kind of stuff I do here at GlobCredit.com. I do a lot of tire kicking. Unfortunately, most of the tire kicking results in non stories.

That's not to say that tire kicking is a total waste of time. It absolutely isn't. I have broken plenty of stories here at the site -- all of which required a lot of tire kicking. (See stories here, here, here, here, here, and here.)

I try to keep the site fresh. I try to point to stories that I think my readers will be interested in. I, in a nutshell, expend a lot of time trying to make sure that my readers think GlobCredit.com is worth visiting.

My site is a collaborative work. It doesn't work if my readers aren't tipping me off to news stories that are interesting. It doesn't work if I don't create stories that I write myself. It doesn't work if I fail to acknowledge the readers who tip me off to stuff I blog about. It doesn't work if I fail to acknowledge reporters and authors who write the source material that I point to.

The site also doesn't work well when I have to waste my time (and yours) writing stories like this. My time, and yours, would be better spent reading about credit stories that are interesting.

In the meantime, I have not been able to track down that Washington Post story that my reader says first "brought this (American Express story) to the public's attention." If someone has it, please post a link to it.

Meanwhile, I need to get back to work. I just received a tip that Chase.com is changing its policy on WaMu credit-limit allocations. The rumor is that Chase sent out a corporate communication on Friday. Credit-limit combinations can only take place if the cards are related to the same originating bank. Therefore, if the rumor is true, a WaMu card could no longer be combined with a Chase card. If that turns out to be the case, you'll see a story about it here later today. If it's not true, then it's just another rumor that turned out to be nothing at all.

Let the tire kicking begin.

UPDATE: I was unable to confirm the WaMu/Chase rumor. Chalk this one up as another non story.

Monday, March 30, 2009

American Express Changes Its Membership Rewards Policy -- Will Give Canceled Customers 90 Days To Redeem Rewards

American Express's Membership Rewards policy has changed. The changes by New York-based American Express will be detailed in a letter that customers should be receiving soon. Instead of cardmembers forfeiting all of their points, which has always been the policy at American Express, canceled cardmembers will have up to 90 days to redeem their rewards.

American Express is quick to point out, however, that cardmembers must be in "good standing" at the time of the account closure. What does good standing mean? An American Express spokeswoman, Desiree C. Fish, says that American Express defines "good standing" this way: "We look at a number of factors to define good standing including that the account is current and the cardmember hasn't filed for bankruptcy."

Until now, cardmembers who got their accounts closed had very little recourse. American Express's previous policy was simple. If we cancel you, for any reason, all of your accumulated membership rewards points are forfeited. "If for any reason we cancel any Linked Account (including because of your death, bankruptcy or insolvency), any points accrued in your program account will be forfeited," according to American Express's previous membership rewards disclosure (see rule here). That was especially harsh for long-standing customers who had racked up hundreds of thousands of rewards points.

So why the change in policy? "Our Membership Rewards terms and conditions state that if for any reason we cancel your card, any points accrued in your program account will be forfeited," Fish says. "However, given the economic environment, we have made the decision to make accommodations for cardmembers who we have canceled for risk reasons, but whose accounts were in good standing." (Emphasis mine.)

The new policy covers rewards points. Does the new policy cover cash-rebate cards, too? "We are also making accommodations for any of these cardmembers canceled in good standing. We are providing the cash rebate as a statement credit, or if their rebate is larger than their account balance we will issue a check for the cash rebate amount," Fish says. Remember the woman who forfeited her $500 Costco rebate check (link here)? I'd give American Express a call if I was her.

So, to recap: "If American Express cancels an account that is in good standing, we allow those cardmembers to redeem their rewards within 90 days of the cancellation date as long as their account remains current," Fish says. Additionally, says Fish, "cardmembers who were canceled in good standing and want to redeem their points should call American Express Membership Rewards customer service to do so."

Finally, what about customers who may have been canceled not so recently -- not within the past 90 days? "Any cardmember who was canceled in good standing in the past can still contact American Express Membership Rewards customer service and we will review the request," Fish told me.

In other words, if your account was canceled well beyond 90 days ago, you may -- or may not -- get your rewards restored. Still, it's worth a shot.

Related Articles:

•Read More American Express Stories Here

Despite Credit-Limit Reductions, FICO High Achievers Continue To Fare Well

A recent study conducted by FICO shows that credit-limit reductions are not hurting consumers with high credit scores. To manage risk, lenders have been reining in available credit, which isn't surprising. What is surprising, though, is that -- even though lenders have cut limits for those who are considered low risk -- scores have actually trended upward, according to FICO.

FICO's research, which looked at data from April 2008 to October 2008, focused exclusively on the impact that credit-limit reductions or account closures had on consumers with no "recent risk triggers" on their credit reports. A risk trigger was defined as a late payment, collection, or public record. While FICO confined its study to those three risk triggers, I was interested in some of the additional risk triggers that FICO said lenders look for. Indeed, FICO says that some risk factors that lenders look at include excessive cash advances, overdrawing checking accounts or bouncing checks, and unemployment benefits that consumers collect. Those factors suggest that lenders are going well beyond the credit report to assess risk. In other words, heads up.

Meanwhile, the study's findings also shed some light on why FICO recently decided that it would not tweak its scoring model to account for the number of credit-limit reductions that consumers have recently experienced (see story here). According to FICO, only 16% of the United States population experienced a reduction in total revolving credit from April 2008 to October 2008. Some five percent had a risk trigger; the remaining 11% did not. And remember: the no-risk-trigger group actually enjoyed a score increase during the study period.

Here are some of FICO's findings:

  • Lenders targeted higher scoring population — Our analysis of data from April 2008 and October 2008 shows that when lenders reduced the amount of credit available to people whose credit reports had no recent risk triggers, lenders were targeting borrowers with inactive or low-balance card accounts. On average, this population already tended to be very low-risk. Their median FICO score was 770, and their card accounts typically had: a very low balance, low credit-utilization ratio (see FICO's utilization primer here), very few if any missed payments, and a long credit history. As a result, small reductions in total revolving credit had minimal effect on their FICO scores.

  • For borrowers in the no-risk-triggers segment who received a reduction in total revolving credit, the median FICO score actually increased from 768 in April to 770 in October 2008. Contributing to this positive score change were lender updates to their credit reports which reflected good credit habits such as paying bills on time, paying down revolving debt, and taking on new credit sparingly.

  • The median FICO score for the national population did not change between April 2008 and October 2008. (Based on Equifax data alone, the national median FICO score remained 713.)

  • Credit utilization rate changed little — On average, lenders reduced the total revolving credit available to a borrower in this population (no risk triggers) by $2,200, a relatively small amount. That is approximately 5 percent of the average total revolving credit ($44,000) available to this population during the six-month period.

Let me point out one thing. That median Equifax FICO score of 713 is interesting. You'll recall that I recently interviewed Craig Watts, public relations director for FICO. I was told that the median score had fallen to about 720 -- down slightly from FICO's most recent figure of 723. "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," FICO's Craig Watts told me at the time (story link here).

If Equifax's median FICO score was 713 in at the end of October, then what are the median FICO scores at Experian and TransUnion? Equifax's recent median score suggests that median scores at TransUnion and Experian must be significantly higher. Let's just say that I am scratching my head over this one. Scores could be higher at Experian and TransUnion, sure, but would they be high enough to bring the median FICO score for the general population -- using all three bureaus -- to 720? (If one of my readers has an explanation, feel free to offer it in the comments section. Thanks.)

You can view all of the findings of FICO's study here (link). Read More...

Friday, March 27, 2009

JPMorgan Chase To Refund Account Fees For 400,000 Credit-Card Accounts (Update2 -- Adds New York Attorney General Angle)

On Friday JPMorgan Chase said that it would refund fees to 400,000 cardmembers who were assessed a maintenance fee of $10 a month, according to a Dow Jones Newswires story. The fee, which was imposed back in January, targeted slow-paying customers who had low promotional interest rates. In addition to the monthly fee imposed in January, Chase also lifted monthly minimums to 5% of the balance, up from 2%. Today's announcement only pertains to the monthly fee. The 5% minimum payment will remain in effect.

From Dow Jones:

But come April, Chase will double back on assessing the monthly service charges, and even refund previous monthly charges it posted to customers' accounts.

"Beginning in April, and based on customer feedback, Chase will stop charging the $10 monthly service charge and credit the service charges billed to date," a Chase spokeswoman, Stephanie Jacobson, told Dow Jones Newswires.

Jacobson said the decision to assess account fees at the rate of $120 a year applied to "less than one-half of one percent of our customers." The credit card accounts in question, she said, carry low promotional interest rates and are tied to "a small percentage of customers that have made little progress in paying down these loans.

"Our desire is to have these balances paid back in a reasonable period of time," Jacobson said. "The minimum payment due will remain the 5% of their new balance."

Read the entire story here (link).

UPDATE1: This is not in the story, but I figure my readers would want to know about this: Chase had every intention -- even after balances were paid off -- to keep assessing that $10 maintenance fee month after month. In other words, the $10 fee was going to remain forever -- with or without a balance. This was not a temporary fee that would have been assessed only while the balance existed. I imagine some people were going to be upset when they figured that out.

Chase's decision to lift the fees, though, makes that issue moot now. But at least you have some idea of what Chase was up to with this fee. I imagine most customers would have closed the account once they realized that there would be an annual fee of $120 in perpetuity. Probably exactly what Chase had in mind, too. Grab as much coin as it could -- while there was a balance -- and then get the undesirable customer to close the account after the balance is paid off.

UPDATE2: It turns out that Chase -- in part -- caved in because of pressure from New York Attorney General Andrew M. Cuomo's office. See press release here (link).

Related Articles:

Chase Adds Fee For Low-Rate Credit Cards

Change of Terms in Your Credit Card Agreement -- How Do You Reject The New Terms?

Have You Been Sending Unsolicited Ideas To Bank Of America?

Given my readership, I just know that one of you has been sending Bank of America unsolicited ideas. Fess up. Which one of you is doing it? Apparently, it's gotten to the point where Bank of America has posted an "Unsolicited Idea Submission Policy" page (hat tip Josh). The sole purpose for publicizing its policy, according to Bank of America, "is to avoid potential misunderstandings or disputes when Bank of America’s products or marketing efforts might seem similar to ideas submitted to the Bank." Given the general unhappiness of the American people -- especially as it relates to the banking industry -- I don't think Bank of America should worry too much. Unless, of course, "Kiss my ass, Bank of America" is something that it could weave into a marketing campaign.

No. I doubt there will be too many ideas or product names that overlap. But you never know. My readers are a creative bunch. Something tells me that, in the comments section of this story, they'll be able to come up with a host of wonderful ideas for Bank of America. I can only imagine some of the slogans, product names, and marketing ideas they'll generate. (Big grin.)

And don't worry, Bank of America, I've already put readers on notice. Their wonderful ideas, according to your disclosure, won't be accepted or considered by you or your affiliates -- unless something catches your fancy. Indeed, the second part of Bank of America's disclosure says that unsolicited ideas become the property of the bank. What's more, those ideas can be used for any purpose whatsoever. And if Bank of America makes some money from one of your ideas, too bad. In other words, Bank of America doesn't consider or accept your ideas but, just in case you send something really good, it reserves the right to use it.

The disclosure:

Dear readers of mine, do you have any ideas -- unsolicited or otherwise -- for Bank of America? Any slogans or marketing ideas that Bank of America might be interested in? If you've got them, I'd like to hear them. And if there are enough of them, I'll be sure to forward them to Bank of America as well -- even though, dang, we won't receive any compensation.

Here's a link to the unsolicited-idea policy page (link).

Related Articles:

•Read More Bank of America Stories Here

Mexico Rebels At Credit Card Rates, Mulls Limits

The credit-card industry is going to take a hit in Mexico. Consumers cannot pay their bills. Interest rates of more than 100% (on some cards) are finally taking their toll. At the core, the situation isn't a whole lot different than it is in the United States. Card issuers in Mexico issued a lot of cards to people who -- if they ever did -- no longer have the capacity to repay.

From the Associated Press (hat tip Don in SW OH):

Many now regret it: With interest rates, commissions and fees topping 100 percent a year, delinquencies have soared as the global economic crisis boosts unemployment and leads banks to raise rates even more.

"There's no way out," said Manuel Correa, a Mexico City messenger who saw his minimum monthly payments quadruple to 1,500 pesos, or $105, when he missed a few after losing his previous job. That amount is a third of his income.

"I'd have to choose between eating, paying the rent or paying the bank," he said. He chose to eat.

A bailout is looming. I don't see how Mexico avoids it. One of the largest card issuers in Mexico, by the way, is Banamex, a subsidiary of Citigroup. If Citigroup ends up needing a bailout in Mexico, we can call it a double dipper (since it is already being bailed out in the United States).

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

Related Article:

Wal-Mart de Mexico Plans 100,000 Credit Cards by Year-End -- With Interest Rates of 59% to 75% Read More...

Thursday, March 26, 2009

Consumers Vent On Overdraft Fees

The Wall Street Journal has a story this morning on overdraft fees. Apparently consumers are irate about the fees associated with said overdrafts. Shocker. The Fed is looking into whether the banks' handling of overdraft fees needs to be overhauled. Public comment ends at the end of March.

From the Journal:

"It's deeply unfair," said Mr. Shriver, 43 years old, when reached by telephone. He wrote to the Fed in exasperation after a series of small purchases he made last month racked up $525 in overdraft fees. "I'm mad at my bank but I'm also mad at the system," he said. "There needs to be more oversight so these fees aren't so extortionary."

Most banks and credit unions automatically sign customers up for what they call overdraft "protection," that allows -- rather than blocks -- purchases and ATM withdrawals that overdraw their bank accounts. For this service, the institutions charge customers fees ranging from $10 to $38 per overdraft, according to a study released last November by the Federal Deposit Insurance Corp.

Read the rest of the story here (link).

Liz Pulliam Weston -- at her blog -- has a take on this as well (link here). Read More...

When It Comes To Credit-Card Utilization, Don't Listen To The Experts

Many experts suggest that consumers keep their credit-card utilization ratios at 30% or below (some even suggest that 50% or lower is fine). I think that's too high. My anecdotal evidence, using only my experience, suggests that a better utilization ratio is 10% or lower. What's more, my recent experience also shows just how sensitive FICO's utilization calculation can be.

I recently allowed one of my credit cards to report a balance of nearly $900. The balance represented a utilization ratio of 11% on this particular card. (For those who don't know, utilization is the amount of credit that you are currently using relative to your credit limit. If your credit limit is $5,000, and you're using $1,000 of that limit, then you're using 20% of your available credit. Thus, your utilization is 20%.) When my card reported this balance to the credit-reporting agencies, I received an alert from FICO Score Watch (full disclosure: I have a financial relationship with myFICO.com; I get a commission if you use one of the FICO ads on my site). This $900 balance dinged my score by nearly 30 points. My Equifax FICO score plunged from 787 to 760. Yikes. While I'll regain those lost points when my new balance -- consisting of purchases for the past month (along with the $900 payment I made) -- gets reported to the credit-reporting agencies during the next five days or so, I should have been more attentive to my utilization ratio. And don't forget: utilization is calculated per card -- and on all cards combined. Don't let either get above 10%.

Still, does anyone think that losing 27 points is warranted? For a $900 balance? On a single card? Did I really become that much more risky? And what might have happened if I allowed my balance to represent 30% of my credit limit? I can only imagine what the impact might have been.

For the record, I think that it's silly that FICO thought that my 11% utilization and $900 balance on a single credit card was worth nearly 30 points. But it is what it is. FICO is sensitive when it comes to utilization. I've always known that. I'm not here to cry about it -- especially since I'll regain the points when my utilization dips below 10% again. I'm merely pointing out my experience so that readers understand just how important it is to keep utilization low.

By the way, I used the word "allowed" earlier in the story. I used that term because I don't permit my utilization ratios to get above 10% on any card (except this time). Even though I pay my credit-card balances in full, I still -- like everyone else -- need to watch the amount of credit I use each month. If anyone wonders why I often pay my balances in full before the statement closes, let this experience serve as a reminder.

Experts recommend credit-card utilization ratios of 30% or lower. For me, that's too high. It should be too high for you as well. My readers would be better served by keeping that number at 10% or below instead.

Subprime Mortgage Crisis: Failure to Predict Failure

Researchers at three business schools say that statistical models that were used to predict loan defaults didn't work because these models relied too heavily on hard information, such as credit scores and loan-to-value ratios. Soft information, such as job security, upcoming expenses, and behavior, would have been more useful. The incentive to collect more information, though, was de-emphasized because of the high-securitization period that we were living in. Indeed, lenders, because they were packaging these loans and selling them to third parties, had no reason to scrutinize borrowers.

From the press release:

Rajan and colleagues Amit Seru of the University of Chicago and Vikrant Vig of the London Business School examined data on securitized subprime loans issued from 1997 to 2006. They found that in a high-securitization period -- a lending environment where greater numbers of loans are sold to third parties -- interest rates on new loans relied increasingly on hard information about borrowers (e.g., FICO scores and loan-to-value ratios) rather than more personalized soft information.

However, statistical models designed for low-securitization periods -- where the original lender holds the loan -- rely on more personal information. Those models break down when applied in a high-securitization period, the research shows. The result is that defaults are underpredicted for borrowers for whom soft information is more valuable, such as those with little documentation, low FICO scores and high loan-to-value ratios.

The researchers say lenders' incentives to collect soft information changed because of the tremendous growth in securitization in the subprime sector after 2000. When a lender sells the loan to a third party, the original lender no longer bears the risk of default on the loan.

You can read the rest of the press release here (link).

If you're interested in the study, you can find it by clicking the link at the bottom of the press release.

Wednesday, March 25, 2009

Late On A Car Loan? Meet The Disabler

Because I've never been late on a car payment, I guess I don't mind. I'm talking about technology that's used to disable cars if a consumer doesn't make a timely payment. Think of it as a kill switch for auto dealers. If you don't make your car payment on time, your dealer has the ability to render your vehicle immobile.

From the Wall Street Journal:

Customers have at best mixed feelings about the systems. "Sometimes I tell our friends our car is under house arrest," says Michelle Gibbs, a 36-year-old resident of Blue Springs, Mo. Although the remote device on her silver Honda Accord has never actually shut down the car, she compares it to "those ankle bracelets they put on you when you've done something bad."

At the same time, she says, the remote kill switch in her car seems like a reasonable price to pay when she doesn't think she could qualify for a car loan elsewhere. The device's persistent reminders, she says, have kept her from missing payment deadlines on a number of occasions. "For the most part we've liked it, because it has helped us build better credit," Ms. Gibbs says.

But consumer-advocacy groups such as the Consumer Federation of America say the devices represent a disturbing new layer of surveillance and could potentially endanger drivers if the devices leave them stranded when the cars get shut down.

Read the rest of the story here (link).

Tuesday, March 24, 2009

Tip Of The Day: American Express Offering Double Membership Rewards Points

American Express is offering its cardmembers double membership rewards points on gas and groceries. You can sign up by visiting American Express's Web site or by calling a phone number and entering a code. The promotion runs from March 15, 2009, through March 15, 2010. There is a $1,000 spend limit each month.

Cardmembers and their authorized users can earn double points on the following consumer cards: the American Express Card, the American Express Rewards Green Card, the American Express Preferred Rewards Green Card, the American Express Gold Card, the American Express Rewards Gold Card, the American Express Preferred Rewards Gold Card, the American Express Rewards Plus Gold Card, the Platinum Card, and the Centurion Black Card.

Full details of the offer can be found here.

Related Articles:

•Read More American Express Stories Here

Senate To Consider Relief For Credit Card Holders

A Senate Judiciary subcommittee is hearing arguments this morning on a bill that would provide more immediate relief for debt-ridden credit-card customers who have high interest rates. The bill would hasten the implementation of regulations that are supposed to go into effect in July 2010.

From the Washington Post:

Sponsors say the bill gives consumers with high interest rates and on the verge of financial collapse a powerful tool to negotiate a lower rate with their credit card companies. Under the bill, lenders with high interest rates would get nothing if their customers file for bankruptcy.

The bill would apply to rates higher than 15 percent plus the current yield on the 30-year treasury bond. That rate currently is 18.5 percent.

Read that closely. This bill, if adopted, would hammer card issuers if a customer with an interest above 18.5% files for bankruptcy.

From the article:

"The added risk that such products will not be recoverable in bankruptcy will simply result in their withdrawing from the market," John said. "The products will become too risky for reputable financial institutions to offer.

"Certain other reputable lenders will continue to offer products to these borrowers, and may even lower their fees," he added. "But they will increase the requirements to qualify for such loans in a way that will reduce the number of potential customers."

I think it's tough to argue with David C. John on this one. As it relates to this particular bill, I say this to consumers: be careful what you wish for. This one could sting.

Read the rest of the article here (link).

Do-It-Yourself Balance Transfer May Come With A Cost

A site that I visit from time to time -- the FiveCentNickel -- wrote a story last week about do-it-yourself balance transfers. Here's how it works: a consumer buys $1 coins from the United States Mint with a credit card that has a 0% purchase interest rate (or low interest rate). The consumer then deposits the coins in the bank and uses them to pay off higher-interest-rate debt. Because the transaction is recorded as a purchase -- and not a cash advance or balance transfer -- the consumer gets the equivalent of a fee-free balance transfer or cash advance.

Today's blog entry isn't about whether I think this kind of DIY balance transfer is right or wrong (that's your business). Instead, I want readers to know that they might be sending a negative message to their card issuers if they decide to take advantage of this kind of DIY balance transfer (story link to FiveCentNickel).

I've always considered this a loophole in the system. Indeed, the consumer who takes advantage of this fee-free balance transfer or cash advance is doing so without having to pay a fee or having to pay the money back at a cash-advance interest rate (which is typically north of 20%). While FiveCentNickel suggested doing this with credit cards that offer promotional purchase rates of 0%, some consumers do these purchases on low-interest-rate credit cards as well. Someone who doesn't have a balance transfer offer -- and doesn't have a promotional rate on purchases -- can still benefit from the purchase of coins from the U.S. Mint, especially if his or her everyday purchase rate is low enough. You'd be surprised at how many people are actually doing this.

I figure that card issuers will eventually crack down on this loophole. In the meantime, some consumers are taking advantage of the situation. As more and more consumers do these DIY balance transfers, though, don't be surprised if lenders start to scrutinize these purchases more closely.

When I think of lenders that would get skittish about these kinds of purchases, American Express comes to mind immediately. This is a company that has a panoply of risk-management tools at its disposal. Indeed, this is the card issuer that, until very recently, was using shopping habits to assign credit limits (see story here). It monitors transactions like a hawk. Ask my reader who did a PayPal transaction back in October using an American Express card (see story here). I'd be willing to bet that the U.S. Mint strategy will eventually bring the kind of negative attention that the PayPal strategy ultimately invited.

Since I consider American Express the standard by which all other card issuers are measured when it comes to risk-management techniques, I thought I'd get its take on the situation. "We look at large, out-of-pattern purchases because they can indicate higher risk of fraud. Depending on the situation, we may want to talk to the customer before approving the charge," Susan Korchak, an American Express spokesperson, told me. "We treat purchases of coins as a purchase rather than a cash advance, but if it's clear a customer's buying in bulk for some other reason, we will look into it." I didn't ask Korchak what "look into it" means, but given American Express's history let's assume it's not something positive -- unless it's something positively negative.

My query, by the way, did not tip American Express off to this coin-purchase strategy. It was already aware that customers were engaging in this practice. It's a safe bet that other card issuers are aware of it, too.

The FiveCentNickel is a personal-finance site that tries to give its readers an edge. The site's author, "Nickel," a good guy, was trying to help his readers -- those who are carrying credit-card debt -- with the story on DIY balance transfers.

Still, let my message serve as a cautionary companion to FiveCentNickel's DIY story. It's a jungle out there. Be careful.

Monday, March 23, 2009

Credit Scores May Be On The Rise, But Will it Last?

That's the headline over at The Wallet, a Wall Street Journal blog that I read daily. According to the story, the average credit score rose slightly in February -- to 678 from 676 in January. The Wallet was citing the U.S. Credit Score Climate Report, which is published by Credit Karma, a company that provides free credit scores at its Web site.

From the story:

The U.S. Credit Score Climate Report, which included 24,000 Credit Karma users, found the average score of those surveyed rose slightly in February, to 678 from 676 in January.

Particularly encouraging, the percentage of the participants seeing an increase in their score rose — to 39% in February from 37% in January — while the percentage seeing a drop fell — to 29% from 31%.

But don’t rising unemployment and shrinking credit lines suggest scores should plunge? Yes, probably. But these same factors have made consumers wary of taking on more debt and have prompted many to save money and curb card use.

“The effect of lower spending and credit is dwarfing the effect of reduced credit lines and reduced credit in the economy,” says Kenneth Lin of CreditKarma.com, which tracks the credit scores of over 250,000 users. “The more dominant effect is savings and less reliance on credit.”

My questions: where do these scores come from? Are these FICO scores? Are they the PLUS scores produced by Experian? I couldn't find the source of these scores on Credit Karma's Web site (though it may be there). After doing some digging, I finally figured out that Credit Karma uses TransUnion's TransRisk score (see interview with CEO of Credit Karma here. These are scores that lenders generally do not use. In fact, if anyone knows of a lender that uses TransUnion's TransRisk score, please let me know. For the record, most lenders -- some 90% -- use the score developed by FICO. Full disclosure: I have a financial relationship with FICO; if you buy a score using a link from my blog, I get a commission from the sale.

While I found The Wallet's story interesting, it would have been useful if it had mentioned that the credit scores highlighted in the story are those that can and should be ignored by consumers. I wish the Wallet would have told me why I need to care about Credit Karma's latest data.

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

More Than You Ever Wanted To Know: Credit Card Statistics, Industry Facts, Debt Statistics

At last tally, how many credit cards were in circulation? Which issuer had the most cards outstanding? Which has extended the most credit? Which card issuer sees the most debit-card use? Of the two, Visa and MasterCard, which has the largest presence? CreditCards.com has compiled a list of statistics and facts that will make any trivia buff smile.

From the list:

According to data from the U.S. Census Bureau, there were 159 million credit cardholders in the United States in 2000, 173 million in 2006, and that number is projected to grow to 181 million Americans by 2010. (Source: Census Bureau)

In 2006, the United States Census Bureau determined that there were nearly 1.5 billion credit cards in use in the U.S. A stack of all those credit cards would reach more than 70 miles into space -- and be almost as tall as 13 Mount Everests. (Source: NY Times, Feb. 23, 2009)

In 2007, 73.0 percent of U.S. families had credit cards in 2007. That's a slight drop from 74.9 percent with cards in 2004. (Source: Federal Reserve Survey of Consumer Finances, February 2009)

As of Septembr 30, 2008, there were 339 million Visa credit cards and 314 million Visa debit cards in circulation in the United States. (Source: Visa.com)

As of December 31, 2008, there were 263 million MasterCard credit cards and 126 million MasterCard debit cards in circulation in the United States. (Source: MasterCard.com)

As of December 31, 2008, there were 54 million American Express credit cards in circulation in the United States. (Source: Nilson Report, February 2009)

As of December 31, 2008, there were 57.1 million Discover credit cards in circulation in the United States. (Source: Nilson Report, February 2009)

Two-thirds of survey respondents said they would consider switching their primary credit card if a better feature were offered. (Source: ComScore, September 2008)

76 percent of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. Additionally, they will amass almost $20,000 in student debt. (Source: Nellie Mae, "Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends")

That's just a fraction of the list.

Head to CreditCards.com and check out the rest of it (link here).

Friday, March 20, 2009

Should You Stop Paying Down Your Credit Cards? Liz Pulliam Weston Weighs In

Yesterday I posted a story about paying minimums on credit cards -- and not a dime more (link here). Today, personal-finance author Liz Pulliam Weston weighs in on the topic.

From Liz Pulliam Weston's blog:

Carrying expensive credit card debt–or adding more to your pile if you don’t absolutely need to–is a risky proposition, to say the least. You’re paying unnecessary interest, courting damage to your credit scores and putting yourself further at risk of the whims of your lenders, which can jack up your rates or change your terms at any time.

Furthermore, you need to be suspicious of any “one size fits all” advice, because everybody’s financial situation is unique.

The key in knowing what to do know is to gauge your total financial flexibility–your ability to pay your bills and cope with setbacks based on your available resources.

Liz goes on to offer several recommendations, which you can read here (link).

Credit Card Issuers Need Time To Comply With Fed’s Massive New Regulations (UPDATE1 -- Adds USA Today Response)

Steve Bartlett, president and CEO of the Financial Services Roundtable, which represents 100 of the nation's largest financial services companies, says card issuers need more time. Bartlett says that the new rules, which some are trying to fast track, should not be rushed. If the industry is rushed, consumers will be hurt. What's more, Bartlett says only a minority of card issuers engaged in the practices that the Fed is trying to curtail.

From the op-ed piece in the USA Today:

In fact, virtually all credit card companies either never engaged in these practices or adopted reforms two or more years ago to halt some of the most criticized provisions that are addressed in the Fed rule, such as double-cycle billing. In 2008, the vast majority of credit card customers did not see a change in their rates or terms.

Most consumers manage their credit responsibly. But if customers have maxed out their credit cards or are late making payments, negative consequences will occur, as outlined to the consumers in the contracts they received before they were able to use their accounts.

Now, more than ever, consumers have a responsibility to manage their credit wisely, just as credit card companies have a responsibility to be fair and transparent.

Some members of Congress have called for an unrealistic implementation date for these new rules, as short as three months. That time frame will increase credit risk overall and force lenders to limit access to credit. The harm to millions of Americans who are already struggling in difficult economic times would be significant.

From a reader at USA Today -- who posted a comment after the opinion piece: "3 months is plenty of time; I hope Congress forces all of you greedy, grasping card companies to toe the line for once!" I guess the reader didn't appreciate Bartlett's message (grin).

UPDATE: USA Today, meanwhile, has its own opinion.

The banking industry says it is simply pricing for "current risk." That might be fair for future purchases. But it is manifestly unfair to change the rules after purchases are made. As for the 18-month wait for change, a Fed official told Congress on Thursday that the industry needs "sufficient time … for an orderly transition." Funny, issuers don't seem to need much time to program their computers to jack up rates and fees and slash credit lines.

It's true that banks are going through a maelstrom, that people should use credit responsibly and pay their bills, and that every business is entitled to a profit. But if the industry's answer to new rules is to squeeze consumers for every last dollar before the regulations take effect in the middle of next year, then stricter laws, put in place sooner, are the only logical response.

You can read USA Today's opinion piece here (link).

You can read Steve Bartlett's position here (link).

From The Misinformation Files (Forbes.com): How To Raise Your Credit Score

I am not sure how popular Forbes.com is these days, but it needs to get "rewrite" involved on a particular story that was written last night. Reporter Anna Vander Broek struggled with a story about raising credit scores. Forbes is reputable enough that it should not have allowed this particular story to appear on its Web site. What's more, the editors must have been sleeping at the wheel as well.

From the story:

A credit score of 720 will get you an auto loan with an interest rate around 5%. A score of 620 will raise your interest to at least 13%. If you take out a $2,000 car loan, that's the difference between paying $100 and $260 a month.

Seriously? A $2,000 car loan? OK, fine. Using a 60-month loan, a $2,000 loan at 13% would result in a car payment of $45.51 a month. If she meant a $20,000 loan you'd have a car payment of $455.06. A 5% loan on $2,000 would get you a payment -- on a 60-month loan -- of $37.74. A $20,000 loan at 5%, meanwhile, would cost you $377.42 a month. It looks as though the reporter just took the loan amount and used the loan percentage to come up with the figures. Five percent of $2,000 is $100. And 13% of $2,000 is $260. Wow. An editor didn't catch that?

From the story:

The two most important factors that affect your score are your payment history and whether you've had any collections.

Those two often go together. Miss a payment that you never catch up on and you'll end up in collections. The two most important factors, just for the record, are payment history and utilization. Those two categories comprise 65% of your FICO score (see story here).

From the story:

To beat the system, Johansson suggests you pay off your credit card bills and then wait a full billing cycle before charging any more purchases on the card. That means your credit card company will report your debts to the credit agencies when you have a low balance. Then, right before you visit the loan office, put a small charge on the card--around 5% of your limit. FICO likes to see that you're still using credit, but doing so responsibly.

This is just silly. On the one hand, this person is recommending that a consumer pay the card in full -- and refrain from using the card for an entire month. Presumably, this person wants the card to report a balance of $0. But then, right before visiting a loan office, this same consumer is supposed to create a balance that is 5% of the available credit limit.

What's missing here, of course, is that card issuers typically report balances just once a month. If you don't time your visit to the lender just perfectly, there's a very good chance that the 5% usage won't even be reflected on the credit report. A better suggestion is to just use a small percentage (preferably less than 10%) of the available credit each month -- that way you don't have to play this game.

From the story:

If you don't know what your current credit score is, you have a few options. First, avoid Web sites that advertise a free credit report. In most cases, you'll end up having to pay in the end. The only place you can truly get a free credit report is at the government-sponsored site AnnualCreditReport.com. Keep in mind, though, that this free report only shows your credit history, not your FICO score. You can get your FICO score directly from Fair Isaac for around $30.

I thought the reporter was going to tell me about the few options I have if I want to know my credit score. Instead, she discusses credit reports. She's right, though. You should avoid Web sites that advertise free credit reports. Consumers should use AnnualCreditReport.com, which is the only place you can get a no-strings-attached credit report once a year (link here).

As an aside, I just have to point something out. At the top of the Forbes.com story, there is an advertisement for freecreditreport.com, a Web site that advertises free credit reports (yes, the very kind of site that the reporter told her readers to avoid). Freecreditreport.com, it turns out, sponsored the Forbes story. I wonder if Forbes gives freecreditreport.com 7 days to cancel if it's not satisfied (link here). Ha!

See screen shot here:

As for FICO scores, you can get them in several places. One, you can get them from myFICO.com (TransUnion and Equifax only, since Experian and myFICO had a falling out in February). Or you can get them from Equifax.com or TransUnion (here) directly. Finally, the FICO score you get directly from myFICO.com will cost $15.95 (this month you can get a 30% discount if you use the discount code of myFICOis8). In any case, FICO scores are not $30 -- and never have been.

From the story:

If it turns out you do have a low score, it's worth spending time to raise it, even if that means you put off applying for a loan. Consider hiring a credit counselor to help you perform a "rapid re-score." It might cost you $100 or more, but that's small change compared to what a lender might demand in higher interest rates.

If you didn't know, you'd think that "rapid re-score" was some magic product that turned your low score into a high score. Rapid rescoring is valuable when there are errors on your credit report or you have high balances that were recently paid off (but are not yet reflected on your credit reports). It's not something you'd use if you had a bevy of late payments strewn about your credit reports. Those missed payments won't be undone through the rapid rescoring process. If you have a low score because of information that is accurately reflected on your credit report, you're going to have a low score before and after you try rapid rescore.

I'm not surprised the reporter recommended rapid rescoring, though. The person she quoted exclusively throughout the story is Eddie Johansson, president of Credit Security Group, a firm that provides rapid rescoring services. Nothing against Eddie, mind you. But it's funny how that works.

If I had been the editor working this story (was there an editor?), I would have "spiked" it (killed it). Or I would have asked for a complete rewrite. To have allowed this story to be publicly consumed is a shame.

Read the rest of the story here (link).

Thursday, March 19, 2009

Don’t Pay More Than The Minimum On Your Credit Cards

Last week I got an email from my friend Steve Rhode. Steve is president of the Myvesta foundation, and founder of GetOutOfDebt.org. His email message was brief: "In light of all the people out there that are facing debt problems now ... I wanted you to see this." The "this" turned out to be a story he wrote for his site. The story urges people to pay just the minimum on their credit cards.

From Rhode:

Now, does this approach make mathematical sense? Absolutely not. The least expensive way to get out of debt is to pay down high interest rate debt first, but if you are doing that at the exclusion of saving you need to understand that the cost you will pay for not having emergency cash available, might be the loss of your home or the inability to eat.

So where are you going to get this cash to save? Well a recommendation in the Wall Street Journal suggested:

"But people without enough on hand right now may find it makes sense to borrow from their credit cards and put that money in a bank account. Sure they will pay a negative spread, borrowing at 12% and earning 1%. But they may figure that is the price of being prepared."

I don’t think I’d go that far but at the very least, only pay the minimum payments on your credit cards right now and not a dime more. Use the extra cash you would have sent above the minimum payment to put in your savings account.

Steve is not alone in this thinking. Suze Orman, the ubiquitous personal-finance author, has done an about face. Earlier this month, she wrote this:

If you have an unpaid credit card balance and not much saved up in emergency savings I need you to listen up. My advice has changed.

I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can.

Let me tell you why I am now telling you to do this. With rising unemployment, having a big emergency cash fund is vital, even if it means curtailing your credit card repayment strategy.

This is a major shift for Orman. She has always advocated a strategy of aggressively attacking credit-card debt. She now wants consumers, who do not have an emergency fund, to pay the minimum amount due on their credit cards and build up a cash-reserve fund of eight months.

Readers, help me out here. If someone doesn't have an emergency fund, with three to six months (or eight months if you're listening to Suze Orman) of cash that can be used for living expenses, does it make sense to pay just the minimum on credit-card debt that is accruing at 15% to 20%?

Read the two pieces and weigh in.

You can read Steve Rhode's piece here (link).

You can read Suze Orman's piece here (link).

UPDATE: Personal finance author Liz Pulliam Weston has also weighed in on this issue. Read her story here (link).

Bank of America Wins Credit Card Fee Lawsuit

Credit-card users who were hoping for a positive outcome in the 7th Circuit Court of Appeals got bad news today. Judge Easterbrook ruled that card issuers can assess a penalty interest rate retroactively during the month in which the penalty is imposed.

The court also rejected plaintiff's request to apply Illinois state law, which would have precluded Bank of America from instituting a 32% interest rate. Instead, Judge Easterbrook said that, as a national bank, Bank of America remains free to export interest rates that are lawful in its home state of Delaware (see Marquette Nat. Bank v. First of Omaha Svc. Corp., a 1978 case, for more information on that landmark decision).

From Reuters:

According to the 7th Circuit opinion, Swanson's interest rate rose to 32 percent from 18 percent after she exceeded her credit limit in at least two of the prior 12 months, and then continued to use her card.

Bank of America notified her of the increase in December, and then applied the higher rate for the entire December 2007-January 2008 billing cycle. Swanson contended that this was insufficient notice, and that she deserved a refund of $60 plus statutory penalties, but the court disagreed.

"The point of advance-notice requirements is to allow customers to shop for better rates," Easterbrook wrote. "But customers are not entitled to avoid fees for completed defaults, such as late (or skipped) payments, or over-limit charges.

Read the rest of the story here (link).

Related Articles:

•Read More Bank of America Stories Here

Wednesday, March 18, 2009

Is Credit Card Protection Worth The Cost?

This is a timely story. People are losing their jobs and credit-card balances are high. Given that combination, you might be thinking that credit-card protection services make sense. I think they're -- generally -- a waste of money. While I have never had this kind of protection, I have talked to those who have. When trouble hits, and you try to take advantage of the "insurance" policy you've been paying for, you better hope the stars align properly. If they don't, you could learn, quickly, that you don't have any protection at all. Card protection plans are typically great for card issuers and lousy for consumers.

From Bankrate.com:

You're also not eligible if you're already unemployed. Many companies want you to be employed for 30 to 90 days before enrolling, and Wells Fargo demands at least four months. Forget about enrolling if you left your job voluntarily.

Only full-time employees need apply. The majority of credit card companies don't cover part-timers working less than 30 hours a week, seasonal workers or self-employed.

If you activate payment protection after being laid off, you'll need to show proof that you're receiving state unemployment benefits. Some issuers have waiting periods, stating you must be unemployed for at least 30 days before they'll activate the plan.

In the World's Foremost Bank fine print that Young received, payment protection for a job loss resulting from temporary disability meant "you must be physically unable to perform any work or service for wages, gain or profit." A doctor's note is required for card payment suspensions. Miss a month of sending in the proper documentation for any claim, and your protection disappears.

Also note that these are not true insurance policies (they used to be, though). Card issuers got smart. They're now called "debt-cancellation plans." These plans are not regulated. Good for the card issuer; not good for you.

Read the rest of the story here (link).

Carrying Bigger Bills? You’re Less Likely to Spend Them

Last week we talked about credit cards -- and how you're likely to spend more with cards than you do with cash (story link here). Today we're talking about currency. According to a study, which appears in the Journal of Consumer Research, people are less likely to spend when they carry bigger bills. Therefore, you're better off carrying a $100 bill than you are if you carry a $20 bill.

From the Wallet:

The two looked at what they call the “denomination effect” — how the size of bills in your wallet impacts how likely you are to spend them. Their research found that people spend less when carrying large bills. In short, you’re less likely to spend one $20 bill than you are to spend 20 one-dollar bills. It’s the “pain of paying”, they write.

“With a credit card, you don’t see cash flow visibly happening before your eyes,” Prof. Srivastava says. “When you have a $100 bill, you want to save it.”

It makes sense to us. Think of the last time you had a $100 or a $50. Would you crack one of those bills to buy a cup of coffee? Unlikely. (Not to mention that many stores and cafes don’t accept large bills.) But we think little of breaking a ten or a twenty for similarly small purchases. (This also explains why ATMs generally serve out tens and twenties — we’re apt to run through the cash quickly and come back for more.)

Professor Srivastava, by the way, has also done research on credit-card use. He, too, agrees that using cards results in higher spending -- as opposed to using cash. The irony? He still uses cards and he pays in full each month. Maybe he thinks he is the exception. Maybe he doesn't think he will spend more with credit cards. Or maybe he doesn't mind paying more when he uses a credit card. Whatever it is, I found it interesting that he still uses credit cards -- when he knows, according to his study, that it results in higher spending.

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

House Of Cards

We've talked a lot about "good" credit-card customers and "bad" credit-card customers around GlobCredit.com. Revolvers, those who carry balances from month to month, used to be considered the best customers. Those who paid in full each month were considered "deadbeats." It has been a strange relationship to say the least. Now that card issuers are on the ropes, are the good customers now the bad customers? Are the bad customers now the good customers? In November I suggested that Citibank, with its rate hike, was driving away its "good" customers; in the end, it would be left with its "bad" customers (see story here). Given how important interest income is to these card issuers, they better be careful.

From the New Yorker (hat tip Russ):

But while making borrowing easier boosted the companies’ profits, it also increased the risks they faced, risks that started to hit home once the economic slowdown began. According to Fitch Ratings, credit-card chargeoffs—debts that companies determine they will not be able to collect—rose to almost 7.5 per cent in December, up forty per cent from a year earlier. And, as unemployment continues to rise, so, too, will the number of people who are unable to pay their bills.

It’s little wonder, then, that credit-card companies are now scrambling to shed the customers they think are most likely to default, and to limit the amount that others can spend. In effect, they’re trying to follow the advice given by Larry Selden and Geoffrey Colvin in a book called “Angel Customers & Demon Customers.” Not all customers are equal, it turns out: some are tremendously profitable, while others, like the guy who calls customer service six times a day to check his account balance, cost more than they’re worth. To boost profits, you must cultivate the angels and protect yourself against the demons.

That sounds easy enough. But credit-card companies have created a strange business, in which there’s a fine line between good and bad customers. Their best customers aren’t those who dutifully pay off their balance every month; instead, they’re the ones who charge a lot and pay only a little every month, carrying a sizable balance and racking up interest charges and late fees. These are the “revolvers,” and the credit-card business feeds on them. Credit-card companies don’t necessarily want revolvers to pay off their debts; if they did, there’d be no interest or fees to collect. They want their loans to be, in the words of a banking regulator, “a perpetual earning asset.” And they’ve thought a lot about how to keep those interest payments coming. For instance, they used to keep minimum payments relatively high. But, over time, companies started lowering minimum payments, sometimes to just two per cent of the balance. The lower the minimum payment the less people pay off each month and the longer they stay on the hook.

Read the rest of the story here (link).

Tuesday, March 17, 2009

More Than Ever, It's Important to Follow The Payment Trail

Let me tell you something. This blog of mine could be a full-time job. I get a lot of email -- and a lot of good stories to write about. Most of the time I do not turn my email messages into stories. Every now and then, though, I do. That's especially true when I start to see a trend in my email box. Which brings me to today's story.

One of my readers, we'll call him Hank, recently scheduled a payment on his eBay MasterCard. The card, which is underwritten by GE Money Bank, has a modest limit. Hank uses the card to make purchases on eBay (shocker). Anyhow, this month's payment was around $165. The statement closed toward the end of February and the payment was due on March 14. Once the statement closed, and the bill was generated, Hank scheduled the payment through his PayPal account, which is how he pays his eBay card each month. All is well.

Until yesterday. "Got home from work last night and it occurred to me that the money had never been withdrawn from my checking account. So I log into PayPal, and then to the card details, and I note that a late fee of $39 has been assessed," Hank says. Sounds like a simple mistake. Somewhere along the way, the technology hiccuped. The payment never got to GE Money Bank. A simple call should fix this right up.

"I have paid this card in full every month since I got it; since it was their error, and I have an email confirmation of my payment being "set-up," I call them to try and get the charge removed," Hank continues. In addition to the error that occurred somewhere along the payment chain, the late fee appears to have been assessed on the payment due date, too. No matter. This looks like as an easy case to resolve. Just call GE Money Bank and explain the problem.

Hank lobs a call into GE Money Bank. The first customer representative cannot help him. Hank escalates the call and gets a supervisor. The supervisor offers to refund $15 of the $39 late fee. No dice, says Hank. He refuses to make that concession. He wants the entire $39 back. Cancel the account, Hank tells the supervisor. The supervisor, according to Hank, begs him to keep the account open. "I told him sorry -- if this is the way they treat their best customers, I would hate to see how they treat distressed ones," Hank told me. "Sorry, it is not a lot of money, but it is the principle for me. If they are not willing to waive a late charge that is their fault, I really do not want to do business with them." (Note: Hank accesses the card through PayPal, but he is ultimately redirected to GE Money Bank's site to make the payment. That's why this isn't a PayPal problem and it is a GE Money Bank problem.)

Hank believes this is happening more and more -- though this was the first time it had happened to him. Hank's right. I have noticed a pick up in these kinds of complaints. Don't get me wrong, though. These kinds of errors are not new. What is new, though, is that card issuers are becoming more and more reticent about refunding the fees. When things were going well for the card issuers, it wasn't a problem. Now that they're going broke, though, good luck.

What has Hank learned from this experience? "I guess I would say if you pre-schedule payments, double check them right before the due date. A $39 late fee on a $165 balance is usurious," Hank says. "And I would also say [this]: if negotiation doesn't work, be prepared to walk away. Just because they successfully stuck it to me once doesn't mean I have to give them the opportunity to do it in the future. Card issuers clearly have no loyalty to their customers, why should we have any for them?" Anything else, Hank? "I will not do business with them anymore. It is going to get to the point, and I think sooner rather than later, that they need us more than we need them -- especially those of us who don't carry balances."

Here's my take. Watch the payment trail. If you schedule a payment be sure that it actually clears on time. Hank didn't catch the error early enough. In the future, he will. Used to be that an error like this could be resolved easily and quickly. Those days have seemingly passed. Card issuers -- desperate for fees -- are not as sympathetic to errors as they used to be. Let this story serve as a reminder of that.

Cartoon Of The Day -- Sharin' of the Green

We haven't had a cartoon of the day in a while. Gary Varvel, the great cartoonist over at the Indianapolis Star, has a good one, though. AIG, which has received some $170 billion in taxpayer funds (with more to come), doled out $165 million in bonuses to AIG executives this past weekend. AIG, it says, had very little choice. Contractual obligations tied its hands (see story here).

Gary Varvel's cartoon from yesterday (hat tip Lisa):

P.S., Happy St. Patrick's Day.

Credit Card Issuers Choke Firms With Rate Hikes, Limit Cuts

We mostly talk about individual consumers around here but lost in the shuffle is small business. Small businesses, that rely on credit cards, are getting hammered right now. Just how important are credit cards to companies with fewer than 500 employees? Half of those companies use credit cards as a primary-borrowing tool. Who knew.

From Bloomberg:

“My business is seasonal, so we count on credit to stock the store at the end of the slow season and prepare for the busy season,” said Woodward, who canceled her Citibank and Capital One credit cards in February after learning that rates would climb to 19 percent from 10 percent. She said she always made timely payments and kept low balances.

Almost three-quarters of U.S. companies with fewer than 500 employees are experiencing a deterioration in credit or credit- card terms at a time when half of them depend on credit cards as a primary source of financing, according to a December survey by the National Small Business Association, a trade group with more than 150,000 members.

The increase in credit-card costs has forced some business owners to stop using their cards, and at the same time declining credit limits are cutting their access to cash, said Todd McCracken, president of the Washington-based NSBA. Twenty-eight percent of small businesses surveyed by the NSBA said they had their card limits or lines of credit lowered in the second half of 2008.

Read the rest of the story here (link).

Tighter Credit Makes Tax Refund Loans Harder To Get

I lump these refund-anticipation loans (RALs) in with those payday loans that most of us rail against. Indeed, RALs, and the vigorish associated with them, make loan sharks blush. Given how quickly refunds get turned around these days -- using electronic filing -- it makes little sense to get a RAL. Still, assuming you are creditworthy enough to get one of these loans, there are some who do not mind paying Guido and Vinnie, also known as HSBC and its buddy, Santa Barbara Bank & Trust, for access to fast cash.

From the Associated Press:

While consumers may be expected to know that loans typically require a credit check, the people who seek RALs often have little contact with financial institutions. "The folks who find RALS attractive are not the most sophisticated financially in the country," said Robert Kerr, of the National Association of Enrolled Agents, a trade organization for people who represent taxpayers before the IRS.

Moreover, many people who seek RALs have weak credit histories. "More than half, couldn't get a loan under normal circumstances," said John Hewitt, chief executive of Liberty Tax Service, a tax prep chain based in Virginia Beach, Va. "If the bank wasn't fairly certain that they would get the money from the IRS, they wouldn't get a loan."

RAL programs have been the target of numerous lawsuits in the past decade, including several that accused the tax prep companies of inadequate or misleading disclosures in loan applications. In January, H&R Block reached a $4.85 million settlement with California Attorney General Jerry Brown that prohibits the company from marketing RALs as early tax refunds rather than loans. In its 2008 annual report, H&R Block detailed $113.7 million in costs related to other RAL litigation since 2003. Jackson Hewitt Tax Service Inc., the nation's second largest chain, reached a similar $5 million agreement with the California attorney general in 2007.

Read the rest of the story here (link).

Monday, March 16, 2009

Should The Madoff Victims Get A Bailout?

Bailouts are in the air. Banks got them. Insurers got them. Investment bankers got them. Consumers...er, oops. Scratch that one. What about those Bernie Madoff victims? They lost billions. Should they get something? The victims surely want something. What do you think? Joe Nocera, in a New York Times column this past weekend, says that he feels sorry for them. But that's as far as it goes.

From the column:

Even Mr. Wiesel thought the government should help the victims — or at least the charitable institutions among them. “The government should come and say, ‘We bailed out so many others, we can bail you out, and when you will do better, you can give us back the money,’ ” he said at the Portfolio event.

But why? What happened to the victims of Bernard Madoff is terrible. But every day in this country, people lose money due to financial fraud or negligence. Innocent investors who bought stock in Enron lost millions when that company turned out to be a fraud; nobody made them whole. Half a dozen Ponzi schemes have been discovered since Mr. Madoff was arrested in December. People lose it all because they start a company that turns out to be misguided, or because they do something that is risky, hoping to hit the jackpot. Taxpayers don’t bail them out, and they shouldn’t start now. Did the S.E.C. foul up? You bet. But that doesn’t mean the investors themselves are off the hook. Investors blaming the S.E.C. for their decision to give every last penny to Bernie Madoff is like a child blaming his mother for letting him start a fight while she wasn’t looking.

Read the rest of Nocera's column here (link).

Obama: AIG Can't Justify 'Outrage' Of Executive Bonuses With Taxpayer Money Keeping Company Afloat

This is probably the most active story out there today. Everyone is talking about it. Obama wants to prevent AIG execs from getting bonuses. These bonuses are tied to contracts that AIG execs entered into with AIG. The government owns 80% of AIG. Should the government squash the bonuses? Or do you think that a contract is a contract?

From the Associated Press:

"It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said at the outset of an appearance to announce help for small businesses hurt by the deep recession.

"How do they justify this outrage to the taxpayers who are keeping the company afloat," the president said.

Obama spoke out in the wake of reports that surfaced over the weekend saying that financially strapped American International Group Inc. was paying substantial bonuses to executives.

Noting that AIG has "received substantial sums" of federal aid from the federal government, Obama said he has asked Treasury Secretary Timothy Geithner "to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."

Read the rest of the story here (link).

For Some Credit-Card Holders, It's Fewer Cards, Higher Rates, Lower Limits

Over the weekend, a group of us were talking about the targets of these recent credit-limit reductions and interest-rate hikes. Who is being targeted? Bad customers only? Good customers? Everyone? I think it's across the board. No one is being spared. The industry showered too much credit on everyone. The industry is now pulling it back in. In yesterday's Miami Herald, Bankrate.com's Greg McBride echoed my sentiments.

From the story:

Greg McBride, a senior financial analyst at Bankrate.com, is skeptical of the industry's claims -- although there is no way to say for sure because companies guard information about accounts closely.

''I think a reasonable person could figure it's probably more than the industry is letting on,'' he said. ''We're not just talking about distressed consumers anymore. We're talking about people with great credit histories and low balances being blindsided.'' Ultimately, he said, it may hurt the companies.

''They're alienating the same customers that they're going to want back two years down the road,'' McBride said.

Not so long ago, helping borrowers rack up debt was a good thing. Credit card companies benefited when cardholders charged their original purchases and accumulated interest. They flooded consumers' mailboxes with offers to sign up for new cards.

Now, with unemployment at 8.1 percent and card company profits plunging, the industry wants to stop, or a least slow, consumers from building up such big balances. They're concerned customers may never be able to pay off the mountain of debt. Published reports say card companies have already written off billions in credit card loans customers haven't been able to pay.

Read the rest of the story here (link).

Do Attractive People Have Better Luck Getting Loans?

Interesting blog entry over at the Wallet (hi, Mary). Well? Do attractive people have better luck getting a loan? Research, using Prosper.com loan data, shows that better-looking people do have better luck. It should be noted -- and the Wallet does make the point -- that Prosper lenders are ordinary joes and janes. I wonder how well this research would translate if we were talking about real bankers and real banks. If lending was done face to face, would better-looking people have an advantage there?

From the Wallet:

The researchers took 12,000 photos of loan applicants posted on peer-to-peer lending site Prosper.com and handed them to 25 volunteers. The 25 survey takers were asked to look at all of the pictures and assign each a degree of trustworthiness, ranking the photos on a scale of 1 to 5, with one being not trustworthy at all and five being the most trustworthy. They were also asked whether they found the person in the photo attractive and, in either case, whether they would extend a loan to that person. The result: Better-looking people were more likely to get loans, at least from the 25 people surveyed.

Read the rest of the story here (link).

Friday, March 13, 2009

A Bank Of America Balance Transfer Goes Terribly Wrong

This is one of those stories. I hear about these stories quite a bit but I never get a lot of details. This one is different, though. I have all of the gory details. This is the story of a reader who tried to take advantage of a balance transfer offer that he received from Bank of America. Anything that could go wrong did.

My reader, Ryan, has been a credit-card customer with Bank of America for about ten years. During that ten-year period, Ryan has never missed a payment with B of A -- or any other creditor. What's more, he's never been late. Ryan and his wife both have full-time jobs. And they do not have a mortgage payment. What they do have, though, is a fairly substantial credit-card balance of $12,000.

The $12,000 balance is sitting on another bank's credit card, accruing interest at 0%. The problem, though, is that the promotional rate is about to expire, which is why Ryan was looking to move the balance to B of A. Ryan called B of A and haggled for a 1% rate, which would expire in March 2010. There would be a 3% transaction fee. Satisfied with the terms, Ryan decided to take the deal. "They read us the standard terms of the agreement and tell us the transaction has been approved," Ryan told me.

Fast forward to a week later. "We are responsible consumers who keep an eagle eye on all our finances," Ryan says. "We check our account online and notice that the transfer has not gone through." Uh, oh. Ryan decides to give B of A a call to find out what the holdup is. Turns out that the transfer was rejected. But that's not all. B of A also canceled Ryan's credit card. "We are taken by surprise. There was no notification of this termination. No email. No phone call. No letter. We had checked the account online that very morning and it was active," Ryan told me.

So what in the heck happened? "They tell us their credit department had 'randomly' reviewed our file and decided to 'automatically' terminate the account," says Ryan. "It was merely 'coincidence' that it came one day after the balance transfer offer had been made," Ryan says, not believing a single bit of B of A's explanation. (As a side note, this situation reminds me of the story that Liz Weston featured on her blog recently. Two of her readers -- also Bank of America credit-card customers -- tried to get their interest rates reduced. The phone calls ended badly (blog link here).)

B of A, meanwhile, says that it is willing to do a 2.9% balance transfer (good until August 2009) on Ryan's other B of A card. Ryan rejects the inferior offer. By this time, Ryan has spent about two hours on the phone going back and forth with customer-service representatives. Frustrated, Ryan asks for a supervisor. Ryan must have the patience of a saint. I would have requested a supervisor within ten minutes.

Ryan finally gets a supervisor on the phone. The supervisor explains what happened and says that its decision to terminate the offer and the card is related to a delinquency on Ryan's credit card. That's news to him. "We explain this is not possible, that we’ve never missed a payment," Ryan says. "They tell us that we are wrong, that we have defaulted, and that we need to discuss it with their credit-assessment department." Of course, the credit-assessment office is closed for the evening.

Ryan hangs up and heads to annualcreditreport.com so that he can get his free annual credit report. Just as he suspected, there are no delinquencies on his credit report. At this point, Ryan is pissed. "Bank of America lied to us," he says. Ryan jumps back on the phone and speaks to someone in B of A's fraud department. Ryan's complaint goes something like this: B of A reneged on its verbal agreement to do the original balance transfer, it failed to inform him of the canceled balance transfer, and a B of A employee lied about a delinquency that does not exist.

Ryan is told to call back in the morning when, the B of A employee says, someone can fix the problem. While I understand Ryan's frustration, let's make something clear. B of A, like other banks, reserves the right to change its mind about balance transfers. That doesn't satisfy Ryan but I wanted to get that out in the open. In the meantime, Ryan has now spent three hours on the phone. Ryan finally gives up for the evening.

I wish I could tell you that the story ended there. It doesn't.

The next morning Ryan is back at it with B of A. He lobs a call into the credit-assessment department, hoping for a swift resolution. Ryan reaches a credit analyst. The analyst conducts a mini financial review. Ryan provides all of the information that's requested. Ryan is then put on hold. After a few minutes on hold, the credit analyst returns. Not only is the card going to remain canceled, he is told, but the limits on Ryan's other cards are going to be slashed by $30,000. "I ask why they would do such a thing," Ryan says. Since becoming a B of A customer, household income has moved substantially higher, Ryan told me. So what gives? Bank of America said "the income figure I had given her was actually much less. I point out that she had asked for my individual income and that there is a massive difference between individual income and household income. Our annual household income is more than double my income. I also point out that this income is significantly higher than when we originally opened two of these credit cards, which we did right after college when neither of us had secured jobs."

In light of the explanation Ryan offered, the analyst said that she would recalculate the income figures. She put Ryan on hold again. Five minutes pass and the analyst returns. Sorry. Even with the big jump in income (double the first figure she used), it isn't going to make a difference. The card will remain closed and the limits will be slashed by $30,000. Ryan was told, after he asked, that the reduced credit limits would negatively impact his credit score. "Sorry, yes," the B of A analyst told Ryan. "We asked why -- having never missed a payment in the ten years that we have been customers of theirs and having never missed a payment with any card or debt that we have –- why Bank of America would suddenly, out of the blue, decide to damage my credit score. She declined to answer the question," Ryan says.

This Ryan is persistent. Ryan, extremely frustrated by this point, asks to be transferred to yet another supervisor. He gets transferred to a Kristy Meekins, who works in the Cleveland call center. Once again, Ryan explains the situation -- including the misunderstanding about the income figure that the analyst first used to justify her credit decision. After listening to Ryan's pitch, Meekins said that B of A's decision -- and the amount of credit it was willing to extend -- was in keeping with their new lending standards, which are based on "the current economic climate."

Meekins did offer an alternative solution, though. "Bank of America would give us the transfer at the interest rate previously agreed on (1%) but they would reduce our line of credit by $30,000 and we would have to spread the transfer across multiple cards, including the card that we use to make our purchases and pay in full each month," Ryan says. "Meaning, when we pay our bill, the amount will be credited against the low balance transfer rate and not the higher purchase APR which we never allow to accrue interest." Ryan knows a bad deal when he hears one. This one reeked. "We tell her this is not a solution," says Ryan.

After giving the supervisor a lecture on B of A's own financial woes, woes that the American taxpayer is helping to cure, Ryan throws in the towel. After spending five-and-a-half hours on the phone with B of A, no resolution was forthcoming. "If this is how Bank of America treats customers of ten years who have never been late with, or missed a payment, I cannot even begin to imagine how they are treating customers who have had difficulties across the years," an exasperated Ryan tells me. "If this is how American business thinks it’s going to survive the current economic crisis, then our country is headed off the cliff."

I was curious about the $12,000 balance. Where did that come from? "The reason we were doing this transfer is not because we had made excessive purchases last year, it was not because we had taken a holiday we could not afford; it was because my wife missed more than a month of work to be with a family member who had been diagnosed with cancer. We relied on credit to bridge the gap," Ryan says.

I'm not going to give Ryan a lecture -- because he doesn't need it -- but the bottom line is that a balance is a balance is a balance. Card issuers don't care about your reasons. They only care about whether you're going to pay them off. It's nothing but business. In hindsight, Ryan would have been much better off just staying off the phone. And that goes for most people. If you don't absolutely have to, don't get on the phone with card issuers. More and more, the end result is not positive.

I'll give Ryan the last word.

"Our nation is scaffolding businesses that have failed to meet the most basic standards of financial diligence and those same businesses are turning around and punishing the very people who are their life support," Ryan argues. "If Bank of America is to survive, it is because people like us will continue to pay the bills. If we don’t (pay the bills), then they won’t (survive). You’d think that would be Business 101. Then again maybe it’s too much to expect a business that’s all but ran itself into the ground to understand the basics. That was, after all, their problem in the first place."

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