New Credit Card Bill (7/17/2009)

On May 19, President Obama signed the “Credit Card Accountability, Responsibility, and Disclosure Act”. This legislation has also been referred to as The Card Act of 2009 or The Credit Card Bill and will take effect on February 22, 2010. Everyone who has a credit card will be impacted in some way, positively or negatively.

Right now, approximately 60% of Americans carry a balance on a credit card. These cardholders have the most to gain from this legislation. Here are a few components of the bill:

Limited interest rate hikes: It will be much tougher for a credit card company to raise your interest rate. Certain conditions must be met and you must receive at least 45 days notice of the rate hike.

Universal default outlawed: This was the practice by which one card company can charge a higher rate because you made a late payment to another card.

Payment due dates: Credit card companies must give you at least 21 days to make a payment after the statement is mailed to you. “Cut-off times” are illegal as well. In the past, credit card companies would indicate that they need your payment by 5 p.m. on the due date or they would charge a late fee. This arbitrary cut-off time is no longer legal.

Highest interest rate balances paid first: Depending on your card’s terms, certain balances may have a different interest rate. For example, your rate for balances on purchases may be 9% while your rate for balance transfers or cash advances is 15%. In the past, credit card companies would apply any partial payment to the balances that had the lowest interest rate. The new law requires that any partial payments be applied to the higher interest rate balances first.

Over limit fees: If you go over your credit limit, most card companies will authorize the transaction and charge you an “over the limit” fee rather than denying the transaction. The new bill indicates that you must “opt in” in order to allow transactions to exceed your credit limit and therefore, incur an “over the limit” fee. If you “opt out” of this fee, all transactions that exceed your credit limit will be denied and no charge will be assessed.

Age requirements: In past, you could obtain a credit card at age 18. The new law requires individuals 18-20 years old to have a parent or guardian as a joint cardholder.

Minimum payments: Credit card companies will be required to disclose the consequences of making only the minimum payment, in particular, the amount of time it would take you to pay off the entire balance if you continued to make the minimum payment. Credit card issuers must also tell you how much you would need to pay each month if you wanted to payoff the entire balance in 12, 24, and 36 months.

These components of the new legislation are designed to help consumers who are having financial trouble and to help curb abusive credit card company practices. Much of the legislation will result in lower profits for the credit card companies. Many industry experts predict the credit card companies will respond to this legislation by doing the following:

First, since credit card companies will have a harder time raising your rate while you’re a cardholder, look for low introductory rates to disappear and for interest rates to be higher when the card is initially opened.

Second, the availability of credit overall will be reduced. Over the past several years, credit card companies have issued credit cards without caution. I see bank clients daily whose available credit is greater than their annual salary (and in some cases, the outstanding balances are greater than their annual salary). According to the New York Times, if the unemployment rate hits 10% (as of July 1 it was 9.6%) credit card losses in the U.S. are expected to top $186 billion in 2009. Like any other organization that loans money, credit card companies are implementing more stringent underwriting policies.

Third, since this new law doesn’t go into effect until February 22, 2010, a number of credit card companies are taking advantage of this grace period to respond by analyzing their current credit card portfolio. Here are a couple of things you can expect to see:

1. They are identifying “high risk” cardholders. “High risk” cardholders are defined differently by every credit card company. They are generally people that use their card for cash advances or have transactions at casinos and liquor stores. Once they identify these people, they will reduce credit lines, raise the interest rate, or increase minimum payments. These are all legal practices, so long as the credit card company discloses these changes in terms within 30 days.
2. If you have a high credit limit relative to your balance, a credit card issuer can reduce their risk exposure by lowering your credit limit. This is very common right now.

Lastly, since credit card losses are going up and profits are going down, “reward” cardholders will see some changes. If you currently have a card that gives you “points”, “cash back”, or any other perk for using the card, expect those benefits to be scaled back. For example, if you’re not paying an annual fee now, they may start charging one. If you currently pay an annual fee, expect it to go up. Also, your points, miles, or cash back rewards may not be worth as much as they have been in the past.

My advice as it relates to this legislation.
1. Review your current credit card situation. If one of your credit card providers implements some unfavorable terms as a result of the pending legislation, you should explore other options. However, before you close a credit card account, make sure you have a back up or a new card to replace it. You don’t want to get stuck without one. As I indicated, obtaining a new credit card isn’t as easy as it used to be.

2. The credit card industry is still very competitive, but instead of competing for everyone, they are only competing for the “good” customers. If you have good credit scores and stable income, you should shop around for a new card if the benefits of your current card have been reduced to your dissatisfaction.

3. If offered, try to obtain a credit card from your primary bank. Banks always view customers more favorably if they have a checking account with them. Having a card from your bank is more convenient. In many cases, a credit card from your primary bank can be tied to your checking account for ATM transactions or overdraft protection. They typically have a number of options when it comes to paying the bill, such as direct transfer via online banking or automated telephone service.

In summary, this legislation will have some sort of impact on most credit card holders. In the coming months, please pay particular attention to the mail you receive from your current credit card provider as some of these changes may apply to you.

As always, e-mail me with any questions.

Understanding Credit Scores (6/29/2009)

I work for a trust company in St. Louis and we publish a quarterly newsletter that highlights a specific topic our clients will hopefully find timely and relevant. In May, I was asked to write an article on credit scores. Of course, the finished newsletter was much prettier, but you get the benefit of the substance below.
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In today’s market conditions, obtaining credit has become more difficult for consumers. The mortgage crisis has put a crunch on capital in the financial services industry and as the supply of capital remains low, lenders have been forced to tighten credit standards.

Tighter credit standards have meant a much greater emphasis on your credit score when obtaining financing than in the past. Not only can your credit score determine your credit worthiness to a lender, but it can also determine how much you’ll pay when you borrow money. Many lenders practice credit-based pricing on many financing options, meaning those consumers with higher credit scores can obtain better borrowing terms, including a lower interest rate.

Lenders aren’t the only people checking your credit score. Insurance companies routinely use your credit score to determine premium rates. Landlords often check the credit scores of prospective tenants prior to renting an apartment. According to the Society of Human Resource Management, 35% of employers check the credit of prospective employees to help determine their degree of responsibility. Even cell phone carriers will routinely check your credit score.

To understand your credit score, you need to know where it comes from. There are three major credit reporting agencies in the U.S. – Experian, Equifax, and Trans Union. All three of these agencies use slight variations of computer software developed by the Fair Isaac Corporation. This is why your credit score is commonly referred to as your FICO score. All three of these entities collect data from creditors independently, therefore your score will vary because the data collected is not consistent among each agency and neither are the formulations used to compute your score. When applying for credit, some lenders will obtain all three credit scores and some will use one credit reporting agency exclusively.

Scores can range from 300-800. The median credit score according to the Fair Isaac Corporation is 723. It’s tough to determine exactly what a “good” score is because every lender has different cut off points where they will lend at the best rates or lend at all. Here are general ranges:

800+ Excellent
750-799 Very Good
700-749 Good
650-699 Average
600-649 Below Average
550-599 Poor
<550 Very Poor

Below are the five characteristics that go into determining your score and how they are weighted according to the Fair Isaac Corporation:
35% = Payment history
30% = Amounts owed
15% = Length of credit history
10% = New credit obtained
10% = Types of credit used

There are several things you can do to improve your credit score. 1.) Always pay your bills on time. This is the highest weighted characteristic that makes up your credit score. 2.) Keep your credit card balances low relative to your credit limit. It’s important to have a high credit limit relative to your outstanding balances, but having too much credit availability will make you a high risk borrower to a prospective lender. Therefore, you should never have open credit you don’t need. 3.) Since credit history is a significant portion of your overall credit score, it’s important to begin obtaining credit at an early age. 4.) Pay down your debt rather than moving it around between different credit facilities. Transferring balances to new credit cards could lower your FICO score. Because so many variables go into determining your score, it is not considered an exact science. The bottom line: Obtain credit, pay your bills on time, and minimize outstanding debt. If you follow these rules, it will reflect in a positive credit score.

VantageScore
While each credit bureau has traditionally used their own version of the FICO formula to compute your credit score, they have recently introduced their own version called VantageScore. VantageScore is a new formula created by the three credit bureaus to improve the consistency of your credit score. Even though the VantageScore formula used by each credit bureau is the same, the score will still differ slightly because the data used by each credit bureau is still not consistent. In addition, VantageScore has a different scale, similar to an educational grading scale. The scores range from 501-990 as follows:

A = 901-990
B = 801-900
C = 701-800
D = 601-700
F = 501-600

VantageScore also weighs credit characteristics slightly different from that of the FICO model. Here’s the VantageScore breakdown:

32% = Payment history
23% = Credit utilization (debt to credit ratio)
15% = Amounts owed
13% = Length of credit history
10% = New credit obtained
7% = Available credit

You can obtain your VantageScore from each one of the three credit bureaus. Because VantageScore is not yet widely accepted by financial institutions, it’s unclear how your VantageScore compares to your FICO score. However, if your FICO score is high, it should also reflect in a high VantageScore. Even though VantageScore was created three years ago, FICO continues to be used by the vast majority of financial institutions.

How to obtain your credit report
The Fair Credit Reporting Act of 2003 allows each U.S. resident to obtain a free copy of their credit report annually. The only government-sanctioned website available to obtain your credit report is http://www.annualcreditreport.com/ or you can call 1-877-322-8228. This website requires you to choose which credit reporting agency to use when obtaining your credit report. While the credit report is free, it will not contain your specific credit score. You have the option of paying a fee to get your score.

Under normal circumstances, most experts will recommend getting a copy of your credit report annually. If you plan to finance a large purchase in the near future, you should prevent any surprises by obtaining a copy of your credit report for review prior to applying for a loan. If you have any reason to suspect any errors in your credit history, you should obtain a copy to be sure. Staying on top of your credit is even more important during these uncertain economic times.

What to do about errors on your credit report
If you find what you believe to be an error on your credit report, you should write to both the credit bureau and the specific creditor, immediately. Mistakes or inaccuracies will affect your credit score and even your ability to obtain future credit. Your letter should include your name and address, a description of the specific item(s) you’re disputing, and why you’re disputing it. If you’re not sure what information to include, you can find sample letters on the Federal Trade Commission’s website, www.ftc.gov/credit. Be sure to send copies (not originals) of any supporting documentation of your claim. As an additional measure, you should send your letter via certified mail and request a return receipt. The address for the creditor and the credit bureau furnishing the report will be on your credit report.

Both parties will take typically 30 days to research the claim. Although don’t be surprised for the process to take several months, especially if you’re dealing with multiple inaccuracies. Be sure to include as much information as possible to help expedite the correction. In most states, you’re eligible to receive an updated copy of your credit report to ensure the error was rectified.

Alert: New Credit Card Scam (7/10/2009)

There's a new credit card scam that's making headlines today. It's been verified by Snopes.com. Below is an excerpt from an e-mail I received from our security department. It includes an explanation of how the scam works.

This scam is pretty slick since they provide YOU with all the information, except the one piece they want... Note, the callers do not ask for your card number; they already have it.

The scam works like this:
Person calling says, 'This is (name), and I'm calling from the Security & Fraud Department at VISA. My Badge number is 12460, Your card has been flagged for an unusual purchase pattern, and I'm calling to verify.

This would be on your VISA card which was issued by (name of bank). Did you purchase an Anti-Telemarketing Device for $497.99 from a marketing company based in Arizona ?' When you say 'No', the caller continues with, 'Then we will be issuing a credit to your account. This is a company we have been watching and the charges range from $297 to $497, just under the $500 purchase pattern that flags most cards. Before your next statement, the credit will be sent to (gives you your address), is that correct?' You say 'yes'.

The caller continues - 'I will be starting a Fraud Investigation. If you have any questions, you should call the 1- 800 number listed on the back of your card (1-800-VISA) and ask for Security. You will need to refer to this Control Number. The caller then gives you a 6 digit number. 'Do you need me to read it again?'

Here's the IMPORTANT part on how the scam works:
The caller then says, 'I need to verify you are in possession of your card'. He'll ask you to 'turn your card over and look for some numbers'. There are 7 numbers; the first 4 are part of your card number, the last 3 are the Security Numbers that verify you are the possessor of the card..
These are the numbers you sometimes use to make Internet purchases to prove you have the card. The caller will ask you to read the last 3 numbers to him. After you tell the caller the 3 numbers, he'll say, 'That is correct, I just needed to verify that the card has not been lost or stolen, and that you still have your card. Do you have any other questions?'

After you say no, the caller then thanks you and states, 'Don't hesitate to call back if you do', and hangs up.. You actually say very little, and they never ask for or tell you the card number. Once they have the 3-digit security code, they will make several new purchases to your card, in any amount.

Fraud investigators are not sure exactly how the scammers are getting your visa number. Obviously, a number of people see your card everyday, from restaurant servers to check-out employees at stores. The simple solution to protect yourself is to never give ANY information on your credit card to anyone you don't know or trust.