Just weeks after the new credit card rules went into effect, the Federal Reserve has proposed new rules to counter moves made by credit card issuers in reaction to the first set of rules.
Follow me? Okay good. See this is the problem when it comes to new regulations – they are quickly circumvented, and often exacerbate matters.
The Credit Card Accountability Responsibility and Disclosure Act (CARD Act), which became law on February 22, prohibits arbitrary interest rate increases, ends double-cycle billing, and eliminates negative payment hierarchy.
But these changes, among others, have forced credit card issuers to look for new streams of revenue, including charging inactivity fees if a credit card isn’t used during a certain period.
The new proposed rules, which would take effect in late August, would ban that practice, and bar companies from charging a customer a penalty fee that exceeds the dollar amount involved in the corresponding misstep.
In other words, if you failed to make your minimum payment of say $10, you couldn’t be charged any more than $10 for the violation.
Typical late fees are $30 or more, even if a the balance or minimum payment is well below that.
Card issuers would also be prohibited from charging customers multiple times for the same violation.
Credit card issuers who have raised interest rates since January 1, 2009 would also need to evaluate whether the circumstances involving the increase have changed, and if so, lower the rate accordingly.
Additionally, issuers would need to disclose to consumers the reasons tied to any rate increases.
Stay tuned for Credit Card Act III.
This post was written on March 4, 2010
Beginning next month, websites that offer so-called “free credit reports” will need to add a disclosure atop the page so consumers don’t confuse them with the no-strings-attached credit reports offered from the government.
By “free credit reports,” they mean those free trial credit reports that require you to sign up for an ongoing service; they’re only “free” if you cancel within the initial trial period, which not all consumers seem to understand.
So come April 1, you’ll see the following text on websites offering the not-so-free credit reports:
“THIS NOTICE IS REQUIRED BY LAW. Read more at FTC.GOV. You have the right to a free credit report from AnnualCreditReport.com or 877-322-8228, the ONLY authorized source under federal law.”
The FTC is hoping that’ll be enough to steer customers toward the official free credit report website, though I’m sure the impostors will come up with some way to circumvent the whole thing.
The Credit Card Act of 2009, which is now finally in effect, required the FTC to issue a rule pertaining to the deceptive marketing of “free credit reports” by February 22, 2010.
Between now and April 1, you’ll see a slightly different disclosure, which reads: “Free credits reports are available under Federal law at: AnnualCreditReport.com.”
Keep in mind that the free credit report offered by the government does not include a free credit score, so that’s the big different between the two.
However, the government report includes all other relevant information, so you should be able to estimate where you stand on the credit score range.
This post was written on March 1, 2010
Discover is offering $50 cash back on their Discover® More® Card if you spend $599 in purchases during the first three months.
There’s no annual fee, and the card carries 0% APR for purchases for the first six months and 0% APR for balance transfers for the first year.
The standard APR will vary between 12.99% variable and 20.99% variable.
The balance transfer fee is 5%, with a $10 minimum and no maximum.
It also offers cash back up to 5% in various, rotating categories, including home and fashion, gas, movies, restaurants, and more (and 1% on all other purchases).
Decent deal if you’re looking for a new credit card.
This post was written on February 26, 2010
It appears as if the best borrowers out there are defaulting on the mortgage more often than the credit card, according to an analysis from Fico, the creator of the heralded Fico score.
Last year, 0.3% of consumers with Fico scores between 760-789, quite high on the 300-850 score range, defaulted on real estate loans, compared with just 0.1% who defaulted on bankcards.
While the numbers are low for both, it’s evident that the housing crisis has had an unprecedented impact on consumer credit behavior, forcing even the most creditworthy to take a hit.
The question is how many of the those mortgage defaults were strategic, meaning they were planned for ahead of time, as a kind of business decision.
And how many were situations where the homeowner was only able to pay everyday bills while the hefty mortgage slipped away?
Overall, bankcard accounts were just 1.6 times more likely to become 90 days delinquent than mortgage loans in 2008 and 2009, a ratio that has been sliced in half since 2005.
With all these increased mortgage defaults, Fico may have to tweak its scoring algorithm to better predict credit risk.
Banks and lenders have already tightened the screws, as only 25% of consumers who were granted a new mortgage in 2008 had credit scores below 700 (what is a good credit score), compared to nearly half in 2005.
But with even the most creditworthy failing to pay the mortgage, it’s evident that credit score alone isn’t sufficient to determine a borrower’s ability or willingness to repay.
This post was written on February 23, 2010
I was watching the Winter Olympics this evening when a Visa commercial popped up, claiming it was the only payment card accepted at the Vancouver games.
This seemed a bit strange, as it would make life difficult for those holding MasterCard and American Express credit cards, not to mention out-of-towners and their random assortment of credit and debit cards.
But low and behold, it really is true, not just a marketing gimmick.
Visa has an exclusivity agreement with the Olympic Games to be the sole payment card provider accepted.
That means only Visa credit, debit, and prepaid cards or cash can be used to purchase Olympic tickets, official merchandise, and/or food and beverages in the Olympic venues.
The same goes for the official Vancouver Olympics store, which states, “In recognition of Visa’s long-standing support of the Olympic and Paralympic Games, we proudly accept only Visa cards on vancouver2010.com.”
Visa also created and manages the entire payment system infrastructure and network throughout the Olympic venues, so looks like they’re the boss.
It’s a bit surprising for Visa to shut out the other card issuers like this, but that’s competition for you.
Just unfortunate for the many visitors that will need to travel around with wads of cash, which could prove to be a boon for area pickpockets.
Oh, and the merchants that will lose out on all those would-be sales…
This post was written on February 17, 2010
When the new credit card rules go into effect on February 22 (Credit Card Bill of Rights), perhaps one of the most exciting changes will be the way payments are allocated.
In the past, credit card issuers applied payments over the minimum payment to balances with the lowest APR because it worked in their favor.
Let’s look at an example:
Total credit card balance: $5,000
Purchase balance: $3,000 @ 18% APR
Balance transfer balance: $1,500 @ 0% APR
Cash advance balance: $500 @ 20% APR
In the scenario above, credit card issuers would apply any extra payments to the balance transfer balance set at 0% APR.
That would leave the balances subject to the highest APR and associated finance charges intact, costing you more money.
It wouldn’t be until that $1,500 balance transfer balance was paid off before the purchase balance and finally the cash advance balance would be paid down.
The practice meant big money for credit card issuers, and never-ending debt for struggling card holders.
Fortunately, lawmakers said enough was enough, and stamped out the negative payment hierarchy.
Going forward, the reverse will be true when you make more than the minimum payment.
So in the above example, any extra payment(s) will attack the cash advance balance first because it has the highest APR, and thus the most finance charges.
The last balance to be paid down will be the balance transfer set at 0% APR, which benefits card holders because it’s not accruing any interest (at least during the promotional period).
The rule change is good news for card holders looking to pay down debt; of course, it should have always been this way, but better late than never.
This post was written on February 10, 2010
The so-called “American Express Zync credit card” was released recently, aimed at younger consumers who wish to pay their balance off in full each month (whether they like it or not).
Like many other American Express credit cards, it’s an installment card (also referred to as a charge card) because the full balance must be paid each month; no minimum payment option with this one.
That means there’s no interest or finance charges tied to the Zync card, which is clearly a plus for young consumers who are notorious for getting into debt.
Of course, it diminishes the value of the credit card to some degree, as it’s really a form of convenience, and not so much a revolving credit line.
It’s similar to many of the American Express credit cards already kicking around for older consumers, like the Gold Card, which must be paid in full each month.
The big difference is the annual fee, which at $25, is much cheaper than the credit cards for the big boys.
Zync from American Express is also customizable, with four different packs available for an additional $20 each annually (the Eco Pack is free).
They include the Go Pack, Social Pack, Connect Pack, and Eco Pack, each offering special deals and discounts for the associated lifestyle.
Zync offers standard American Express membership awards, purchase protection, extended warranty, return protection, excellent dispute resolution, and more.
While Zync may be a good choice for parents who want their kids to carry a credit card without the risk of being hit with finance charges, the annual fee can be a bit of a setback.
There are also a number of revolving American Express credit cards with no annual fee out there that offer the same benefits, though there is the risk of getting into more trouble.
It seems the Zync was released with the credit crisis in mind, as revolving credit cards dominated those boom years, and may be getting phased out as card issuers look for profit without taking on as much risk.
Apply here if the card interests you…
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author’s alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.
(photo: debaird)
This post was written on February 4, 2010
In a few weeks, it will be a lot more difficult to get a credit card if you’re under the age of 21, at least, that’s the plan.
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit Card Bill of Rights) will go into effect on February 22, and bring with it a number of changes, which I previously wrote about.
But another issue at hand is extending credit to so-called underage consumers, namely those under the tender age of 21.
The impending legislation will require that those under 21 who apply for a credit card either get a co-signer aged 21 or over, or document the ability to repay the credit card debt.
If the under 21 applicant chooses option one, that co-signer will be on the hook for any unpaid debt; if they choose to document income, it’ll probably be rather cumbersome, and certainly not the instant approval we’ve all grown so fond of.
Additionally, if under 21, a credit line increase will only be permitted on a joint account with the co-signer’s permission.
In other words, kids can’t go increasing their card limit without their parent’s knowledge.
So it’s going to be more difficult to get a credit card if you’re under 21, which in one respect, will be a good thing.
But what about those who need the credit, are generally responsible, but unable to get a co-signer or document income?
Will it lead to an increase in the use of prepaid credit cards, or an increase in personal loans, those with much less favorable terms than credit cards?
I hope all the implications have been considered for the sweeping changes, especially since credit cards are often a young consumer’s initial credit building tool (how to build credit).
This post was written on February 1, 2010
Most of us don’t know the true cost of credit, we simply pay attention to what we’re paying in fees and finance charges.
But the cost of goods and services increases as a result of credit card use, as merchants need to pay fees to banks, credit card issuers, and other companies for the infrastructure, equipment, and convenience.
These merchant and interchange fees vary based on the type of transaction, merchant, and card issuer involved.
Visa charges an average of about 1.80% per transaction, while American Express charges around 2.50%, though smaller retailers typically pay between 3.25% - 3.75%.
This is why you’ll often find that not all small merchants accept American Express, as they don’t want to pay the extra fees (Amex also tends to side with the consumer, another drawback for merchants).
If the merchant has a special deal in place with a card issuer, perhaps based on a volume or exclusivity agreement, they’ll be able to secure lower pricing.
Take a look at these figures below, provided by TrueCostofCredit.com to get a better understanding of what credit really costs:
But even if you elect to pay with cash, more often than not the price already reflects the option to pay with plastic, unless you work out a deal specifically with the merchant.
The use of credit is already priced in, so it’s wise to get your hands on a rewards credit card, like the American Express Blue Cash, which offers cash rebates of up to 1.25% - 5% on all purchases.
Tip: Watch out for merchants that try to pass the “transaction fee” onto you directly.
This post was written on January 20, 2010
All of the major credit card companies have announced they will not charge the usual transaction fees for certain donations made toward relief efforts in Haiti.
Visa, MasterCard, American Express, and Discover have all separately announced the waiving of interchange fees, typically between one to three percent of a given transaction.
So instead of charities like the American Red Cross and Doctors Without Borders losing out on a piece of each donation, they’ll get to keep that money and ideally use more of it to help those in need.
Visa said it wouldn’t apply interchange fees through February for select charities yet to be named; MasterCard is waiving interchange fees on relief donations made to American Red Cross, AmeriCares, Unicef, Save the Children and CARE U.S.A.
American Express will rebate transaction fees for charitable donations made on its card for nonprofit organizations listed on the Agency for International Development’s website.
Discover is also waiving fees, but didn’t make clear which organizations would be included.
It’s believed credit card companies and banks make around $250 million a year on fees tied just to charitable donations; they make billions annually for all transactions.
They’ve only waived their fees once in the past, after the 2004 Indian Ocean tsunami.
This post was written on January 20, 2010