Friday, May 15, 2009

Open Thread -- Open Topic/Off Topic

The blog has more than 600 entries. Additionally, there are well over 17,000 comments. Not surprisingly, some threads, though long and interesting, are old. Some of my readers are not likely going to post in those old threads -- for fear that no one will see them (except me). As an aside, I get an email any time someone posts a comment at I have a LOT of email. Anyhow, one of my readers made a suggestion this morning. I think it's a good one.

From here on out, I am going to create an "open topic/off topic" thread. I'll do that on Monday morning. The blog entry can be used for just about anything. As always, no attacks on each other will be permitted. Otherwise, almost anything goes. You can talk about anything. Importantly, though, you can use the thread to talk about credit issues that have not been addressed at my blog. Or you can talk about stuff that I have written about -- stuff that might have been written about months ago (where you might not want to post in the old thread).

I have no idea how many of my readers want this feature. It could be that none of my readers are interested in this kind of thing. Tell you what. I'm going to give this a whirl. If very few people post in it, I will assume that it's not something my readers want. If that's the case, don't be surprised if I discontinue it. If, however, I see that the thread is active, I will keep bumping the thread to the top of the blog each Monday.

We'll see how it turns out.

Thanks for reading. Thanks for supporting the blog. And thanks for sharing.

Thursday, May 14, 2009

Paying With Cash Could Soon Pay Off

Cash-carrying customers could catch a break if a couple of Senators have their way. Senators Durbin and Bond are trying to push legislation that, if passed, would allow retailers to offer discounts to debit-card users and put an end to restrictions that payment networks such as MasterCard and Visa place on retailers who charge less for non-credit-card transactions.

From the Wall Street Journal:

"The extra charges the establishment has to pay for the use of a credit card are kind of hidden inflaters in the cost of the product," said Sen. Richard Durbin (D., Ill.), who is pushing the measure with Sen. Christopher Bond (R., Mo.).

Small banks and credit unions, which stand to lose revenue if consumers cut back card use, are pushing back, along with the rest of the card industry.

Retailers seeking the change "do not want to pay their fair share for the significant benefits they get when accepting debit and credit," said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a group representing bankers and credit card networks.

My guess is that this proposed legislation, which is part of the larger credit-card bill in front of the Senate, will not survive. Banks, which have every incentive to make sure that consumers keep using plastic, will do all they can to put this proposed legislation to sleep.

Read the rest of the story here.

Wednesday, May 13, 2009

What Does Your Credit-Card Company Know About You?

Whether it be debt collection or credit-card solicitation, those in the card industry know everything about you. They know where you shop; they know what you buy; and they know what each purchase means. The card industry has built psychological profiles to figure you out. And figure you out it has.

From the New York Times Magazine:

The exploration into cardholders’ minds hit a breakthrough in 2002, when J. P. Martin, a math-loving executive at Canadian Tire, decided to analyze almost every piece of information his company had collected from credit-card transactions the previous year. Canadian Tire’s stores sold electronics, sporting equipment, kitchen supplies and automotive goods and issued a credit card that could be used almost anywhere. Martin could often see precisely what cardholders were purchasing, and he discovered that the brands we buy are the windows into our souls — or at least into our willingness to make good on our debts. His data indicated, for instance, that people who bought cheap, generic automotive oil were much more likely to miss a credit-card payment than someone who got the expensive, name-brand stuff. People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.

And this one:

Data-driven psychologists are now in high demand, and the industry is using them not only to screen out risky debtors but also to determine which cardholders need a phone call to persuade them to mail in a check. Most of the major credit-card companies have set up systems to comb through cardholders’ data for signs that someone is going to stop making payments. Are cardholders suddenly logging in at 1 in the morning? It might signal sleeplessness due to anxiety. Are they using their cards for groceries? It might mean they are trying to conserve their cash. Have they started using their cards for therapy sessions? Do they call the card company in the middle of the day, when they should be at work? What do they say when a customer-service representative asks how they’re feeling? Are their sighs long or short? Do they respond better to a comforting or bullying tone?

Enjoy the rest of the story here.

Related Articles:

When it Comes to Your Credit Card Company's Web Site, You're Not Anonymous

Are Your Shopping Choices Hampering Your Ability to get Credit Line Increases?

Are You A Bankruptcy Risk? Enigmatic Score May Tell Lenders

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

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

Tuesday, May 12, 2009

Advanta Shuts Down Credit-Card Lending Amid Surging Charge-Offs

Beginning next month, Advanta credit-card customers will no longer be able to use their credit cards to make purchases. The card issuer says that customers will be able to pay their existing balances over time. The halt in credit-card lending, which takes place on June 10, will affect some 1 million customers.

From Bloomberg:

Advanta has reported three consecutive quarterly losses and has seen its shares plunge from about $30 in June 2007 to $1.13 at the close of New York trading yesterday. The U.S. jobless rate reached 8.5 percent in March, a 25-year high, squeezing sales for small business owners. The economic slowdown affected Advanta’s customers across the country, Chief Financial Officer Philip Browne has said.

“We’ll be shutting down accounts for future transaction activities, but many of the customers will maintain balances and pay us off over time,” Browne said yesterday in a telephone interview. “We’ll have to service and collect on that, and that will be the first order of business for the company.”

Desperate times call for desperate measures. Advanta hopes the halt in lending is temporary. However, my prediction is that Advanta will not survive. The card issuer caters to small-biz owners. Small business has been ripped during this economic downturn. Still, Advanta's business tactics likely didn't help matters either.

The company reported a charge-off rate of 20% back in March. Given the card issuer's penchant for hiking rates to 30%+ on customers who are in good standing -- and who have not missed any payments -- it's not surprising that Advanta is now getting killed.

You reap what you sow.

Read the full story here.

Monday, May 11, 2009

Cartoon of the Day -- Excessive Credit-Card Rates?

Credit-card issuers have been vilified. These "monsters" have been slashing credit limits, instituting fees, and raising interest rates to levels that would make the mafia blush. So it's not surprising that editorial cartoonists have had plenty of material to work with lately.

Here are a few recent cartoons from Stuart Carlson (hat tip Shawnee, via creditboards, for the excessive rates cartoon):

Related Articles:

Rising Credit Card Losses Are Next Challenge For Banks

It used to be that the card industry could predict credit-card losses by tracking the unemployment rate. No more. During the most recent earnings season, card issuer after card issuer talked about loss rates outpacing unemployment rates in the near future. The upshot is that it'll be a lot more difficult to predict just how bad -- and how high -- loss rates will ultimately get.

From the New York Times:

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capitol One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.

Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.

And, so, cardholders should continue to expect reduced credit limits and tougher approvals. In other words, the beat goes on.

Read the whole story here.

Friday, May 8, 2009

Our Personal Finance Problem

I've been waiting for the perfect time to introduce my readers to one of my favorite bloggers -- and blog. Today is that day. One of my readers, CaughtShort, tipped me off to this blog back in March. I've been reading it ever since. The blog, Bad Money Advice, is operated by Frank, an unemployed hedge-fund manager who writes with a sharp pen.

Frank, who started the blog back in January, says that his blog is a blog about advice. More specifically, he -- in my mind -- is a watchdog who makes sure that people who write about money, be they mainstream journalists, radio personalities, authors, or bloggers, get it right.

Admittedly, he is not a personal-finance expert. "My qualifications for giving personal financial advice, and for criticizing the advice of others, are thin," Frank wrote in his maiden post back in January. "Then again, the qualifications of the established experts in this field seem no more substantial." Touche.

I have to tell you, life would be a whole lot easier if guys such as Frank were not around. Those who dispense faulty advice wouldn't have to worry as much about being taken to task. They could get it mostly right, or somewhat right, and leave it at that. However, with Frank looming in the background, personal-finance writers need to make sure they get it right. If they don't, Frank will be on the case soon enough.

As I said earlier, Frank's primary goal isn't to dispense advice of his own. His goal is to point out the really bad advice that others -- too frequently -- offer up. In doing so, though, Frank must, and does, offer advice of his own (so that he can clear up the original misinformation). In that way, Frank separates himself from the drive-by critic -- who often criticizes but offers nothing more.

Frank says that the premise of his site is twofold: "that personal finance advice ought to be taken seriously and that it needs to be a lot better than it is now." Frank's correct. And to that end, Frank is there to make sure that it is.

Bad Money Advice reached the 100-post milestone yesterday. The 100th post, titled "Our Personal Finance Problem," is the one that I think my readers should read first. The post captures the essence of what Frank -- and Frank's blog -- is all about.


Thursday, May 7, 2009

American Express: The Madoffs Did Not Leave Home Without It

If you've got some down time, you might want to check out some of Bernie Madoff's American Express statements, which are tied to his business platinum card. The statements, which are from last year, paint a picture of just how prolific these Madoffs were (there are a lot of "employees" on the account) -- when it comes to spending.

This is the stub for January 2008 (hat tip Josh):

Here is the stub for July 2008 (click to enlarge):

And here is a stub from August 2008 (click to enlarge):

Notice that Madoff also had a "hard" limit of $200,000 on his "no-preset-limit" card. Apparently, even the rich and fraudulent get hard limits. Who knew.

If you're interested in all of the purchases associated with the three AmEx statements, go here (hat tip DealBook).

National Addiction To Easy Credit Remains Consumers' Downfall

It really doesn't matter how much Congress attempts to curb credit-card abuses. Some consumers are too addicted to credit; no amount of legislation is going to help these folks. Michelle Singletary, writing for the Washington Post, says that some of the measures being pushed through Congress contain a number of exceptions and conditions that would allow card issuers to continue punishing cardholders. Meanwhile, Singletary predicts that the most vulnerable customers will actually opt in for this punishment.

From the Washington Post:

Congress and President Obama are trying hard to stop credit card issuers from allowing consumers to go over their credit limits. To reduce oppressive over-limit fees, credit card issuers would have to get a customer's permission to set up their account to process transactions that would place them over their credit line.

This "gives consumers control over their own credit behavior," said a senior administration official who is working with the Treasury Department on the president's credit card reform initiative.

I've stood in the store behind people who hand over their credit cards and close their eyes and silently pray that the charges will be approved.

Who do you think will opt in to allow over-limit purchases?

According to Singletary, those most likely to opt in will be those who can least afford it -- those who are already maxed out.

Later in the column, Singletary talks about clarity and transparency when it comes to card agreements and statements. She's all for that, of course. But she wants to take it a step further. She calls her idea a radical one. I figure she's joking, though. Maybe she's not.

You can read the entire column here.

Wednesday, May 6, 2009

Bank of America Faces $34 Billion Gap

Apparently the stress test didn't go well for Bank of America. The bank needs some $34 billion or so to shore up its ailing capital position. The Wall Street Journal, citing people familiar with the situation, said that an official announcement is expected Thursday after the market closes.

From the Journal:

At Bank of America, the government's findings are likely to set off a scramble over how to fill the capital hole at the nation's largest bank in assets.

The Charlotte, N.C., bank already has received $45 billion in capital from the federal government, some of it to help the bank cover losses stemming from its purchase of securities firm Merrill Lynch & Co. in January.

The amount of capital now needed by Bank of America could exceed what the bank can raise by selling assets or more shares to the public.

As a result, the bank may have no choice but to convert the government's preferred shares into common stock.

Dilution, anyone?

Read the rest of the story here.

Tuesday, May 5, 2009

Justices Limit Use Of Identity Theft Law In Immigration Cases

Did you catch this ruling yesterday? The Supreme Court of the United States ruled -- unanimously -- that an identity-theft law, a fan favorite among prosecutors, cannot be used against illegal immigrants who get caught using fake Social Security numbers. Instead, the Court held, illegal immigrants who use Social Security numbers to commit other crimes must know that the identification number belongs to a real person. The distinction is worth an extra two years of punishment.

From the New York Times:

Stephen H. Legomsky, a professor of immigration law at Washington University School of Law in St. Louis, said Monday’s decision would have a major impact on the strategy of Immigration and Customs Enforcement, making it more difficult for the agency to press criminal charges against immigrants with no other offenses but working illegally.

“In the ordinary immigration case, this will no longer be a weapon,” Professor Legomsky said.

The Obama administration has said that it will shift the focus of immigration enforcement to employers who intentionally hire unauthorized immigrants in order to pay lower wages or otherwise lower costs. But last week the administration said agents would continue to detain illegal immigrants found in raids.

Read the rest of the story here.

Equifax Consumer Credit Trends For March

Credit-card issuers remained busy in March. Reuters, looking at Equifax data from March, reports what many of us already figured. There were fewer card offers being made (a lot less), issuers closed 20 million card accounts, and credit limits fell by some $425 billion.

From Reuters:

In March, lenders closed 20 million card accounts, sending the total down by 58 million from a July 2008 peak to 380 million.

Equifax Inc's (EFX.N) March Credit Trends Report, drawn from 11 million credit profiles, was provided exclusively to Reuters.

4.7 percent of payments on bank-issued credit cards were at least 60 days late in March, an increase of 38.3 percent over last March.

The number of credit cards from banks issued in January and February 2009 fell 38 percent from the same period in 2008. Equifax obtains this data after a one-month lag.

Credit limits continued to fall as well, by $425 billion from a July peak of $3.59 trillion to $3.16 trillion in March.

In addition to the factbox published by Reuters, you can also read the companion story that goes with the credit-card data. Read it here.

Reuters also tallied up the most recent homeowner information as well. You can read it here.

Monday, May 4, 2009

Singing the American Express Blues (UPDATE -- Includes AmEx Spokesperson Comment)

As I've said before, readers send me quite a bit of email. Readers with all sorts of issues feel compelled to shoot me their stories (which I appreciate). Sometimes, the story is even compelling enough for me to write about. Often, though, I don't do anything with the story at all. Why? Because the story wouldn't exist if the customer had taken care of business. Take Fred Wilson's story, for example. He's singing the blues because American Express shut down all of his accounts. Wilson has been a loyal American Express customer for 26 years. Despite a recent late payment, he thinks that American Express should cut him some slack. American Express isn't budging.

From Wilson's story over at Seeking Alpha (hat tip Hegemony via Creditboards):

I've been a customer of American Express since 1983 and have never failed to pay a bill. Right now, between my business interests and family, I carry and pay for five American Express accounts. I'm not going to get into the monthly amounts that these accounts turn over, but I will say that they are significant.

The smallest of these accounts is an old Flatiron Partners account. We don't use that account very much anymore, but we do still use it occasionally. A month ago, we were accidentally late paying that account. And as a result American Express shut down all of my accounts without notifying me. My partners in Union Square Ventures could not use their cards, I could not use my personal card, they shut off all of the accounts I have with them even though they were not in any way related to the Flatiron account. I suspect the accounts are linked because they all funnel membership miles into one single account.

I would imagine that Wilson is not hurting for money. He's a well-known venture capitalist who has enjoyed a lot of success over the years. I suspect that he's looking for a break because he's not a deadbeat. Instead, he's simply guilty of not paying attention to a due date.

Many American Express customers have had their cards shut down for a lot less. Wilson committed a cardinal sin with American Express, though: he missed a payment. And for that, American Express has no tolerance. If Wilson had pitched me his story -- rather than writing it himself -- I might have been interested in one angle. Even with 26 years of perfect payment history, American Express was unwilling to take that into account.

American Express told me that it could not address Wilson's case specifically, but generally speaking "in this environment, we’re trying to strike the right balance between accommodating our cardmembers' spending needs and minimizing unpaid balances that ultimately have to be written-off," an American Express spokesman said. "When a customer is past due in paying their bills, for example, that’s often a red flag. The best advice I can offer is for cardmembers to contact us directly if they have questions or concerns about their account. That way we can have appropriate dialogue with that cardmember."

In other words, Wilson's best bet is to contact American Express directly. What's more, I'd recommend that he bypass front-line customer-service representatives. Ask for a supervisor immediately. Given American Express's recent history, I wouldn't expect a reversal. But who knows. Stranger things have happened. And for the record, I'd say that AmEx probably overreacted in Mr. Wilson's case. A customer of 26 years, with a flawless payment history, probably warrants a second chance.

That said, if you're unwilling to pay your bill on time, even if you're rich, should you get a break? Haven't we all been taught that it's not enough to have the money? You have to actually turn it over too.

What do my readers think? Should Wilson have been cut some slack here? Does his 26 years of on-time payments trump his recent late payment?

You tell me.

Read Wilson's story here.

Credit Card Companies As Evil Villains? It's Not That Simple

Credit-card issuers are easy targets these days; everyone is taking a whack at them. Sure, they've done some sleazy things, which warrants some of the new legislation that's being implemented, but some of the things that consumers -- and politicians -- have railed against miss the mark. Instead of vilifying card issuers for raising rates and slashing limits, Americans should be applauding. So says the Los Angeles Times.

From the story:

The real scandal, according to the common refrain, is that issuers such as American Express, Citigroup and Bank of America have received billions of bailout dollars from taxpayers. How dare they repay the favor by putting the squeeze on us?

This is where populism shades into demagoguery. Critics who argue that it's inappropriate for bailed-out banks to tighten credit terms on taxpayers have it exactly wrong: If we're footing the bill, we should praise these banks for being stingy with credit, not hammer them for it. It won't be any easier for them to pay us back if we hector them into maintaining the loose standards that produced this mess.

Have fun with the rest of the story. There are plenty of paragraphs left to chew on. Read them here.

Friday, May 1, 2009

Suze Orman Says That Emergency Planning Remains Job #1

Suze Orman caused quite a stir back in March when she recommended that people start paying just the minimum amount on their credit cards. In lieu of paying more than the minimum, she said that people need to build up an emergency fund that covers eight months of living costs. In this environment, she argues, that's more important than paying more than the minimum amount on credit cards. In response to Orman's March column, Liz Pulliam Weston, a highly respected personal-finance columnist, wrote a column last week titled "Bad advice from Suze Orman." Now, in what I can only imagine is a response to Weston's column, Orman is out with yet another column -- explaining, in detail, why her March column still makes sense.

From Orman's column, which was published this evening:

My strategy for years has been that if you are in credit card debt you are to pay the minimum due each month on every card, and then pay extra on the card with the highest interest rate. So all that has changed is that I am now telling you to not pay more than the minimum on the card with the highest balance. To be honest, in this environment if you were paying only the minimum on all the other cards, you have probably already seen your credit, or your credit score impacted. Paying only the minimum isn’t “good enough” according to the credit card companies right now.

So why am I not telling you to pay more than the minimum on all your cards to preserve your credit score? Well, I seriously doubt you have the money to pay more than the minimum on all your cards; if you did you would have already paid down your debt instead of paying the astronomical interest rates the card companies are levying these days. And even if you could manage to pay down your card debts, we still have the problem of where you will come up with cash in an emergency. A lowered credit score you can recover from, but not being able to handle a financial emergency can lead to horrible consequences. I wish you weren’t in this situation of having to choose the lesser evil, but here you are. I say sacrifice your credit score if necessary, so you can protect yourself and your loved ones from life’s what ifs.

First, I have not followed Orman over the years, so I have no idea if she has always recommended that you pay minimums on all of your cards -- and pay more than the minimum on the card with the highest interest rate. I take her at her word that she has said that (even though she did not spell that out in her March column).

Second, Orman says that she's not recommending that people pay more than the minimum on their cards because she "seriously doubt[s] you have the money to pay more than the minimum on all your cards; if you did you would have already paid down your debt instead of paying the astronomical interest rates the card companies are levying these days."

My question: if she "seriously doubts" that people have the money to pay more than the minimum on their cards, how does she propose that people build up an eight-month cash reserve fund?

Orman writes:

So how do you pull this off? I am not going to tell you to cut back your spending. Please. I am not going to insult you; I know you have already done that. I know you have scoured every expense to cut out all the “wants.” And I know you are not making matters worse by running up more credit card debt. I get that you “get it.” But you still need a way to start building up real emergency savings. That is why I suggest paying less on your highest-rate credit card (but make sure you pay the minimum due) so you have more cash to put into a savings account.

I'm not trying to bust Orman's chops. I'm not. But for the life of me I do not understand how someone will be able to save eight months' worth of cash for emergency purposes -- especially if they've already "cut back" on spending and "scoured every expense to cut out all the wants."

All that Orman is recommending here is that people not pay more than the minimum on their highest-rate card. Assuming that people were already paying just the minimum on their cards (per Orman's advice) and assuming that they've already cut their expenses to the bone, and assuming that Orman is correct that people can't pay more than the minimum on their cards anyhow, how long will it take to accumulate eight months of cash that will be socked away in an emergency fund?

Suze does not address that in her latest column, but I'd imagine that it will take years. And maybe a lot of them.

Read Orman's column here.

The New ‘700 Club’

I have to admit that I had to check the publication date on Newsweek's story about high credit scores. Given what's included in the story, I figured it was written about two or three years ago. Nope. It was written just yesterday. When you read the story, you'll see why I was wondering about the date. The first two paragraphs read like a throwback to yesteryear.

From Newsweek:

San Diego banker Henry Li, 27, is paying for his 3 Series BMW on a credit card that has been charging him less than 2 percent interest—for more than three years. He puts his monthly expenses on another card and gets 5 percent cash back on his gas and groceries and 1.5 percent back on everything else. He's always sorting through offers for great discounts on cable service, cell phones, mortgages and credit cards. Sometimes he calls his card issuers and raises his credit limits just for sport.

Why? Li lives the freewheeling life of a person with a high credit score. Break through 750 (on the typical range of 300 to 850; Li says his score is roughly 750), and it's as if you've gotten the keys to the kingdom. Especially now, with wary lenders tightening credit for most would-be borrowers, life is good for the credit-score elites. They still face a broad array of zero percent credit-card deals, mortgages at rock-bottom rates and other gimmes that B and C borrowers can only lust after.

Read the entire story here.

It Depends On Meaning Of Usury As U.S. Credit Cards Average 14%

I've been chronicling the credit-card industry at for exactly ten months. It's amazing how much -- and how rapid -- the industry has changed during that time. Rising losses have prompted card issuers to raise fees, raise interest rates, and cut credit limits. The moves have affected good customers and bad. The question is: have credit-card issuers gone too far?

From Bloomberg Markets magazine:

Banks need healthy credit card earnings, since they can no longer rely on profits from trading the exotic securities that brought the markets to the abyss. Now, they are squandering customer loyalty and curtailing lending, which will hurt them in the long run, says Robert Hammer, chief executive officer of Thousand Oaks, California-based credit card advisory firm R.K. Hammer Investment Bankers.

The retreat occurring in credit cards is like nothing Hammer has seen in his 30-year banking career, he says. “They are shooting themselves in both feet,” he says. “They are saying, ‘We aren’t going to take risk.’”

Initially, I figured that some of my readers were just talking a big game. "We're never using credit cards again," they'd say. "I'll never use that card again," an emailer would write. But as time goes on, I become more convinced that some of my readers will forgo credit-card use forever. Still others will use credit cards but become pay-in-full customers exclusively (a very good thing for customers; not so good for card issuers).

The past ten months has been fascinating. I'm curious to see what the next 12 months has in store for us.

You can read the rest of Bloomberg's story here.