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New Restrictions on Debt Settlement Companies:
Note: In almost every case, it is better for debtors to file for bankruptcy under Chapter 7 or Chapter 13 than to use a debt settlement company. Bankruptcy offers many benefits that a debt settlement company cannot provide, including re-establishing your credit sooner. A debt settlement company offers no advantage over bankruptcy, but costs the debtor considerably more money. To learn more, see Bankruptcy — Table Of Contents.
New rules regulating credit card issuers were approved by the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration. The following rules take effect in July, 2010:
Rules Aim to Protect Credit Card Users
Banks and other credit card issuers are using additional information in assessing the creditworthiness of their customers. While all of them use credit scores, some are searching for additional information on their customers to try to forestall credit problems in these hard times.
Some of the criteria being used as a basis for lowering credit limits or maybe even canceling accounts include home prices in the customers' neighborhoods, the type of mortgage lender being used, and where they shop. According to this New York Times article, American Express Kept a (Very) Watchful Eye on Charges, American Express was even using spending patterns as a additional means to gauging credit risk of its current customers. American Express was evidently compiling a list of merchants who had more than an average share of customers that later had credit problems, then looked for customers who frequently shopped at those sites, causing American Express to re-assess their creditworthiness in light of the other information. American Express stated that it has stopped using shopping criteria for credit scoring, and that its main criteria is the overall debt load of the customer compared to their financial resources. It has also told analysts recently that people with multiple mortgages on multiple residences use to be a good credit sign—now it is considered a red flag. American Express does consider mortgage lenders, which they can learn about from their customers' credit reports, and that credit lines may be affected if the mortgage lender is a subprime lender or if it went bankrupt. Another area being examined for its small business customers is the type of business that the customer is involved in—credit limits may be lowered or even credit denied if it is a type of business that will probably be adversely affected by the current downturn, such as home construction or finance.
Citigroup has stated that it is using some mortgage data, but does not consider specific stores being shopped by customers or the type of merchandise being purchased. Capital One stated that geography is considered, but not spending patterns.
In 2008, CompuCredit, a subprime lender, was cited by the Federal Trade Commission for failing to disclose that customers' credit lines could be lowered if they shopped at particular types of merchants that would indicate that either the customer was under financial stress, such as marriage counselors and repair shops, or that customers did not spend their money wisely, such as bars and nightclubs, pool halls, pawnshops, and massage parlors—although one may find a good bargain at a pawnshop.
Credit cards sock late payers with default rates of 30% or more
It has oft been said that the reason credit card companies raise interest rates for the slightest delinquency is because of the increased risk. It does make sense to charge people with lower credit scores a higher interest rate when the customer is acquired—higher risk does require a greater yield—but once the customer has been acquired, does it make sense to charge the maximum default rates of 30% or higher, even if someone is only a little late on 1 payment? And if someone is paying late because they have run into financial trouble, jacking up the interest rate to usurious levels would seem to increase the odds of not getting paid at all.
I think the real reason that credit card companies do this is because they can. When people are unable to pay off their credit card debt, even if they are paying their bills regularly, I believe that credit card companies see this as an opportunity to take advantage of such people to reap enormous returns. Otherwise, a better method of reducing risk would be to not allow the customer to make any more charges until the debt has been reduced significantly, or, if the credit card company truly believed that the customer was a real risk, to cancel the account, but allow the customer to continue making payments, using the original interest rate, so that the customer will be able to pay off the account eventually. Cardholders with little debt are rarely charged such rates even if they are late because they could easily pay off the debt and cancel the credit account, which is a risk that most companies don't want to take, considering how much they spend to acquire accounts. This is why people with a heavy debt load get socked with usurious interest rates even if they pay regularly, and customers with little debt don't. So don't go into heavy debt, and let lenders take advantage of you. Besides, lower debt increases your credit score and is simply more prudent.
To help the consumer, the Federal Reserve is proposing a requirement that a 45-day notice of a rate hike be given to the consumer, with the option to cancel the account and pay off the debt at the original interest rate.
A recently introduced Stop Unfair Practices in Credit Cards Act would limit penalty rate hikes to 7% and could only be applied to future credit, not to past balances. The Act would also eliminate the exorbitant fees that card companies charge to pay quickly, and that payments be applied to balances with the highest rates 1st.
American Express and VISA are now offering creditworthy customers the option to charge their rent or mortgage payment with their credit cards. American Express started allowing the charging of rent in 2003 and mortgage payments in May, 2007 with a few partners—rental developers and mortgage companies—and has expanded it gradually to 200 cities in 35 states. VISA started offering rental and mortgage payment services in 2007.
While it is a great way to earn reward points, it could also lead to greater consumer debt, and lessen the motivation of users to solve critical financial problems right away. Although the program is currently restricted to the most creditworthy customers, considering the highly competitive credit card business, it may be gradually expanded to the general population.
Charge the Rent, but Only if You Don’t Need To
The above site allows you to check your report at ChexSystems, if they have a report on you. However, they do not display the information online. You have to call, and provide the information to their automated voice system, and then they mail you your report in about 5 days. The site has a sample report that details what is covered.
The ChexSystems Consumer Report may include any debts owed to a bank, writing checks without sufficient funds, and returned items. Major sections include:
Many people, as authorized users, have company credit cards to pay for business expenses. Sometimes the people pay the monthly bills themselves, and sometimes, especially for smaller businesses, the company pays the bill. However, an authorized user's credit score can suffer if the card payment is late, even if the company pays the bill.
Here's a good article about using low-rate offers from credit card companies to invest or spend. Most of the principles are obvious, but beware if there is no cap on the balance-transfer fee. Although most balance transfers in the past had a cap (example: 3% of balance or $50, whichever is less), more card issuers are eliminating the cap. Thus, transferring a balance of $10,000 at 3% with no cap will cost $300 just to transfer, compared to $50 with a balance transfer that has a $50 cap.
Credit Scores - This is my new, illustrated article on credit scores, and how to raise them.
The FICO® Score Estimator - Get a free estimate of your FICO credit score here by answering a few questions that will take less than 5 minutes. Your estimated score will have a low and a high estimated score with about a 50 point range.
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