Tuesday, September 30, 2008

Something Even I Need To Be Reminded Of: It's Not A Bear Market For Everyone


The last couple of weeks have been psychologically tense. The stock market has been getting hammered. The credit markets (especially institutional lending) has transformed. Housing prices continue to trend lower, though at a slower pace (see today's S&P/Case-Shiller home-price report for July). And the consumer continues to look like a deer in the headlights. Indeed, as far as the consumer knows, the consumer credit markets have all but dried up for them as well. And they'd be wrong.

Consumers who continue to keep their eyes on the headlines are missing the boat. I will concede that the consumer credit markets have closed up for some consumers (no question about it). But banks still want to lend to good risks (indeed, they NEED to lend to survive). Although this is anecdotal, I have friends who, over the past week, have applied for a slew of credit cards. All of them have FICOs over 700 (some in the low 700s). With the exception of a Nordstrom denial (too many inquiries), it was a clean sweep. There were American Express, Discover, Citibank, Juniper, HSBC, and Chase approvals. And the limits were generally strong. I was surprised. I shouldn't have been.

I had fallen into the trap of looking at the overall markets -- and paying attention to the scary headlines. I figure if I am doing it, so are a lot of other people. I'm now focused on the ball again. There is a bear market for some people -- yes, indeed -- but there is also a bull market out there as well. Last week I wrote a story about being flexible in my thinking. I'm always willing to tweak my thesis.

People with good to excellent credit can still apply for credit cards. They'll still get approved. They'll still receive healthy limits. In other words, despite all the doom and gloom, there is opportunity out there for those who qualify. The banks are open for business. They're simply waiting for the right people to come on in.

Don't get caught in the trap of thinking that everyone is foreclosed from the consumer credit markets.

That's simply not so. Credit Matters Blog

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  • Higher Limits Beget Higher Limits

  • High FICO Score -- Sitting in the Garage or on the Open Road?


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    Bankruptcy Filers Are About to Get a Second Chance at a Fresh Start


    Relief could be coming to a credit report near you. That's right. Credit-reporting agencies have been ordered to deal with discharged debt appropriately. The agencies have until tomorrow to get compliant.

    From the Wall Street Journal: Dealing With Debt That Refuses to Die

    A recent court order requires the three major credit-reporting bureaus -- Experian Group Ltd., Equifax Inc. and TransUnion LLC -- to clean up the credit files of millions of consumers who have filed for Chapter 7 bankruptcy. The problem: Old debts, which are typically forgiven by the courts in a bankruptcy filing, are still being reported as active on many consumers' credit reports.

    The judge for the case, David O. Carter of the U.S. District Court for the Central District of California, has given the bureaus until Oct. 1 to revamp their systems. Experian and TransUnion say they have already updated their credit files to be compliant with the court order, while Equifax declined to comment. TransUnion also sent notices to some customers saying they "may experience a slight change" to their credit scores if any of their accounts are updated because of a bankruptcy.

    Related Articles:

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  • One Man's Struggle to Overcome Bankruptcy -- and Reach FICO 800


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    Monday, September 29, 2008

    Prepare and Plan -- What To Do Before Your Wallet or Purse is Lost or Stolen


    This has to be one of the worst feelings imaginable. I have never lost a wallet. And I have never had a credit card stolen. However, I have had a credit card number compromised. It's a pretty helpless feeling (aside from being a royal pain in the ass to deal with). Still, I only had a number compromised; I could not imagine having a wallet or purse stolen. I imagine it doesn't get much worse. Most stories tend to focus on what you do after you've lost your wallet or purse (and all of your credit cards). Today's story addresses the things you should do before it ever happens.

    I believe, though I have no proof, that most people do not memorize all of their card numbers. Ditto the phone numbers to their credit card companies. I haven't memorized any of that information either. No matter. What I have done is taken a picture (close-ups) of each of my cards -- both front and back. I've put these pictures on a 2GB memory stick, which I have hidden in my house. Only my wife and I know where the memory stick is.

    Assuming that my wallet is ever stolen, and I am not far from my house, I will be able to bolt home and pull the memory stick out of its hiding place. I will then be able to quickly call of the creditors that need to be called. Lately, I have been thinking about carrying the memory stick with me (with the hope that I could plug my memory stick into a nearby computer (at a store, for example). Since I can now encrypt the files on the memory stick, I'm not so worried about keeping it in my front pocket. To this point, though, I haven't been brave enough to try it yet. I may in the future. Until then, it remains in the house.

    If I am not near my house, I carry a small piece of paper on me (at all times) with all of my creditors' phone numbers. It's very simple. Creditor name (Citibank) and phone number (800-950-5114). That's it. Nothing more. In a pinch, I can quickly call of them and notify them that my wallet has been stolen. Even if I do not have the card numbers on me, I will be able to verify myself by giving the customer-service representative personal information over the phone that will prove who I am. We can then cancel the cards.

    As for the other important information in my wallet, I have recorded that stuff as well. I have a backup of everything that I carry on a daily basis. Which reminds me. Many of us are carrying far too many cards in our wallets and purses on a daily basis. Fact is, I use one or two cards a day -- tops. Why do I need to carry ten cards in my wallet? It makes more sense to simply carry a primary card and a few backups at most. The rest should stay home -- in a safe place. The practice of leaving your cards at home will mitigate any damage that would occur if your wallet or purse is lost or stolen. (Also, stop carrying your social-security cards on you. Please. I see a lot of people carrying social-security cards on them. Don't.)

    In addition to recording all of my vital information, I also have a file where I keep my user names and passwords. I do not have any passwords sitting around my office. I now use Locknote to secure this text file. With Locknote, I now feel secure leaving my login information on my computer.

    In the event that your credit cards are stolen, you might want to call the credit bureaus. It might be smart to put a credit freeze or fraud alert on each of your credit reports at that point. Also, be sure to watch your online accounts like a hawk.

    By the way, it's true that your monetary liability is $50 for purchases that are made before you report the cards lost or stolen (and it's $0 for purchases after you've reported the card lost or stolen). But that's not the problem. The problem with lost and stolen cards is often the amount of time spent dealing with the fraudulent purchases that take place on the card. You'll have to submit fraud affidavits to your card company saying that you did not make the purchases in question. Indeed, when my BMW Visa card number got compromised in 2006, it took months of back-and-forth correspondence between me and BMW before I finally got the situation squared away. And that was just one card. Imagine if you had to deal with a half dozen! Therefore, the faster you can get your cards reported stolen or lost, the less time you'll spend later on trying to resolve issues. In other words, it's a race. By being prepared, you'll have a jump on anyone who might want to use your cards fraudulently.

    In the meantime, here are some key numbers just in case you lose any of your cards.


    FRAUD ALERT (AND FREEZE) NUMBERS FOR CREDIT BUREAUS

  • Experian: 888-397-3742

  • Equifax: 888-766-0008

  • TransUnion: 800-680-7289


  • LOST OR STOLEN CARDS

  • American Express: 800-992-3404. Outside the United States, call collect 336-393-1111.

  • Bank of America: 800-732-9194. Outside the United States, call collect 302-738-5719.

  • Chase: 800-432-3117. From Outside the United States, call collect 302-594-8200.

  • Citibank: 800-950-5114. From Outside the United States, call collect 605-335-2222.

  • Discover: 800-347-2683. From Outside the United States, call collect 801-902-3100. Also, here is the Discover card lost and stolen checklist.

  • Federal Trade Commission's Lost or Stolen Information.


  • LOST OR STOLEN SOCIAL SECURITY CARD

    Also, if your Social Security card is lost or stolen, you should request a new card here: How do I replace a lost Social Security card?.

    Remember: the Social Security Administration does not take reports of lost or stolen cards. The best you can do is simply request a replacement card.

    In addition to replacing your Social Security card, you should also read this information about identity theft and your Social Security card: Identity Theft And Your Social Security Number.
    ------

    If I didn't list the number for your card company, be sure to get it and write it down. Anyhow, you can store all of these phone numbers in your cell phone. Do that right now while it's fresh in your mind.

    Listen, I'm hoping that you'll never have your cards stolen or lost. But in case you do, be prepared. Take the necessary steps today to make sure that everything goes as smoothly as possible later.

    Prepare and plan. If you haven't already done so, start doing it today. CreditMattersBlog.com

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    Saturday, September 27, 2008

    The Weekend Roundup (The Week In News)


    These are the articles that caught my attention during the week (some may require a subscription -- though I always try to get the free version of the article whenever possible):

  • The crisis: A timeline (Money)

  • Experian National Score Index (Experian)

  • The Buck Stopped Then (New York Times)

  • The Morning After: Five Good Things About The Collapse (New York Post)

  • The theory behind the global credit crunch (The Herald)

  • The Great Shakeout (New York Magazine)

  • FAQs on Morgan-Goldman changes (USA Today)

  • Trickle-Down New York (New York Magazine)

  • Anatomy of a Bank Failure (Pro Publica)

  • A Bailout We Don't Need (The Washington Post) Credit Matters Blog


  • Related Articles:

  • The Weekend Roundup (Sept. 20) -- Anxiety Rises As The Era of Easy Credit Comes To an Abrupt End

  • The Weekend Roundup (Sept. 13) -- Banks Push Harder On Credit-Card Debt

  • The Weekend Roundup (Sept. 6) -- The Secret History of the Credit Card


  • Read More...

    Banks That Have Gone Bust Since October 2000


    Thought you might find this useful.

    The largest bank failure ever was Washington Mutual, September 25, 2008. But it didn't cost the Federal Deposit Insurance Corporation a dime. IndyMac, which failed in July, nailed the FDIC for $8.9 billion.

    From the Wall Street Journal: Banks That Have Gone Bust For 2008-2009 (link here).

    A more extensive list of failed banks can be found at the FDIC's Web site. Here is a list of banks that have failed since October 2000. Failed Bank List (link here). Credit Matters Blog

    Read More...

    Friday, September 26, 2008

    Everything You Ever Wanted to Know About Credit Cards and the Industry


    I figured it was time for me to build a list like this. I've learned a heck of a lot as a result of digging (several hours of digging, by the way) for all of this information. If I don't impart at least one thing you didn't know, I'll eat my hat. Enjoy.

    1. In 1946 John Biggins of the Flatbush National Bank of Brooklyn invented the first bank-issued credit card.

    2. The Diners Club card was issued in 1950 by Diners Club founder Frank McNamara.

    3. American Express issued its first charge card in 1958.

    4. The BankAmericard (later called Visa), issued by Bank of America, was also issued in 1958.

    5. Smiley vs. Citibank, a U.S. Supreme Court case, lifts state restrictions on the fees that credit card companies can charge customers.

    6. Electronic banking traces its roots back to 1955. Bank of America was the first banking company to use the technology (in 1959).

    7. Credit reporting can be traced back to the 1800s, when Lewis Tappan first implemented it.

    8. TransUnion was created in 1968 by its parent company, Union Tank Car Company. TransUnion was later acquired by the Chicago-based Marmon Group.

    9. Experian was created in 1980 and started off as an information service business.

    10. Equifax (originally called the Retail Credit Company) was founded in 1899 and incorporated in 1913. It has been known as Equifax since 1975.

    11. Fair Isaac (founded in 1956), the creator of FICO, built its first credit scoring system for American Investments in 1958.

    12. The first FICO score was created for Equifax in 1989.

    13. Consumers were finally able to gain access to their FICO scores beginning in 2001 when Fair Isaac partnered with Equifax to roll out Score Power.

    14. The Discover card was created by Sears in 1985. Years later, in 1997, Morgan Stanley acquired the brand. Morgan Stanley spun off the card company in 2007. Discover now trades on the NYSE under the stock symbol of DFS.

    15. Visa started out as BankAmericard. BankAmericard incorporated in 1970 as National BankAmericard Inc. In 1976, the BankAmericard name was changed to Visa. In early 2008, Visa completed the largest initial public offering in U.S. history (V: NYSE).

    16. MasterCard was founded in 1966 as Interbank Card Association. Gains exclusive rights to the "Master Charge" name in 1969. By 1979, the company was renamed MasterCard. MasterCard became a publicly traded company in 2006 (MA: NYSE).

    17. Merchant agreements from Visa and MasterCard stipulate that retailers are not supposed to ask for photo identification as a condition to the sale.

    18. Innovis is the fourth credit reporting agency. Here is the background for the CRA.

    19. American consumers, according to the Federal Reserve, currently (as of September 8, 2008) have $969.9 billion in revolving debt.

    20. American Express card numbers start with 34 and 37. Visa cards numbers begin with 4. MasterCard numbers run from 51 to 55. And Discover numbers start with 6011. These are called issuer identifiers.

    21. Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299 (1978). This landmark decision, published in 1978, held that Omaha Bank could charge customers in Minnesota the highest interest rate allowable by Nebraska law. What this meant is that a credit card company located in South Dakota, for example, could export the highest permissible interest rate allowed in South Dakota to locations across the United States. Credit Matters Blog

    Read More...

    Thursday, September 25, 2008

    Former Employees at MBNA Talk About Deceptive Credit Card Practices


    If you missed Nightline the other night, you missed a good one. However, have no fear. The video is available at ABC's Web site. I was truly disgusted by the stuff I saw and heard. The two employees, even if they were rogue employees, irritate me to no end. And it makes me rethink this Credit Card Bill of Rights stuff. Maybe it truly is needed. After watching the Nightline show, I'm thinking that it likely is.

    Do I think this stuff happens? Yes. Do I think it's widespread? No. But when you give these CSRs incentives to move direct deposits and balance transfers (so that they can win internal contests), you get these kinds of tactics.

    Here is a quote from the Nightline interview:

    "I was essentially finding a way to force you to take $100,000 or whatever, interest free, thinking that you're getting a good deal, and knowing that it's unlikely at the end of the initial period you're not going to be able to pay it back, and you're going to be in debt for the rest of your life."


    But it gets worse. According to the former MBNA employees, the card company would decline the credit card for the slightest reason. When the customer called in, the pitch was on:

    "You could be in a restaurant and your card gets declined, what do you do? You have to call in," Colombo said. And that meant another chance to sell. "Sorry about the dinner, we'll fix it so you can pay for the dinner, and by the way, you have $20,000 available so let's find a way to get it into your checking account."


    There is more, but you can watch the entire Nightline video for yourself: Are Credit Card Companies Dealing in Debt? (link here)

    See also CNN's story: Ex-bankers on pushing customers to rack up debt (link here)

    And the St. Petersburg Times weighs in as well: Credit card customer service reps' tales feed fire (link here) Credit Matters Blog

    Read More...

    Corporations Adopt a Survivalist Approach -- by Tapping Credit Lines


    Can you imagine if the consumer tried this at home? Times are tough. Credit is tight. The consumer thinks, aha!, I can tap all of my credit limits -- by taking cash advances. They could call it their rainy-day fund. That would definitely play well with their creditors. NOT. Let's just hope that the consumer at home doesn't think that what works for corporate America will work for them. It never does.

    From the MarketBeat blog over at WSJ.com: Corporations Adopt a Survivalist Approach

    What’s happening now may be the corporate equivalent of buying 10-gallon containers of mayonnaise and gigantic drums of beans and wheat. The current strategy is one of cash-hoarding, as companies have elected to tap into credit lines on a “just in case” basis, while others suspend or pullback on dividends and stock-market buybacks.

    Farther down in the blog entry, MarketBeat highlights a Wall Street Journal story out this morning, titled: U.S. Firms Gird for Hits and Draw On Credit Now

    In that story, one particular passage caught my eye:

    When a bank enters into a revolving credit line with a customer, whether it's a business or an individual, the amount of that loan commitment counts against the bank's capital ratios. That means that as companies draw down existing credit lines, it doesn't strain the bank's already-depleted capital levels.

    The bigger impact is on a bank's liquidity. Bank treasurers are generally charged with gauging the likelihood that specific loans will be drawn down, and the expected demands that will place on the balance sheet. That in turn influences the bank's decisions about whether to make new loans to other borrowers.

    The turn of the screw just made things a little tighter. I don't think we've seen anything yet.

    Corporations are tapping these lines because they see storm clouds moving in. I'm wondering how long the consumer can continue to hold out. Credit Matters Blog

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    Things You Find While Noodling Around Equifax's Web Site at Midnight


    I'm a trivia buff. I'm also someone who likes obscure facts and figures. While I was looking for something on Equifax's site the other night, I ran across several pages that had some interesting facts on them. I imagine that you'll recognize some of them; but there might be some things that you didn't know. If you find other things (in the future) -- that I missed -- feel free to post them in the comments section at the bottom of this page. The information doesn't have to come from Equifax, either. I'm interested in all kinds of credit trivia. I don't care if the information comes from FICO, TransUnion, Experian, or whatever. I only ask that you provide the source of your information. As I find more stuff in the future, I'll be sure to post it in the comments section as well.

    I'll start off with the stuff that I recently found on Equifax's site:


    FICO -- POPULATION OF CONSUMERS WHO HAVE THESE SCORES

    20% are above 780
    20% are in the range of 745 - 780
    20% are in the range of 690 - 745
    20% are in the range of 620 - 690
    20% are below 619


    TOP REASONS FOR GETTING DENIED CREDIT -- THE REASON CODES USED

    Serious delinquency
    Serious delinquency, and public record or collection field
    Time since delinquency is too recent or unknown
    Level of delinquency on accounts is too high
    Number of accounts with delinquency is too high
    Amount owed too high on accounts
    Ratio of balances to credit limits on revolving accounts is too high
    Length of time accounts has been established is too short
    Too many accounts with balances


    NEGATIVE INFORMATION -- HOW LONG WILL IT REMAIN ON YOUR CREDIT REPORT?


    Credit Accounts

    Accounts not paid as agreed generally remain on your credit file for 7 years from the date the account first became past due leading to the current not paid status.

    Late Payment History generally remains on your credit file for 7 years.


    Collection Accounts

    Collection accounts generally remain on your credit file for seven years from the date the account first became past due that led to the account becoming placed with a collection agency.


    Public Records

    Judgments generally remain on your credit file for 7 years from the date filed, whether satisfied (paid) or not.

    Paid tax liens generally remain on your credit file for 7 years from the date released (paid).

    Unpaid tax liens generally remain on your credit file indefinitely.


    Bankruptcy


    A bankruptcy under chapter 7 or 11, or a non-discharged or dismissed chapter 13 bankruptcy generally remains on your credit file for 10 years from the date filed.

    A discharged chapter 13 bankruptcy generally remains on your credit file for 7 years from the date filed.


    Inquiries

    Inquiries are a record of companies and others who obtained a copy of your Equifax credit file. The Fair Credit Reporting Act (FCRA) requires that Equifax disclose to you who requested copies of your credit file. Depending on the reason your credit file was accessed, Equifax generally retains these for one to two years.

    Source: Equifax.com

    If you have more facts and figures, not just from Equifax, please post them here. Credit Matters Blog

    Read More...

    Wednesday, September 24, 2008

    Credit Cardholders’ Bill of Rights Act of 2008 -- Roll Call


    I have mixed feelings about this particular Act.

    On the one hand, it will protect the consumer who doesn't do any homework. In particular, I am talking about the credit-card consumer who does not read his or her credit-card agreement. Many of the "gotchas" that pop up are clearly disclosed in the card agreement. I'm constantly amazed at how many people don't realize that a late payment could have severe consequences. Imagine that!

    On the other hand, though, this Act would weaken a credit card company's ability to assess -- and price -- risk on the fly. There is a lot to be said for that. If someone is running up huge balances -- and beginning to be late on payments -- I want to price that risk immediately. I do not want to wait some 30 days.

    At this point, I am decidedly undecided. (Editor's Note: I've actually become a lot more decided as time has gone on; I now support the Bill. See my comments in the section that follows this story.) How's that for conviction? Anyhow, the House yesterday voted 312-112 to pass the Bill. Most of the nays were on the Republican side (not a surprise). Here is the breakdown for the roll call.

    Meanwhile, a host of consumer groups today sent a letter to the Senate, asking them to add the Credit Card Bill of Rights to the massive bailout plan.

    Here is a snippet from the consumer groups' letter:

    the credit card industry has not learned the lessons of the mortgage crisis. Luring consumers into incurring debt with deceptively low offers and then dramatically escalating the cost of that debt once it is assumed is both unfair to consumers and an unsound banking practice, whether the debt incurred is a mortgage or a credit card loan. Under the Administration’s rescue plan, Treasury Secretary Paulson has asked for the authority to use taxpayer dollars to purchase not just mortgage debt, but bad credit card loans as well, many of which were issued recklessly.

    See, this is where I get irritated. "Luring consumers into incurring debt with deceptively low offers and then dramatically escalating the cost of that debt once it is assumed...?" I'm not sympathetic to this argument. No one twisted any of our arms when we decided to apply for a credit card. No one told us to ignore our credit-card agreements. If consumers didn't realize that 0% teaser rates would re-rate to the purchase rate after the 12 months was up, well, that's too bad. It was spelled out in black and white.

    Don't get me wrong, though. I am certainly sympathetic to an ailing consumer. It's just too bad that these consumer groups are making the consumer out to be an innocent victim who was fleeced by these big, bad credit-card companies.

    You can read the rest of the letter here: Consumers Need Protection From Deceptive & Unfair Credit Card Practices.

    If you have an opinion, I would love to hear it. Credit Matters Blog

    Read More...

    Sign Up For Nine Months of Free Credit Monitoring From TransUnion (Sept. 24 -- TODAY -- is the deadline)


    Today is the last day to opt in for the class-action settlement for In Re: Trans Union Corporation Privacy Litigation.

    You'll have the option of choosing from one of these three:

    1. Sign up for six months of credit monitoring services. If you select this option, you can also register to possibly receive cash benefits in the event of a cash distribution or file an individual lawsuit against the Defendants.

    2. Sign up for nine months of enhanced credit monitoring services. If you select this option, you will not receive any further benefits, including a cash payment, and you will not be able to file an individual lawsuit against the Defendants.

    3. Register to possibly receive a cash payment. If you select this option, you can also sign up for six months of credit monitoring; however if you receive a cash payment, you cannot file an individual lawsuit against the Defendants.

    By the way, almost anyone with a heartbeat will be eligible. This is what you need to qualify: "The Class includes all individuals who had an open credit account or an open line of credit from a credit grantor (including, for instance automobile loans, bank credit cards, department store credit cards, other retail store credit cards, finance company loans, mortgage loans, and student loans) located in the United States anytime from January 1, 1987 to May 28, 2008."

    I chose to receive nine months of enhanced credit monitoring services -- for what it's worth. Not interested in receiving a $3.87 check (I just made that number up; cash payments are usually a joke) as a cash payment.

    Here is the press release from TransUnion: Up to 9 Months of Free Credit Report Monitoring Available to Eligible Consumers.

    And here is the direct link to sign up for your benefits: Register for Benefits.

    Read More...

    FBI Investigates Four Firms at Heart of the Mess


    I've written stories that involved Federal Bureau of Investigation involvement. Let me tell you something: the FBI is often VERY late to the party. Wouldn't it be nice if the FBI could actually be early for a change? Even if the FBI finds that there was fraud at any of the four firms that were at the heart of this financial mess, there will only be jail time for those responsible (if, that is, there is actually any fraud). There won't be any relief for those who were fleeced.


    From the Wall Street Journal: FBI Investigates Four Firms at Heart of the Mess

    The Federal Bureau of Investigation's preliminary inquiries are focusing on whether fraud helped cause some of the troubles at Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc. and American International Group Inc., according to senior law-enforcement officials.

    I'd be shocked, shocked, if everything was squeaky clean at these firms. But stranger things have happened. Maybe everything was above board. I guess we'll find out.

    More from WSJ:
    There is yet to emerge a figure such as banker Charles Keating, who served four years in prison for fraud related to the collapse of American Financial Corp. and whose name became synonymous with the S&L crisis. But already there is widespread anger that mortgage securities deals enriched many on Wall Street at the expense of millions of home buyers and taxpayers nationwide who will end up paying the costs.

    Anyone want to lay some bets? Who thinks a central (and criminal) figure will emerge from this crisis? Will anyone do jail time? Credit Matters Blog

    Read More...

    Realizing You Have Enough Credit is Like Porn: You'll Know it When You See It (thanks, Justice Stewart)


    "So tell me, Gordon, when does it all end, huh? How many yachts can you water ski behind? How much is enough?" Bud Fox, Wall Street (1987)

    As you can tell, I'm a big fan of that movie. In fact, this is the second column I've started off with a Wall Street quote. Here's the first one (link here). Bud Fox does ask a valid question, though. How much is enough? Additionally, how do you know when you've acquired enough? We'll see if I can answer those questions today.

    The first question -- how much is enough? -- is largely a matter of individual circumstances. I've got pals who have more than $1 million in credit card limits. To me, that's amazing. Even if they charged $10,000 a month, they'd only be using 1% of their overall limits. One thing those limits do afford them is this: they will never have to worry about utilization issues (for FICO purposes). The average FICO high achiever uses 7% (link here) of his or her credit. These million-dollar-limit folks would have to use $70,000 to reach 7% utilization. Thus, these guys have the game beat here. Utilization (link here), which accounts for 30% of the FICO score, will never be an issue. Still, how much is enough?

    Certainly, based on my needs, $1 million in available credit is too much for me. What's more, I cannot imagine ever needing that much credit. But that's me. For my pals, maybe they use quite a bit of their limits on a monthly basis. One thing they have in common is that they all have their own businesses. I imagine they run a lot of expenses through those cards. So, yeah, they might have what they need.

    I have my own rule of thumb. I try -- and do -- keep my utilization at 1% overall. If I spend $6,000 a month on my cards, I want to have $600,000 in available credit. If I spend $3,000 a month, then I want at least $300,000 in available credit. That's how I can tell if I have enough. If I'm spending $5,000 a month, and have a $1 million in limits, I probably have too much credit. Still, that's my rule. You'll have to figure out your own. But that's how I determine if I have enough credit.

    As for the second question -- how can you tell if you've acquired enough? -- I've figured that one out as well. By the way, I realize that both questions are similar. However, the questions have slightly different answers. The first question can be answered by defining how much you spend each month. The second question -- for me at least -- is determined by whether my goals have been met.

    Have I diversified my portfolio? I have. Do I have a card with each of the major banks? I do. Do I have a relationship with companies that are well known for customer service? I do but I am still pondering a Discover application. Discover, I've been told, is well known for top-notch customer service. Although it doesn't issue the highest limits, it does handle customers in the way that I want to be treated. Given that situation, there's a possibility that I may apply for a Discover card at some point in the future.

    How will I know if I've acquired enough credit? I'll know that I have acquired enough when all of my goals have been met. If Discover fits within my plan, then I would submit to you that I have not yet acquired enough credit. I can tell you that I am very close, though. I've got cards with Nordstrom, American Express, and Merrill Lynch. Before I applied for these cards, I had great expectations for their customer-service departments. I have not been disappointed.

    I had fun with the title of this column but I really do believe you'll know when you have enough credit. Assuming you have set goals for yourself, it should be pretty easy to spot.

    I have enough credit. My credit limits meet my needs. However, I still haven't acquired enough. After I grab that Discover card -- which should round out my portfolio -- I imagine that I will have acquired enough as well. I've been eyeballing that Discover credit card advertisement on my site for a few weeks now. It's probably just a matter of time before I finally pull the trigger. After I do pull the trigger, all of my goals will have been met.

    Clearly, Paul Gauguin's painting (of two bare-breasted women) doesn't rise to the level of porn. But if it did, I think we'd all realize it. Indeed, as Justice Stewart once said: you'll know it when you see it.

    As for my own situation, I think I've reached the end of the road. Indeed, I can see it. And I know it. CreditMattersBlog.com

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  • Lowering Your Credit Limit is Stupid (plain and simple)

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    Tuesday, September 23, 2008

    Bailout Plan: Credit Cards and Student Loans Getting in on The Action


    The Washington Times has a story about the bailout expanding to credit cards and student loans.

    From the Washington Times: Student, card debt quietly added to bailout plan

    Treasury Secretary Henry M. Paulson Jr. stressed that the additions were needed to ensure that student loans and credit cards - which have become indispensable to the spending habits and career plans of many Americans - do not become victims of the widening credit crunch.

    Student loans, which Wall Street firms packaged and sold to investors just like mortgages, already were hit hard in the widening credit crisis earlier this year, with much of the private loan market disappearing. That forced the government to step in and beef up its direct loan programs for college students.

    Hey, may as well do it now. It was only a matter of time before others would be saying "me too." CreditMattersBlog.com

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    CreditMattersBlog.com Will Begin to Look More and More Like a Traditional Blog


    When I first started writing this blog, back in early July (link here), I treated the blog like a newspaper. Actually, I treated it more like a column, which could be found in a newspaper. I wrote a story once a day. Given my journalism background, it was a natural thing for me.

    However, I have received feedback over the past month or so that makes me think it's time to take this blog to its more natural state. I have written about 70 or so "staple" pieces over the past three months. I've covered all of the nuts and bolts of credit.

    Recently, though, I started to realize that I'm doing more talking than actual teaching. It's getting tougher and tougher to find something to write about. That simply means that I have covered most of the stuff that you'll find useful. I imagine that if you read the 70 or so stories that I have on the site right now, you'd know more than 99% of the U.S. population when it comes to consumer credit.

    Tomorrow's story (which will be published at 12:01 AM ET) will be the culmination of this blog's efforts to educate you. It's titled: "Realizing You Have Enough Credit is Like Porn: You'll Know it When You See It." I think you'll find it interesting.

    Anyhow, beginning this week, you'll begin to notice a change in direction for CreditMattersBlog.com. There will be more daily dispatches (of current credit events) -- and fewer actual columns written by me. To be sure, I will still be writing pieces from time to time, but they'll be more sporadic. I won't be writing a column every single day -- as I have been for the past three months.

    I'm hoping that, even though things will be a little different around here, you'll still continue to visit the site. I'll continue to educate you -- but I'll do it in a different manner.

    About an hour ago, I posted something about a Wall Street Journal story on bankruptcy. These are the kinds of things I'll be highlighting throughout the day. I'll also be editorializing as well. Credit Matters Blog

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    What Happens to Your Benefits After Bankruptcy?


    The Wall Street Journal has a story out today that's timely. More and more companies are succumbing to bankruptcy. What happens to your benefits if you work for one of these companies?

    From the story:

    The Pension Benefit Guaranty Corp. -- a federal agency created under the Employment Retirement Income Security Act, or Erisa -- guarantees your pension payments, but only up to a maximum amount, which means you might have to take a cut. For pension plans canceled in 2008, the maximum monthly guaranteed payment for a 65-year-old retiree receiving regular payments with no survivor benefits is $4,312.50. The PBGC doesn't insure assets in 401(k) plans. But Erisa requires pension and 401(k) accounts to be adequately funded and kept separate from the company's business assets.

    Link to the rest of the story: What Happens to Your Benefits After Bankruptcy Credit Matters Blog

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    July G.19 Report: Consumer Debt Moves Higher


    The Federal Reserve puts out its G.19 (consumer credit) report once a month.

    Quote from the release: "Consumer credit increased at an annual rate of 2 percent in July. Revolving credit rose at an annual rate of 4-3/4 percent, and nonrevolving credit rose at an annual rate of 1/2 percent."

    The most recent data show that there was $969.9 billion in revolving debt (typically credit cards) and $2.59 trillion in overall consumer debt.

    The Fed releases this information about the 7th or 8th of each month. I like to keep my eye on it. Figured I would highlight it today, even though the information is about two week's old, so that you can bookmark it for the future release.

    Link: Federal Reserve's G.19 Report Credit Matters Blog

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    Something Everyone Should Do: Keep Good Records


    The personal computer has made record-keeping easy. Really easy. And yet, most people couldn't tell you what the balance on one of their credit-card statements was 12 months ago. Why? Because most people don't keep track of that kind of stuff. Instead of filing their monthly statements (either on a hard drive or in a filing cabinet), most people simply hope that there will never be a need for that kind of record in the future. That ends today. After today's column, you'll no longer have an excuse to ignore this essential habit. I'm going to show you just how easy it is to keep meticulous records.

    I can't think of a single, er, wait. I was just about to say that I couldn't think of a single credit-card company that doesn't provide an online billing statement. But I forgot about my BMW Visa platinum card. Believe it or not, BMW still hasn't moved into the 21st century. There is no way for me to view my online billing statement through BMW's Web site. (Note to BMW: quit being so damn cheap. You're making me think that your credit-card operations are an after thought.) Anyhow, aside from BMW, all of my card companies provide an online statement. Most of them are in PDF format, which makes saving these particular records really simple. Once you've opened up the online bill in the Acrobat reader, you just hit the save button and put the file on your hard drive. Once you've saved the file, you can rename it so that it's easy to find later on.

    What I have done is created a computer filing cabinet. I have a file for each creditor. And I have put a date on each file. This is what my computer filing cabinet looks like (click the picture for a full-size version):



    As you can see, each card has its own folder. When a new billing statement comes out, the statement goes into its respective computer file. It literally takes me seconds to move my online credit-card statement over to my hard drive. Just in case, I also have a backup hard drive, which is where I store an exact duplicate of my computer filing system.

    For the companies that have not yet moved into the 21st century, I take the paper statement that I get in the mail and I scan it on to my computer. I have a basic Hewlett-Packard scanner (which I bought for less than $100). While this does take a bit longer (about two minutes longer), it's still done each month. It's a habit now, so it's not a problem. After I have scanned the document -- and made a backup copy on my second hard drive -- I shred the paper document. I have a Fellowes confetti shredder that does a very nice job (the Fellowes S8-97Cs shredder for anyone who cares).

    I also have another way of saving records. Often there is no PDF file available for my online statement. Instead, the statement is presented on the card company's Web site. If you want a copy of the statement, you must print the page. Then you'd have to scan the document and save it on your hard drive. That's inefficient, so I have figured out a better way. I have a PDF printer. What? You don't have a PDF printer program? Well, I'm going to tell you how to get one for free. And I will explain how it works.

    I use the PrimoPDF 4.1 program. It's freeware and you can download it at download.com, the site that's owned by CNet. This is a Windows-based program, but I imagine that there are plenty of PDF print programs available for Mac users as well. You Mac users will want to grab one. Anyhow, Windows users can download a copy of PrimoPDF here.

    After you have downloaded a copy, and installed it, it's really easy to use. You simply go to the page you'd like to save and you print it using PrimoPDF. But instead of printing a piece of paper, the program creates a PDF file that you can store on your computer. Here's an example of what happens when you hit use the print function on your computer:


    Notice that one of my printers is actually called PrimoPDF. I hit OK to continue on with the print. The PrimoPDF program opens up and asks me how I would like to handle the job. I simply find the place I would like to save the PDF file and I give it a name. I also select a post process (what I want the program to do after it saves a PDF file). I choose "do nothing." After my PDF file is saved, I want the program to close down. Here's a picture:


    After I have chosen how I want my document handled, I hit "create PDF." And that, my friends, is that. I have a nice PDF file saved on my hard drive and I didn't have to waste any paper in the process. This is also how I save all of my columns. Each morning, right after I post the column that you guys read, I create a PDF file and store it on my computer. I also put a second copy on my other hard drive.

    People might think I am anal for keeping these kinds of records, but you never know when you might need them. This is especially true if -- many years from now -- someone claims that you owe them money (or tries to claim that you owe them more than you actually do). If you've been keeping wonderful records, and know that you don't owe anyone any money, you'll be able to find your proof in a matter of seconds. You will have a record of every bill you've received. What's more, you'll have the next month's bill, which will show that you paid the previous month's balance.

    I used to say that it was smart to keep a paper trail of everything. Now I say that it's smart to keep a PDF trail of everything. I've got records for everything. Best of all, these records are not piling up in some corner of my home. They're safely tucked away on my hard drives. One of my drives, by the way, is external. That means that I'll be able to grab all of my records very quickly in case there's a fire. The external drive holds 500GB of space.

    Record keeping isn't sexy, but it's essential in my life. What's more, it's so easy. Given all of the tools at our disposal, there is absolutely no reason why any of my readers should ever say this when someone requests a financial document that proves the validity of what we're saying: "Document? What document?" Instead, you should be able to locate any document in a matter of seconds.

    Do me a favor: give it a try. I'm willing to bet that you'll be happy you did. CreditMattersBlog.com

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  • Monday, September 22, 2008

    The Current Credit Climate Requires Flexibility


    When the getting was good, I was "getting." Now that it's tough all over, I have adjusted my thinking. My friends have been asking what I am doing right now -- especially as it pertains to credit card applications, usage, and behavior.

    For the past year I have been laying low -- applying for cards sparingly (one application in all of 2008). The climate really started changing after the summer of 2007. You could feel the difference in the air. Approvals didn't seem as easy and, even when there was an approval, the initial limits on those new cards seemed lower. That's not a recipe that I like. I like easy approvals and fat credit limits. Now that those kinds of approvals have faded (relatively), so has my appetite for new credit. I'm being extremely picky right now. I'll only apply for a card if it fits into my plan and it's a card that I just have to have. Right now, there is nothing calling my name (although I have been thinking about getting a Discover biz card). As a result, I remain on the sidelines (for now).

    In addition to my reduced appetite, I'm also well aware that creditors are skittish. We're living in a very uncertain time right now. See Lehman Brothers, Merrill Lynch, American International Group (AIG), Morgan Stanley, Washington Mutual, and every other financial institution that has seen its business change over night. Creditors are changing the way they do business. In fact, they have to change.

    If you're not using your credit right now, you should expect to see some of it disappear. Just a year ago, you could literally put a card in the drawer and use it every six months. That was good enough to keep the card open and the credit limit intact. That's all changed. Card companies are now looking for inactive credit cards (and lines of credit) and closing them. (See my recent story on Citibank's closure of my Citi Flex line of credit.) They're also looking at lightly-used credit cards. If you have a hefty limit on a card that you barely use, you should not be surprised to see the limit reduced.

    Banks are cutting back their exposure to credit-card customers. I've recently been using my inactive cards (ones that I have not used in three months). I've put charges on all of them. I'm trying to stay off the radar screens of these card companies that are just looking to close accounts that haven't been used recently. I'm also stepping up the spending on cards where I have pretty big credit limits. I'd like to keep the limits intact, so I've stepped up the spending on a few of them (normally I would spread the spending around to more cards).

    As for my behavior, I am not doing anything that appears risky. Any creditor that looks at my credit report right now will see that I have not been loading up on debt. In fact, I have been paying bills off before the billing statement even closes (except with my American Express account; I don't believe that most American Express customers pay their bills before the statement closes; I don't want to stick out). At the beginning of the month, I believe that every one of my accounts was reporting a $0 balance (which was an accident; I like to always have at least one balance reporting so that FICO doesn't nail me for not using my credit). I'm still using the cards, but I am simply not allowing the balances to report to the credit reporting agencies. This is what works for me. You'll have to figure out what works for you.

    If you're still operating under the old rules (that existed last year), I think you're making a mistake. Times have changed. The credit market is tight. Creditors are on the hunt for underutilized accounts. They're also looking for accounts that are inactive. Though there is no guarantee that your accounts will be spared, you'd do well to take a close look at them. Make sure you're using them. Make sure that you're not giving creditors any reason to close them.

    This is the time to be flexible in your thinking. If you're not willing to change, you should expect to get knocked out. Credit Matters Blog

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  • Saturday, September 20, 2008

    The Weekend Roundup -- Anxiety Rises As The Era of Easy Credit Comes To an Abrupt End


    These are the articles and videos that caught my attention during the week (some may require a subscription -- though I always try to get the free version of the article whenever possible):

  • Anxiety rises as the era of easy credit comes to an abrupt end (USA Today)

  • Credit Card Clampdown (Seeking Alpha)

  • Debtor's Prism (Wall Street Journal)

  • Pain Spreads as Credit Vise Grows Tighter (New York Times)

  • Choking On Credit Card Debt (Forbes)

  • Winners and Losers of the Federal Government Bailouts (Wall Street Journal)

  • Wall Street titans crumble under credit crisis (MSNBC.com)

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  • The Weekend Roundup (Sept. 26) -- The theory behind the global credit crunch

  • The Weekend Roundup (Sept. 13) -- Banks Push Harder On Credit-Card Debt

  • The Weekend Roundup (Sept. 6) -- The Secret History of the Credit Card



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    Friday, September 19, 2008

    Yahoo! I Have Found The Mother Lode of Credit Misinformation


    I've often wondered where some of the credit misinformation I hear comes from. Seriously. So many people believe so much of the same garbage. I figured there must be some school where they teach this crud. I always ask people where they hear this stuff. Most of the time it comes from the parents. Other times the person doesn't know where they got the misinformation. Regardless, they're out there parroting it like it's the truth, though. Anyhow, the mystery is finally solved. I've figured out where this pathetic and uninformed information comes from: Yahoo! (Incorrect) Answers.

    During the past week, I've spent a good amount of time over there. What I've found is very sad. People with genuine issues ask questions about credit. Some of the answers that follow are insane (and inane). Some are flat-out reckless. Other times I imagine that the person answering the question is just an ill-informed person who has never done a lick of homework. I'd venture to guess that 95% of the answers have a mistake in them. For the most part, the people answering the questions have no expertise. None at all. And yet, there they are giving answers to people who will eventually walk away thinking that they've received good information. Nothing could be further from the truth.

    Here's an example of what I am talking about. The following question and answer is real. I couldn't make this stuff up if I tried.

    QUESTION: "Three credit cards for an 18 year old -- too much?

    I'm almost 19, and current [sic] have 2 credit cards - A Visa student card ($250 limit), and a Discover card ($500 limit). I make sure to pay my bills in full every single month. My credit score is fantastic, and I was recently offered a 13.9% APR on a Capital One Master Card [sic] if I applied and was approved. My questions are:

    1) Is 3 credit cards for someone my age too much?

    2) Does it help or hurt my credit?

    Keep in mind I work two jobs and make decent money for someone my age, and have never had problems paying credit card [sic], cell phone or other bills.

    Any advice would be extremely helpful. Thanks in advance!"

    The ANSWER comes from a person who goes by "Michelle S.": "Yes pay them off now, please. Save yourself.

    At this rate when you are 23 you will be several thousand dollars in debt, even 10k or 15k in dept [sic] by the time you are 30.

    Pay them off now, and start saving money and only buy things when you can afford them. Otherwise you are looking at a life long debt."
    ----

    Her source? She says her answer comes from "experience." Never mind that the person asking the question pays in full every month. The person doesn't even have credit card debt. I have a message for Michelle. You are reckless. Put the keyboard down now. Get some education; then give the Yahoo! forum a try again. What's so scary is that some people will actually listen to her drivel. Michelle is actually called a "top contributor" on the forum. Heaven help that forum.

    Then there is this question from someone who wanted to know whether it was necessary to get a credit card (in general).

    QUESTION: "Do you really need a credit card?

    I know that apartment complexes will ask (for) your credit score, and if you don't have one you have to make like 5x the monthly rent. Or you need a score to apply for loans. But I've seen so many anti-credit card movies and articles. Is having a credit card really necessary?"

    ANSWER from "Patty Ann": "No, I don't think they are necessary. Your credit rating isn't based on your credit card use, but on how you pay off all bills."
    ----

    Uh, wrong, Patty Ann. Patty Ann clearly has no business answering this kind of question. She was wrong from the get-go. Credit card usage is extremely important to credit scores. Utilization is worth 30% of the FICO score. Still haven't had enough of this lousy information? There's a ton of it on Yahoo! It's actually sickening.

    But here's another one for you.

    QUESTION: "I'm 16 and want to start getting credit is there any way?

    I'm 16 and want to start gaining credit so I don't have problems ahead in life."

    ANSWER from some schmoe named "Lady Shmoe": "STOP! Whatever you do, check out Financial Peace University or Dave Ramsey's books first!

    It seems to take credit to make credit and that sucks because credit cards are evil. Please be very careful before getting a credit card."
    ----

    There was more to her answer, but it was gut-wrenchingly pathetic. The answer, of course, is that you must be 18 years old in the United States to get a credit card or secured credit card. You can be made an authorized user if you're younger than 18, but you cannot get your own card until you're 18. Period. End of story. Lady Shmoe decided to rant on about Dave Ramsey instead of addressing the question at hand. Lady Shmoe your name is apropos. Nice choice.

    Wait, there's more. Here is another one by "Lady Shmoe."

    QUESTION: "I currently have my first credit card, and I'm still a bit confused. I have $1,000 of available credit. After I pay my first months payment, or minimum payment does my credit get renewed and go back to 1,000? Or must I first completely pay off my existing balance?"

    ANSWER (from the Shmoester):

    "It is like simple math:

    $1,000 balance
    minus $100 dollar shirt
    = $900 dollar balance on card

    $900 balance
    + $50 payment
    = $950 balance

    Be oober careful with a CC. Interest will eat you alive. Don't go overboard either. I recommend calling the CC company and asking them to lower the balance to $200 or $300. You will still beef up your credit standing that way. Always pay more than the minimum payment each month - pay the whole amount owed if humanly possible."

    Disgusting.

    Is this what Dave Ramsey (the all-cash guru) is teaching his disciples? Yo, Dave, you might want to put this Lady Shmoe at the head of your class. She could be one of your brighter students. What a joke. Is that Lady Shmoe a hoot or what? Seriously, this is the kind of information being passed off at Yahoo! Answers. How can you not feel sorry for the poor souls in need of some real answers? Yo, Shmoe: stop answering questions. You are wrecking lives over there. Pathetic and sad. All I can do is shake my head. Oh, and by the way, Shmoe, the correct word is “limit” -- not balance. You wanted the person asking the question to lower her limit -- not her balance. Bawaahaaahaha. These people slay me.

    A user that goes by the name of "Emma F" was just as moronic -- but, because this is my blog, I'm not going to highlight her garbage on my site. Instead of answering questions about credit, she should stick to what she knows best. And whatever that is, it certainly isn't credit.

    It seems that Yahoo! Answers has been overrun by a bunch of ignorant fools who have no education. Seriously, some 90% of the people I saw answering questions flat-out scared me. The answers were flimsy, wrong, half-wrong, totally wrong, or misinformed. The commonality, though, was that credit is evil. Scary. Ooooh. Give me a break. It's obvious that most of these people have never done any real thinking in their lives. They wouldn't know what rigor meant if it was staring them in the face. Therefore, instead of educating themselves, they parrot what they've heard others say. As I said earlier, I hit the mother lode of credit misinformation on this one.

    Now, all of that said, I was able to find a few people (a guy who goes by "slimick," for example) who knew what they were talking about. In fact, I found one woman who goes by the screen name of "latebreakfast." I checked out several of her answers. She's on top of her game and it's obvious that she has done her homework. She has answered some 1,103 questions. Nearly one-third of her answers were voted "best answer." It's no wonder, really. She's good. She's sharp. She's thoughtful. And she addresses the questions that she knows the answers to. You don't see her winging it. She leaves that to other nut jobs on the site. Latebreakfast, if you're out there, I just wanted to give you a tip of the cap. You're educating people on that forum one day at a time. Nice job.

    As for the rest of the clowns at Yahoo! Answers, don't quit your day jobs. If I had it my way you'd all be banished from that site. You're wreaking havoc on people who truly need answers. The Internet is a wonderful place for information. But it can also be a dangerous place as well. It's especially dangerous when you get thousands of uninformed, uneducated people trying to pass themselves off as people who are qualified to give credit advice.

    To my readers: please do me a favor. At CreditMattersBlog.com we're pretty well informed here. If you're a daily reader, you know more than 99% of the world when it comes to credit matters. It's now your job to teach what you have learned. I invite you to visit the Yahoo! Answers area. Go to the credit section and educate these people. People are starving over there for the kind of quality information that you can provide them. Latebreakfast and Slimick, bless their hearts, cannot do it alone.

    You can find the site by going to Yahoo! Answers>Business & Finance>Credit. Here's the direct link: Yahoo Answers CreditMattersBlog.com

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    Thursday, September 18, 2008

    Dissecting Credit Card Agreements -- One Piece At A Time (Conclusion)


    We're wrapping this series up today. I've bored you enough with this stuff (I can hear you snoring). On Monday we looked at the disclosures pertaining to authorized users, card suspensions and cancellations, and how to use the card (link here). On Tuesday we forged ahead by taking a look at defaults and account fees (link here). Wednesday we looked at a host of things, ranging from payment allocation to transactions made in foreign currencies (link here). Today we finish up the series by looking at arbitration and litigation, changes in agreement, governing law provisions, finance charges, and the grace period.


    ARBITRATION AND LITIGATION

    First things first. If a dispute ends up in arbitration, you can count on the credit-card company prevailing. BusinessWeek did a piece earlier this year on the arbitration process. Card companies overwhelmingly won these cases (link here). You'd probably be much better off pursuing a case against your credit-card company in small claims court (unless your damages are too large).

    My Juniper US Airways agreement allows me to pursue a dispute via arbitration or small-claims court. I can bring my claim in the justice of the peace court in Delaware or an equivalent small-claims court in my own jurisdiction (that would be a no brainer). If I decide to go through arbitration, I can choose from two preapproved arbitrators that Juniper has provided. (You think they pull these names out of a hat? I'd hate to go through the arbitration process against one of these card companies.) If I prevail at arbitration (yeah, right), Juniper will reimburse me for any fees paid in connection with the arbitration. Arbitration, meanwhile, will be binding. I would not be able to litigate the matter in a court of law if my dispute with the card company has been resolved at the arbitration level.

    Merrill Lynch's arbitration clause states that I can bring a claim against it in small-claims court. If I do, Merrill will not pursue arbitration. If, however, I decide to remove, transfer, or appeal to a different court, then Merrill can move for arbitration. In other words, if you initially file a claim in small-claims court but try to move the proceeding to a different court, Merrill will invoke its right to arbitration. Whereas Juniper gave a cardholder two possible options for arbitration (two entities to choose from), Merrill gives just one -- the National Arbitration Forum (www.arb-forum.com). If that firm is unable to conduct the arbitration, Merrill will pick another firm. You have no say in which arbitrator is used. Under no circumstances will a class-action suit be arbitrated. Additionally, even if you decide to terminate your relationship with Merrill, pay the debt in full, declare bankruptcy, or Merrill sells your debt, you will still be bound by Merrill's arbitration and litigation section. American Express's arbitration clause is very similar to Juniper's and Merrill's.

    I have very strong feelings about the arbitration process. The system is not set up for your benefit. If it was, the card companies would not insist on it. Moreover, as shown by that BusinessWeek article referenced earlier, your chances of prevailing at arbitration are slim to none. I'd rather take my chances in small-claims court or as part of a class-action lawsuit.


    CHANGES IN AGREEMENT

    This is the clause that allows card companies to change the terms of, add new terms to, or delete terms from, the agreement at any time. The only thing that the card company must do is give you written notice. These changes will come in the form of letters that are sent to you. They're often titled: "Important notice of change in terms." You'll want to file those because the new information will supersede the information in your previous agreement. Oftentimes you'll be given an opportunity to reject the new terms (contract modification). If you do reject the terms, your account will likely be terminated -- and you'll continue to pay off your balance (if you have one) based on the old terms.


    GOVERNING LAW

    This is the law that the card company and you are governed by. BMW Visa platinum, for example, operates under Utah law (in addition to federal law). Disputes arising under my agreement with BMW are governed by Utah. Merrill Lynch and I are governed by Delaware law. American Express and I are governed by Utah law. And Juniper and I are governed by Delaware. I imagine that both of those states are very creditor friendly.


    FINANCE CHARGES

    This is the section where you'll find out how your credit-card company assesses interest on your account. When your account has a balance (that carried over from the previous month), BMW uses the monthly periodic rate to calculate your finance charge (interest charge). It uses the daily periodic rate for cash advances. The monthly periodic rate is equal to 1/12th of the annual percentage rate. The daily periodic rate is equal to 1/365th or 1/366th (leap year) of the annual percentage rate. Using a purchase balance, BMW would then apply the monthly periodic rate to my average daily balance. To get the average daily balance, it takes the beginning balance of the purchases for each day of the billing cycle, adds any new purchases, unpaid finance charges, late fees, over-the-limit charges, and any other fees and charges, and subtracts any payments or credits. This gives BMW the daily balance. It then adds up all of the daily balances for the billing cycle and then divides the balance by the total number of days in the billing cycle. That gives BMW the average daily balance.

    An example of this method would probably be helpful right about now. We'll use September as an example. If you started with a balance of $500 on the first of the month and purchased something for $50 during the next eight days -- and then paid all of it off on on the fifteenth, and made no more purchases for the rest of the month, your average daily balance would be $360. That's $10,800 (the sum all your daily balances) divided by 30 days in September. Then, according to BMW, we would divide that average daily balance by the annual percentage rate (using the monthly periodic method). Let's call the APR 12% and that would give us a finance charge of $3.60 for the month (1/12th of 12% is 1%; and 1% of $360 is $3.60).

    Other companies use a daily periodic rate. Indeed, Merrill, instead of using 1/12th, uses 1/365th when calculating interest. Using the numbers from our BMW hypothetical, you would pay some $3.55 in interest on the $360 average daily balance -- rather than $3.60 (which is what we got when we used the monthly periodic rate). The point is that you want to pay attention to the way your card company calculates interest on your balances.


    GRACE PERIOD

    Most companies do not allow grace periods for balance transfers or cash advances. Interest starts accruing immediately. As long as your balance is paid in full each month, your new purchases will not accrue interest during the billing cycle (or during the period from the closing date and the payment date). This essentially gives you an interest-free loan for the entire billing cycle and the period between the statement date to the payment date (as many as 55 days if your billing cycle is 30 days and your payment isn't due for 25 days after the statement closes). Most grace periods range from 20-25 days.

    Believe it or not, that's it. I think we've covered most of the major disclosures found in your run-of-the-mill credit-card agreement. After this exercise, I don't think most of you will have any problems reading your card agreements. If you find yourself reading an agreement, and don't understand something, come back to my blog to see how I handled the particular disclosure.

    Tomorrow we'll get back to the stuff you love. I'll be writing about a particular site where people dispense credit advice like it's going out of style. The twist in the story is that this particular site provides some of the worst credit advice I've ever seen. I pull no punches in the story. I shoot the place up and take no prisoners. I'm in that kind of mood.

    You won't want to miss it. CreditMattersBlog.com

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    Wednesday, September 17, 2008

    Dissecting Credit Card Agreements -- One Piece At A Time (Part 3)


    It's day three in our series on credit-card agreements and we're still looking at basic terms (take a deep breath). When you think about it, that's pretty amazing. I haven't really hit any of the difficult-to-understand terms yet. We've mostly dealt with basic terms -- terms that most people have no difficulty understanding. Today, though, it will get a little more tough. But have no fear. By the end of this week, many of you will feel comfortable reading these card agreements.


    PAYMENT ALLOCATION

    Let's start today off with a softball. Softballs are always nice because they build up confidence. All credit-card companies include a "payment allocation" section in the card agreement. Juniper has a cute disclosure (and it reads just like Merrill's disclosure). It says that it "will apply your payments to the balances on your account in whatever manner we determine." I have to tell you, I am laughing here. How cavalier can Juniper get? All kidding aside, Juniper does say that it will, in most instances, apply payments to lower-APR balances first.

    That's standard across the entire industry. This disclosure should put a customer on notice that if they take advantage of a promotional offer, with a low APR teaser, that your higher-APR purchases will get buried below the promo-rate APRs. That's why you never want to make purchases (assuming your purchase rate is not 0%) on a card if you have a 0% balance sitting on the card (such as when you do those 0% balance transfers). If you're not familiar with this concept, be sure to read my story about balances transfers. Almost all credit-card companies apply payments in this manner. Payments will be directed toward lower-APR balances before higher-interest-APR balances.


    SPECIAL RULE ON CARD PURCHASES

    Let's move on. Are you aware of the special rule on credit card purchases? It's the one that pertains to purchases that you have problems with. For example, if you have a problem with the quality of the property or services that you purchased with your card, you may not have to pay the remaining amount due on the goods or services. There is a catch, though. You must try to correct the problem with the merchant in good faith. Moreover, you must have made the purchase in your home state. If you didn't make the purchase in your home state, then you must be within a certain distance of your mailing address to qualify for the special protection.

    Merrill Lynch, for example, says that you must be in your home state or be within 100 miles of your home if you are outside of the state when you make the purchase. Additionally, the price of the good or service must exceed $50. Therefore, if I live in San Diego, California, and I travel to Yuma, Arizona, for the day, I could have trouble if I buy something there with my credit card. Yuma is 169 miles from San Diego. It's outside of my home state. If something was amiss with the quality of my goods purchased in Yuma, I could not benefit from the special rule for credit card purchases. Darn. If I had gone to San Francisco instead, which is about 520 miles from San Diego, I would have been covered. A purchase in San Francisco would be covered because it's in my home state. My Merrill card, then, would not have served me well recently when I was traveling well outside of my home state. (If the card company owns or operates the merchant, or if the card company mailed the advertisement for the property or services, then the limitations won't apply.) Almost every card company has a special rule for purchases -- and they all read the same. If you've read one, you've probably read them all.


    WAIVER

    Nearly all card agreements carry a waiver clause. Quite simply, it means that even if it fails to exercise its rights under the agreement, or delays its rights under the agreement, or waives its rights on occasion, you cannot rely on its past behavior. In other words, if you go over the limit on your card, and the card company does not throw your account into default, you cannot cry foul if, when you go over your limit again in the future, the card company does assess the default rate on the second over-the-limit infraction.


    SKIP/PROMOTIONAL FEATURES

    From time to time, card companies will allow you to skip a payment. The old MBNA used to offer this feature to me all the time. If you do take the card company up on its offer, your balance will continue to accrue interest. If you are able to skip multiple periods, just recognize that your interest will continue to climb. When the skip or promotional period ends, your regular rates and terms will revert back to their pre-promotional terms.


    ASSIGNMENT

    A card company can -- at any time -- assign your account, assign any sums due on your account, assign the agreement or its rights or obligations under the agreement. In a nutshell, this means that your creditor can give someone else the legal right to handle your account in the future. If your account ever goes into default, because you didn't pay your bill, the card company can assign the debt to a third party. The assignee will have all of the rights that your original creditor had.


    TRANSACTIONS MADE IN FOREIGN CURRENCIES

    If you make a transaction in a foreign currency, it will be converted by Visa, MasterCard, American Express, or whatever payment processor you use, into U.S. dollars. Each creditor has a different fee for conducting the transaction. BMW, for example, charges a 2% fee -- in addition to the small wholesale market rate charged by Visa or the government-mandated rate that is in effect one day before the actual transaction. Juniper, meanwhile, charges 3%. Merrill Lynch charges 2%. And American Express charges 2%.

    That is it for today. Although you can't see it yet, we're starting to see some light at the end of the tunnel. Tomorrow we'll talk about interest rates (daily purchase rates, etc.) and legal rights that you have under your agreement. Credit Matters Blog

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    Tuesday, September 16, 2008

    Dissecting Credit Card Agreements -- One Piece At A Time (Part 2)


    Yesterday we looked at some of the basic terms contained in several credit-card agreements. Today we continue our journey, starting with the default disclosures contained in the American Express, Juniper US Airways, Merrill + Visa, and BMW Visa platinum card agreements that we've been using.

    DEFAULT

    The default clause is one of the most dangerous items in the card agreement. Miss a payment, go over your limit, or fail to comply with any other term in the agreement, and you'll trigger the default clause. The consequences of triggering the default clause are often severe.

    Indeed, the default rate at American Express is prime plus 21.99%, or 26.99%. American Express's default clause is fairly expansive. Clearly, you'll be in default if you fail to pay your bill on time, but American Express may also declare you in default if you "breach any promise or obligation under any other agreement that you have with us or with any of our affiliates." Quite simply, that means if you're in breach with one of American Express's affiliates (a partner), you could be in default with American Express. American Express can also throw you into default if the company receives "information leading us to conclude that you are otherwise not creditworthy." Could American Express be any more vague?

    Well, American Express tries to clarify that previous statement by saying that we'll need to agree that American Express can "rely on information contained in consumer reports, and in our discretion we may consider the amount of debt you are carrying compared to your resources or any other of your credit characteristics, regardless of your performance on this account." In other words, American Express watches your credit reports like a hawk, making sure that you aren't loading up on debt. The company can also perform a financial review on you as well, making sure that your financial resources are adequate enough to cover your current debts. In the worst-case scenario, American Express could immediately call your outstanding balance due and payable if it finds you in default of your agreement.

    There are several other American Express disclosures that are worth paying attention to as well. The company says that you'll be in default if your account is delinquent during ANY three billing periods, or your account is delinquent on the closing date of any two CONSECUTIVE billing periods, or a payment submitted on your account is NOT HONORED. I blew right by those disclosures the first time I read through them. I didn't pay attention to the subtle differences. You'll be in default if you are delinquent on three occasions during a 12-month period. You'll also be in default if you're delinquent during two billing periods in a row. And, finally, you'll be in default if a payment is not honored by your bank. What that means is if you ever (ever) mistype your bank account number when you submit a payment to American Express, you could be in default if your payment is not credited to the correct bank account (and it won't be the correct bank account if you don't enter the right numbers). Make sure you don't hit the wrong key when you're submitting your bank account information.

    BMW's current default rate is 27.24%. You'll be in default with BMW if it does not receive and credit your payment within five days of the due date during any two billing cycles during any review period (a review period consists of 12 consecutive billing cycles ending with the current billing cycle). If you are assessed the default rate, you'll remain there for at least 12 months. BMW's most recent card agreement makes it a lot easier to trigger the default rate. (See my story about BMW's recent changes here.)

    BMW also says that you could be in default if you file for bankruptcy, die or become incapacitated (Black's law dictionary defines incapacity as "lack of physical or mental capabilities." It describes an incapacitated person as someone who is "impaired by mental illness or deficiency, or by physical illness of disability to the extent that personal decision-making is impossible"). Beyond these, BMW has a nice catch-all phrase to find you in default (just in case it didn't snare you with any of the other default possibilities): you'll be in default if, in good faith, it believes "that the payment or performance of your obligations under the agreement is impaired for any other reason."

    Juniper's default clause is quite similar to BMW's, except that it is even less tolerant when it comes to being late. If you're late just once -- by even a single day -- it could declare you in default of your obligations. It could also throw you into default if you ever go over your limit -- whether it be by a purchase, balance transfer, through the use of a convenience check, or through a cash advance. In other words, be extremely careful with Juniper. This is not the place to be late or go over your limit. The default rate on my account is 26.99%.

    Oddly, Merrill Lynch does not spell out its default rate. I scoured the agreement but could not find it. I imagine it's between 27.99% and 29.99%. Regardless, if you are late, go over your limit, or fail to abide by any other term in the agreement, you could be assessed the default rate. Merrill reminds me, though, that even if it doesn't assess the default rate on me when I commit one of the cardinal sins, it has not waived its right to do so in the future if I do something to trigger it again.


    ACCOUNT FEES

    Account fees vary among the credit cards I hold. If I am late at Merrill, my fee will be anywhere from $15 to $39, depending on my balance. It assesses a returned check fee of $29. If I'm over the limit, the fee ranges from $15 to $39, depending on the balance. Juniper has a similar rate structure, except that Iowa residents catch a relative break here. Instead of paying $25-$39 if you're over the limit, Iowans pay just $15. Ditto the late-charge fee. Merrill doesn't give anyone a break (at least it doesn't spell it out in the agreement). Sorry, Iowa. BMW doesn't give anyone a break, either. If you're late there, you'll pay between $25 and $39 -- again, depending on the balance. You'll pay $35 if you're over the limit.

    Also note that some credit card companies only assess an over-the-limit fee if you are over the limit when the billing cycle ends. My Merrill card, for example, only dings me if I am over the limit when the statement closes. That means that I could go over the limit during the statement period, pay the balance down below my limit, and not get assessed a fee for being over the limit. Read your card agreement carefully. American Express is said to handle over-the-limit fees in a similar fashion with its credit cards.

    I would have included American Express's late-fee structure in the previous paragraph, but the structure is too convoluted. You'll be assessed a late fee at American Express if "any portion of the amount due on a billing statement is not credited to your account by the 14th day after the closing date of the next billing period." A $35 fee will be assessed. However, Iowa does catch another break. Iowa residents are assessed a $15 fee for being late.

    Now, here's where the fun really starts. If you still haven't paid your bill -- and it's not paid by the following closing date -- you may be assessed an additional fee (in addition to that first $35 fee) of the greater of $35 or 2.99% of the total amount due "that was not credited to your account by that next closing date." (Iowa, you continue to get lucky here; just $15 for you). Finally, if you still haven't paid your bill, you'll get assessed the greater of $35 or 2.99% of the balance that remains. The language appears to give American Express the right to assess this fee indefinitely (during each successive closing date) until the balance is paid off.

    As for balance transfer fees, find out how your credit card company handles those. My Merrill account, for example, assesses those fees at the purchase rate. That means that those fees will be the last thing to get paid down if I do a balance transfer (remember, lower APRs get paid down first) that is at 0%. My purchase rate is 9.9%. Therefore, the fees associated with the balance transfer will accumulate interest until the balance is paid off.

    We'll stop here for today. I think we've had enough. Some of this stuff is giving me a headache (especially the default rules). Tomorrow we'll delve deeper into the card agreement. I'm hoping to get to some of the legal disclosures (the ones that are more difficult to understand), but we still have a good amount of basic terms remaining. Still, I promise that by the end of the week, you'll feel more comfortable tackling some of the disclosures found in many of these card agreements. Credit Matters Blog

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