Money Credit and Debt

Consumer Credit, Debt, and Bankruptcy Blog

New FTC restrictions on Debt Settlement Companies

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 for Credit Card Issuers

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

New Methods of Assessing Creditworthiness

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.

How Credit Card Companies Take Advantage of People Who Can't Pay Off their Debt

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.

Charging the Rent or Mortgage Payment with a Credit Card

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

Specialty Consumer Reports — ChexSystems

Specialty consumer reporting agency list

Credit reports have information regarding payment history and amount of debt, and is requested by potential lenders before lending money. However, there are many other types of reports that cover gambling, checking accounts, employment, insurance, medical information, rental information, and mortgage financing. This short article has a good list of these reporting agencies, along with toll-free phone numbers. You are entitled to 1 free report per year from each.

ChexSystems Consumer Website

ChexSystems is one of the specialty consumer reporting agencies covering how people manage their bank accounts. ChexSystems relationship with banks is the same that lenders have with credit reporting agencies. Banks get these reports on anyone opening a new bank account, but they also send information about current customers, to add to the database.

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:

Company Credit Cards can Hurt Authorized users' Credit Scores if Paid Late

Company Cards Can Hurt Credit - WSJ.com

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.

Credit Card Rate surfing

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 — Credit Score Estimator

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.

FICO Credit Scores

myFICO - FICO Credit Scores, Online Credit Reports and Identity Theft Protection

Credit scores are an important screen that mortgage lenders and other lenders use to screen loan applicants. This site explains the score, what factors determine it, and their relative weight. The home page shows a table for a typical mortgage, and how the interest rate and payments vary with the score. You can also buy your score here.

Bankruptcy Risk Score — Paying Your Taxes with a Credit Card

MSN Money - This secret score can hurt your credit

A new credit score - the bankruptcy risk score. This measures the risk that a consumer will file for bankruptcy. The score ranges from negative numbers up to 2,000—the higher the score, the more likely the consumer will file for bankruptcy. The bankruptcy risk score is inversely related to the credit score. The higher the bankruptcy risk score, the worse the credit risk.

USATODAY.com - Credit card firms dangle bait to those who owe taxes

Paying for your taxes with credit cards. Add a 2.49% convenience fee.

New Statistics for the New Bankruptcy Law

CardTrak - "Tracking Bank Credit & Payment Cards for the American Consumer"

The number of people filing for bankruptcy before the more stringent new law took effect on October 17, 2005 rose dramatically, but then fell off just as dramatically. Although 2,043,535 bankruptcies were filed for 2005, only a little over 38,000 have been filed from October 17 - December 31, 2005. Almost 60% of the post-October 17th filings were Chapter 13 filings compared to about 30% under the old law.

Credit Counseling - Health Care Bills - Market Gyrations and Mutual Funds - Gas and Energy Stocks

Creditors' Role in Counseling Draws Critics - New York Times

This article discusses the possible conflicts of interest between the credit counseling agencies that will be counseling people contemplating or in the process of bankruptcy and the creditors, who are providing much of the financing for these agencies. The new bankruptcy law requires debtors to get counseling both before and after they file, and the concern is that the counselors may be working more in the interest of the creditors than the debtors.

Treated for Illness, Then Lost in Labyrinth of Bills - New York Times

Inexplicable hospital and doctor bills? Don't know what the codes mean? Seems to me in this computer age, there should be no problem in providing a good description with the code so that a patient knows what he or she is paying for. Otherwise, it would be very difficult to discover mistakes, and a mistake in a hospital bill could be a very costly one. One thing that might help considerably for any hospital patient or a relative, is to keep a diary of every service received and from whom it was received, so that when the bills arrive, you'll at least know if you're actually paying for a service actually received.

Money - Become Rich - Avoid Losing It

How to Make a Million Dollars, by Marshall Brain

Want to become rich? This is one of the best articles I have ever read on the subject—simple and concise.

WebKEW: Making Money on the Web!

An excellent blog by Marshall Brain dedicated to making money on the Web.

"The idea behind WebKEW is to collect together ideas, techniques, case studies, stories, etc. that will help you learn how to create successful web sites."

MSN Money - 8 lottery winners who lost their millions

A very illuminating article about sudden wealth, and how to lose it.

MSN Money - Debt disasters of the rich and famous

The debt woes of the rich and famous.