The reason why people obtain a credit card is for the convenience of making instant payment when making any type purchase.
When you buy something on credit, the credit card firm is loaning you the money until you pay them back. You have the option to pay either the minimum balance or the complete balance. You may only deposit a little part; you will have to continue to pay an interest rate on that balance. The key rule is to pay off the balance every month; this is the finest way to take advantage of your credit card.
Credit cards offer many additional benefits and card issuers only add these extra due to the competitive market place. They benefit you by charging you less to have a credit card. This maybe cards with no annual fee, a low APR or 0% APR for a certain amount of time. Even though it is not as good as cash back or rewards, a vast majority of savings can be made.
Nearly every credit card company has its reward programs. Programs which reward a point or more for a certain amount you spend. Rewards then can be used for travel, takeaways, cards, gas, electricity and other purchases. The more you spend the more points you receive.
There a number of cards that give you a certain cash back percentage on all purchases such as 1% or 2%. Some cards give a higher percentage on certain goods or services.
Just remember, none of these bonuses will help you if you do not use your credit responsibly, in simple terms pay back what is owed or forget obtaining a credit card.
Friday
Thursday
Be A Deadbeat
Merriam-Webster dictionary defines a deadbeat as someone "one who persistently fails to pay personal debts or expenses." So by definition, you'd think a credit card deadbeat was someone who didn't pay their credit card bills each month, whose accounts end up getting sent to collections or charged-off or both. Not so in the credit card industry.
The credit card industry, infamous for making up their own rules, says that a credit card deadbeat is someone who doesn't pay their credit card bills on time each month. That definition is nothing the complete opposite of the one from Merriam-Webster. So who which are you going to trust? Here's why you don't want to listen to what the credit card industry says.
Why the Credit Card Industry Uses "Deadbeat?"
Credit card companies make a large portion of their money from interest and fees paid by cardholders. You only get charged interest when you let your balance revolve - you carry it from one month to the next getting assessed a finance charge each time. Credit card companies love these cardholders because people who pay interest help increase the credit card companies' profits.
When you pay your balance in full each month, the credit card company doesn't make any money off you. If it weren't for merchant fees paid by the stores where you use your card, your credit card would be a waste of 16-digits. You're not a profitable cardholder, so, to the credit industry, you are a deadbeat.
Why You Want to Be a Deadbeat
The reason you don't want to be a credit card deadbeat is simple - because not being a deadbeat is costly. Being a deadbeat allows you to escape potentially expensive finance charges on your credit card balance.
Let's say you have a credit card balance of $5,000. Rather than pay the balance in full each month, you send $200 payments. If you don't charge anything else on the credit card and continue making $200 payments to the account, you will pay $855 in interest by the time you pay off the balance in two and a half years. That's 17% of the original balance. If you'd continued making charges on the credit card rather than pay off the balance, your interest charges would be a lot higher.
Paying your balance in full is a much more responsible way of managing your credit. Not only do you not worry about interest charges, you keep your credit utilization low, boosting your credit score - the number many creditors and lenders use to approve your applications.
Forget about what the credit card industry says about credit card deadbeats. It's more important to save money than to empty your pockets for the multi-billion dollar credit card industry.
The credit card industry, infamous for making up their own rules, says that a credit card deadbeat is someone who doesn't pay their credit card bills on time each month. That definition is nothing the complete opposite of the one from Merriam-Webster. So who which are you going to trust? Here's why you don't want to listen to what the credit card industry says.
Why the Credit Card Industry Uses "Deadbeat?"
Credit card companies make a large portion of their money from interest and fees paid by cardholders. You only get charged interest when you let your balance revolve - you carry it from one month to the next getting assessed a finance charge each time. Credit card companies love these cardholders because people who pay interest help increase the credit card companies' profits.
When you pay your balance in full each month, the credit card company doesn't make any money off you. If it weren't for merchant fees paid by the stores where you use your card, your credit card would be a waste of 16-digits. You're not a profitable cardholder, so, to the credit industry, you are a deadbeat.
Why You Want to Be a Deadbeat
The reason you don't want to be a credit card deadbeat is simple - because not being a deadbeat is costly. Being a deadbeat allows you to escape potentially expensive finance charges on your credit card balance.
Let's say you have a credit card balance of $5,000. Rather than pay the balance in full each month, you send $200 payments. If you don't charge anything else on the credit card and continue making $200 payments to the account, you will pay $855 in interest by the time you pay off the balance in two and a half years. That's 17% of the original balance. If you'd continued making charges on the credit card rather than pay off the balance, your interest charges would be a lot higher.
Paying your balance in full is a much more responsible way of managing your credit. Not only do you not worry about interest charges, you keep your credit utilization low, boosting your credit score - the number many creditors and lenders use to approve your applications.
Forget about what the credit card industry says about credit card deadbeats. It's more important to save money than to empty your pockets for the multi-billion dollar credit card industry.
Wednesday
Escalting Payments
Most everyone is aware that credit scores generally determine whether an application for credit will be approved or denied. Credit decisions are made on car loans, credit cards, mortgages and most other forms of credit based on an applicants credit score. But, the affect of your credit score is not limited to what happens on the corner of approval or denial. If you are sent down the road of approval, your credit score will also determine the tolls you'll pay.
On November 20, 2007 Fannie Mae and Freddie Mac announced loan price increases for borrowers with credit scores below 680 on loans with loan-to-values above 70%. Simply put that means that if you don't have a 30% down payment and your credit score is below 680 you are going to pay higher closing costs and/or higher rates on your home mortgage.
Unfortunately, higher mortgage rates are just one of the ways your credit score can affect the prices you pay. When it comes to credit card debt an average borrower can easily pay twice as much or more interest as someone with an exceptionally high score. Understandably, borrowers whose credit scores identify them as low risk are offered the lowest interest rates available.
What other bills are you paying that are affected by your credit score?
Recent studies have shown that 92% of the largest automobile insurers use credit data in underwriting new business. It has been estimated that a consumer with bad credit is going to pay 20 to 50% more in auto premiums than a person who has good credit.
An Insurance Credit Score is also used to determine whether or not you will get homeowner's insurance and how much you will pay for it! This is based on the belief that the lower your score, the higher the chance that you will file a claim, inflate a claim or commit fraud.
Clearly anyone whose credit report doesn't identify them as a perfect credit risk is a target to pay more for all the most expensive things in their life. How much would an average family save if they could cut their mortgage and credit card payments as well as their auto and homeowner's insurance by 20-50% or more? Is it fair that the people who may afford it least have to pay more?
That is something open to debate, BUT...
It's also been determined that 79% of credit reports contained errors of some kind. Twenty-five percent of credit reports contained serious errors that could result in the denial of credit.
In other words, many people are paying the toll because the information on their credit report is grossly inaccurate. If you don't know what's on your credit report, how to analyze the information or how to raise your credit scores you may be woefully overpaying for some of the biggest items in your families budget. Be proactive, make sure your score is as high as it can be and realize the savings you deserve.
On November 20, 2007 Fannie Mae and Freddie Mac announced loan price increases for borrowers with credit scores below 680 on loans with loan-to-values above 70%. Simply put that means that if you don't have a 30% down payment and your credit score is below 680 you are going to pay higher closing costs and/or higher rates on your home mortgage.
Unfortunately, higher mortgage rates are just one of the ways your credit score can affect the prices you pay. When it comes to credit card debt an average borrower can easily pay twice as much or more interest as someone with an exceptionally high score. Understandably, borrowers whose credit scores identify them as low risk are offered the lowest interest rates available.
What other bills are you paying that are affected by your credit score?
Recent studies have shown that 92% of the largest automobile insurers use credit data in underwriting new business. It has been estimated that a consumer with bad credit is going to pay 20 to 50% more in auto premiums than a person who has good credit.
An Insurance Credit Score is also used to determine whether or not you will get homeowner's insurance and how much you will pay for it! This is based on the belief that the lower your score, the higher the chance that you will file a claim, inflate a claim or commit fraud.
Clearly anyone whose credit report doesn't identify them as a perfect credit risk is a target to pay more for all the most expensive things in their life. How much would an average family save if they could cut their mortgage and credit card payments as well as their auto and homeowner's insurance by 20-50% or more? Is it fair that the people who may afford it least have to pay more?
That is something open to debate, BUT...
It's also been determined that 79% of credit reports contained errors of some kind. Twenty-five percent of credit reports contained serious errors that could result in the denial of credit.
In other words, many people are paying the toll because the information on their credit report is grossly inaccurate. If you don't know what's on your credit report, how to analyze the information or how to raise your credit scores you may be woefully overpaying for some of the biggest items in your families budget. Be proactive, make sure your score is as high as it can be and realize the savings you deserve.
Monday
Credit Cards For Students
If you had started assisting to a college, or will be assisting soon, surely you have already evaluated all financial aids that could be helpful to your new, and a little more complicated, economical situation.
We have all been there, I can tell you now that it is possible to go through college, finance your education and left with any or just a small debt, and also with a good credit record.
A good credit history is, after your education of course, the best thing you can get while you are still a student. Doing this you will open the door to credit. If a house, a car, a boat or a long trip around the world are some of the things you will want to have in your future, your credit score will be the magic wand that will help you to convert these desires into real things.
The better your score, the higher the credit you will have access to, so do not miss any chance to improve it. Even if you have already made any mistakes and you have a not so good credit record, it is possible to revert that situation by doing some wise moves and student credit cards are a fast and accessible tool.
What Credit Card Suits You Best?
There are three kinds of credit cards. They can be prepaid, secured or unsecured. Even when student cards are meant for students, they work the same as normal credit cards, so these groups apply as well for both, normal and student credit cards.
With prepaid credit cards you buy a credit card with a predetermined amount of money that will be available to use for a limited period. This amount will be your card's limit. After you use it, you can either charge money again to the card and continue with using it or just wait to the card's due date, and then it will be canceled.
These credit cards can be used anywhere a credit card is accepted, but you will not be able to buy within monthly installments with these kinds of credit cards, your purchases will have to be done in one payment.
Secured credit cards require you to deposit a certain amount of money into an account. This amount works as your credit limit and also as a secure for the financial company, just in case you do not accomplish with the payments.
Both, prepaid and secured credit cards are a good option to enter in the financial world if you never had a credit card, or if you do not feel sure enough with doing payments and managing credit.
An unsecured credit card is a common credit card product, in which the financial company sets an amount of money as your credit limit, and you just have to make sure to accomplish the monthly payments.
Make Use, But Do Not Abuse!
As a student, you will have the possibility to access any of these cards, since student credit cards have less requirements than regular credit cards and financial companies know that young people are both a good market and loyal customers. Most of people keep their first credit card for many years.
So, if you are one of those people who feel tempted to complete every form that is presented to you, try to refrain from doing it. Keep your credit cards' number as low as possible, one or two will be perfect to finance your education expenses and to stay out of the possible debt that will surely come with more credit cards in your hands.
Go Ahead And Start Your Credit Record
Once you have decided which kind of credit card is better for you, use them wisely. Remember that the fact that you have a high amount of available credit, does not mean that you actually own that money. You will have to pay back every cent of that credit limit that you use.
Always be careful with your expenses and try to accomplish with your credit card's payments. Secured and unsecured credit cards will impact directly in your credit score. On the other hand, prepaid cards do not have any importance to your credit records.
We have all been there, I can tell you now that it is possible to go through college, finance your education and left with any or just a small debt, and also with a good credit record.
A good credit history is, after your education of course, the best thing you can get while you are still a student. Doing this you will open the door to credit. If a house, a car, a boat or a long trip around the world are some of the things you will want to have in your future, your credit score will be the magic wand that will help you to convert these desires into real things.
The better your score, the higher the credit you will have access to, so do not miss any chance to improve it. Even if you have already made any mistakes and you have a not so good credit record, it is possible to revert that situation by doing some wise moves and student credit cards are a fast and accessible tool.
What Credit Card Suits You Best?
There are three kinds of credit cards. They can be prepaid, secured or unsecured. Even when student cards are meant for students, they work the same as normal credit cards, so these groups apply as well for both, normal and student credit cards.
With prepaid credit cards you buy a credit card with a predetermined amount of money that will be available to use for a limited period. This amount will be your card's limit. After you use it, you can either charge money again to the card and continue with using it or just wait to the card's due date, and then it will be canceled.
These credit cards can be used anywhere a credit card is accepted, but you will not be able to buy within monthly installments with these kinds of credit cards, your purchases will have to be done in one payment.
Secured credit cards require you to deposit a certain amount of money into an account. This amount works as your credit limit and also as a secure for the financial company, just in case you do not accomplish with the payments.
Both, prepaid and secured credit cards are a good option to enter in the financial world if you never had a credit card, or if you do not feel sure enough with doing payments and managing credit.
An unsecured credit card is a common credit card product, in which the financial company sets an amount of money as your credit limit, and you just have to make sure to accomplish the monthly payments.
Make Use, But Do Not Abuse!
As a student, you will have the possibility to access any of these cards, since student credit cards have less requirements than regular credit cards and financial companies know that young people are both a good market and loyal customers. Most of people keep their first credit card for many years.
So, if you are one of those people who feel tempted to complete every form that is presented to you, try to refrain from doing it. Keep your credit cards' number as low as possible, one or two will be perfect to finance your education expenses and to stay out of the possible debt that will surely come with more credit cards in your hands.
Go Ahead And Start Your Credit Record
Once you have decided which kind of credit card is better for you, use them wisely. Remember that the fact that you have a high amount of available credit, does not mean that you actually own that money. You will have to pay back every cent of that credit limit that you use.
Always be careful with your expenses and try to accomplish with your credit card's payments. Secured and unsecured credit cards will impact directly in your credit score. On the other hand, prepaid cards do not have any importance to your credit records.
Little White Lies
"You don't look a day over 29."
"The check's in the mail."
"It was the dog."
We all occasionally stretch the truth, but did you know your financial provider tells fibs, too?
No need to rat anyone out just yet -- some of those little white lies may actually be boosting your credit score. Let's see whether any are hiding in your credit file.
Sins of omission
Many lenders fail to fully report to the credit bureaus. They may leave out payment information or even the existence of an account.
That's not necessarily an oversight you want to fix. If you've been a little lackadaisical about paying your bills on time, count your blessings and vow to pay all future bills on time, just in case the lender decides to kiss and tell.
If, on the other hand, your payment history with a particular lender is stellar, you might want to pipe up about invisible accounts and missing payment data. The lack of information can make you look lame to lenders. If most of your accounts have no payment reporting information and you're a stickler about on-time payments, a potential creditor can't tell whether you're a good or a bad bet.
If your credit file is thin, call your nonreporting lenders and ask them to communicate more information about your account, if possible. And remember, just because information doesn't appear on one of your credit reports, that doesn't mean that it's not included on another. Reporting companies aren't required to share information with all three major credit bureaus (Equifax, Experian, or TransUnion) -- or any of them, for that matter.
Hibernating accounts
Remember that Discover card you opened to get those airline miles you needed for your Hawaii trip back in 1999? After you earned your miles and stopped using the card, your lender may have forgotten about you, dear customer, as well.
When you shove a card in your sock drawer and stop using it, it may go into a deep sleep in your credit file. With no payment information to report (and when you stop using a card, there's not much to say), your bank will simply stop reporting anything to the credit bureaus. (The time frame varies from lender to lender, but it can happen in as little as three months.)
For those who have trouble keeping track of multiple bills and paying them on time, an account in hibernation may help keep your record clean, since after several months a late-payment ding will have less of an affect on your score. Still, remember that hibernation does not mean "disappearance." Unused accounts are still listed as open lines of credit on your report until you or your lender formally cancels the card. (After that it will be reported as "closed.")
Don't assume that all's well on an old, unused account. Check up on it occasionally -- make sure you don't owe some annual fee, or that the card isn't being used fraudulently and the bills sent elsewhere. If you truly doubt that you'll ever use the card and it's not one of your oldest accounts, consider closing it. But beware of canceling credit cards willy-nilly. Doing so may actually hurt your credit score. (See our advice on which credit cards you should cancel and which you should keep.)
Covert credit limits
A surprising number of lenders simply do not report consumer credit limits. Keeping this information out of your file is not necessarily an innocent oversight. Without that key piece of data, competitors are less likely to poach clients with preapproved offers.
Capital One caused a stir when its credit-limit reporting tactics became public knowledge: Instead of reporting customers' credit limits, it reported the highest balance carried, which gave the appearance that customers were much closer to maxing out their cards (a no-no for a stellar credit score) than they really were. (FICO scores no longer use this piece of Capital One data when computing consumer credit scores.)
You may want your credit card company to keep mum about how much it trusts you to spend, particularly if the spending limits on your cards are really low. Potential lenders see low limits as an indication that you haven't earned a lot of leeway and that banks don't want to give you too much slack in the leash, since they'll be left with greater losses if you ran off without paying your bills.
If you want your lender to report your limits, and it's not Capital One, call and ask. Sometimes, it's company policy not to report, but at least you can try.
Innocent oversights
Finally, let's all give thanks to the banks that occasionally turn a blind eye or -- intentionally or not -- say something that's maybe not exactly true. For example, did a lender forget to report a late payment or two? Is some business claiming you've been its stellar customer for longer than you actually have been? Has a past creditor forgotten to mention to the credit bureaus that you're no longer doing business with one another? Such mistakes can actually improve your credit standing by overstating how good of a borrower you are. Start composing a heartfelt thank-you note to MasterCard when you get a sec.
You can keep mum and pretend you didn't see any of your lenders' errors -- just smile and nod. But don't be surprised when a company finally sets your record straight. After all, little white lies can't get you out of every pickle.
"The check's in the mail."
"It was the dog."
We all occasionally stretch the truth, but did you know your financial provider tells fibs, too?
No need to rat anyone out just yet -- some of those little white lies may actually be boosting your credit score. Let's see whether any are hiding in your credit file.
Sins of omission
Many lenders fail to fully report to the credit bureaus. They may leave out payment information or even the existence of an account.
That's not necessarily an oversight you want to fix. If you've been a little lackadaisical about paying your bills on time, count your blessings and vow to pay all future bills on time, just in case the lender decides to kiss and tell.
If, on the other hand, your payment history with a particular lender is stellar, you might want to pipe up about invisible accounts and missing payment data. The lack of information can make you look lame to lenders. If most of your accounts have no payment reporting information and you're a stickler about on-time payments, a potential creditor can't tell whether you're a good or a bad bet.
If your credit file is thin, call your nonreporting lenders and ask them to communicate more information about your account, if possible. And remember, just because information doesn't appear on one of your credit reports, that doesn't mean that it's not included on another. Reporting companies aren't required to share information with all three major credit bureaus (Equifax, Experian, or TransUnion) -- or any of them, for that matter.
Hibernating accounts
Remember that Discover card you opened to get those airline miles you needed for your Hawaii trip back in 1999? After you earned your miles and stopped using the card, your lender may have forgotten about you, dear customer, as well.
When you shove a card in your sock drawer and stop using it, it may go into a deep sleep in your credit file. With no payment information to report (and when you stop using a card, there's not much to say), your bank will simply stop reporting anything to the credit bureaus. (The time frame varies from lender to lender, but it can happen in as little as three months.)
For those who have trouble keeping track of multiple bills and paying them on time, an account in hibernation may help keep your record clean, since after several months a late-payment ding will have less of an affect on your score. Still, remember that hibernation does not mean "disappearance." Unused accounts are still listed as open lines of credit on your report until you or your lender formally cancels the card. (After that it will be reported as "closed.")
Don't assume that all's well on an old, unused account. Check up on it occasionally -- make sure you don't owe some annual fee, or that the card isn't being used fraudulently and the bills sent elsewhere. If you truly doubt that you'll ever use the card and it's not one of your oldest accounts, consider closing it. But beware of canceling credit cards willy-nilly. Doing so may actually hurt your credit score. (See our advice on which credit cards you should cancel and which you should keep.)
Covert credit limits
A surprising number of lenders simply do not report consumer credit limits. Keeping this information out of your file is not necessarily an innocent oversight. Without that key piece of data, competitors are less likely to poach clients with preapproved offers.
Capital One caused a stir when its credit-limit reporting tactics became public knowledge: Instead of reporting customers' credit limits, it reported the highest balance carried, which gave the appearance that customers were much closer to maxing out their cards (a no-no for a stellar credit score) than they really were. (FICO scores no longer use this piece of Capital One data when computing consumer credit scores.)
You may want your credit card company to keep mum about how much it trusts you to spend, particularly if the spending limits on your cards are really low. Potential lenders see low limits as an indication that you haven't earned a lot of leeway and that banks don't want to give you too much slack in the leash, since they'll be left with greater losses if you ran off without paying your bills.
If you want your lender to report your limits, and it's not Capital One, call and ask. Sometimes, it's company policy not to report, but at least you can try.
Innocent oversights
Finally, let's all give thanks to the banks that occasionally turn a blind eye or -- intentionally or not -- say something that's maybe not exactly true. For example, did a lender forget to report a late payment or two? Is some business claiming you've been its stellar customer for longer than you actually have been? Has a past creditor forgotten to mention to the credit bureaus that you're no longer doing business with one another? Such mistakes can actually improve your credit standing by overstating how good of a borrower you are. Start composing a heartfelt thank-you note to MasterCard when you get a sec.
You can keep mum and pretend you didn't see any of your lenders' errors -- just smile and nod. But don't be surprised when a company finally sets your record straight. After all, little white lies can't get you out of every pickle.
Sunday
When The Credit Card Bubble Pops
Let me try a few words out on you: "Charge It," "Swipe It" and "Priceless."
You know exactly what I am talking about. We all have credit and debit cards. We all use them, and many of us keep our lives going because of them.
That is, until the bill becomes due.
The sad truth is that we are all complicit in our own economic servitude even if, at bottom, it's not our fault because we live in a consumption society, and don't feel we could live without them.
While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. You would never know it by watching those slick VISA card ads on the Olympic TV broadcasts.
Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy.
You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.
While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. "Just be careful about those credit cards, all right? Don't eat out as much," he said. After the foreclosure crisis, he warned, "the credit cards are next in line."
The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.
To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.
Younger people are being crushed by this debt burden as college students and new consumers. Emma Johnson of MSN Money reports that "Generation Y" is broke.
"The democratization of credit has really generated a competitive spending culture, and plastic has allowed for material goods not had in the previous generation," says Bob Manning, author of Credit Card Nation. "Most of us grew up in a home with just one or two bathrooms for the whole family, he points out; today, new homes usually have at least one bathroom per bedroom."That change has happened so fast," Manning says.
"This generation feels that somehow or another they're going to figure out some technological advancement that's going to get them out of their financial troubles and outsmart the market," says Manning, who served as adviser to the documentary In Debt We Trust. The documentary paints a picture of national financial crisis stemming from the personal-debt burden. (See InDebtWeTrust.com)
Happily, this issue is finally being addressed by Congress and the Federal Reserve Bank. When asked for comments, the public overloaded the Fed's website as the New York Times commented:
When the Federal Reserve asked for comments on its proposed rules on abusive credit card practices, an astonishing 56,000 poured in. Most were from outraged consumers. They told of interest rates skyrocketing when they paid an unrelated bill late. They complained of unwarranted late fees and pushed-up due dates. One Pennsylvania customer fumed: "I'm fed up with credit card company tricks that drive us deeper in debt."
This anguished deluge should send a clear message to leaders in Washington. The Federal Reserve should swiftly adopt its proposed rules against unfair or deceptive credit card practices. But the real burden to curb these abuses falls on Congress.
This discontent is being organized to press Congress to act by groups like the Consumer Federation of America and the Center for Responsible Lending. And Congress is listening:
WASHINGTON (Reuters) - Legislation aimed at curbing credit card billing practices that surprise borrowers with unexpected interest rate increases and fees was approved on Thursday by a U.S. House of Representatives committee.
The bill approved by Financial Services Committee mirrors Federal Reserve proposals that would effectively end double-cycle billing -- in which card companies reach back to prior billing cycles to help calculate the interest charged in the current cycle.
These reforms are a start but much more needs to be done because it's not just billing practices that is at issue -- it's high interest changes, deceptive marketing, and arbitrary rules. On top of that, there are other loans that need scrutiny including payday lenders and student loans. And of course our own addiction to shop until we drop.
You know exactly what I am talking about. We all have credit and debit cards. We all use them, and many of us keep our lives going because of them.
That is, until the bill becomes due.
The sad truth is that we are all complicit in our own economic servitude even if, at bottom, it's not our fault because we live in a consumption society, and don't feel we could live without them.
While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. You would never know it by watching those slick VISA card ads on the Olympic TV broadcasts.
Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy.
You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.
While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. "Just be careful about those credit cards, all right? Don't eat out as much," he said. After the foreclosure crisis, he warned, "the credit cards are next in line."
The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.
To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.
Younger people are being crushed by this debt burden as college students and new consumers. Emma Johnson of MSN Money reports that "Generation Y" is broke.
"The democratization of credit has really generated a competitive spending culture, and plastic has allowed for material goods not had in the previous generation," says Bob Manning, author of Credit Card Nation. "Most of us grew up in a home with just one or two bathrooms for the whole family, he points out; today, new homes usually have at least one bathroom per bedroom."That change has happened so fast," Manning says.
"This generation feels that somehow or another they're going to figure out some technological advancement that's going to get them out of their financial troubles and outsmart the market," says Manning, who served as adviser to the documentary In Debt We Trust. The documentary paints a picture of national financial crisis stemming from the personal-debt burden. (See InDebtWeTrust.com)
Happily, this issue is finally being addressed by Congress and the Federal Reserve Bank. When asked for comments, the public overloaded the Fed's website as the New York Times commented:
When the Federal Reserve asked for comments on its proposed rules on abusive credit card practices, an astonishing 56,000 poured in. Most were from outraged consumers. They told of interest rates skyrocketing when they paid an unrelated bill late. They complained of unwarranted late fees and pushed-up due dates. One Pennsylvania customer fumed: "I'm fed up with credit card company tricks that drive us deeper in debt."
This anguished deluge should send a clear message to leaders in Washington. The Federal Reserve should swiftly adopt its proposed rules against unfair or deceptive credit card practices. But the real burden to curb these abuses falls on Congress.
This discontent is being organized to press Congress to act by groups like the Consumer Federation of America and the Center for Responsible Lending. And Congress is listening:
WASHINGTON (Reuters) - Legislation aimed at curbing credit card billing practices that surprise borrowers with unexpected interest rate increases and fees was approved on Thursday by a U.S. House of Representatives committee.
The bill approved by Financial Services Committee mirrors Federal Reserve proposals that would effectively end double-cycle billing -- in which card companies reach back to prior billing cycles to help calculate the interest charged in the current cycle.
These reforms are a start but much more needs to be done because it's not just billing practices that is at issue -- it's high interest changes, deceptive marketing, and arbitrary rules. On top of that, there are other loans that need scrutiny including payday lenders and student loans. And of course our own addiction to shop until we drop.
Wednesday
Some Truths About Credit Card Debt
Conventional wisdom is that were all hooked and struggling. The reality is, in
fact, quite different and less frightening.
By Liz Pulliam Weston
Youve probably heard that the average American carries more than $8,000 in credit card debt.
Its a figure frequently cited by politicians, journalists and pundits as a sure sign of impending economic collapse. They argue that consumers, already struggling under this massive burden of debt, soon will have to stop spending like drunken sailors. The economic recovery, therefore, is doomed!
The surprising thing about this statistic isnt that its so widely known. Rather, its that the statistic paints a picture thats just plain wrong.
In reality, most Americans owe nothing to credit card companies.
Most households that carry balances owe $2,000 or less.
Only about 1 in 20 American households owes $8,000 or more on credit cards.
These figures are from the Federal Reserves 2001 Survey of Consumer Finances, one of the most comprehensive assessments of what Americans own and owe. (The survey is updated every three years; a summary of 2004's results will be published in early 2006.)
Averages dont tell the tale
Most of the people citing the $8,000 figure credit it to CardWeb.com, a service that tracks credit card trends.Find a loan that's
right for you at the
Loan Center
CardWeb, however, doesnt contend that the average American owes more than $8,000 on cards. Their statistics show that the average debt per American household with at least one credit card was $8,940 in 2002, the last year for which figures are available.
To get that number, CardWeb simply divided the total outstanding credit card debt at the end of 2002 -- $750.9 billion -- by the 84 million American households that it says have at least one credit card. (CardWeb uses a slightly different definition of household than the Fed does. And the company contends that 80% of households, rather than the Feds 76.2%, have at least one credit card.)
Now, by CardWebs measure and definition, the average debt in households with at least one credit card is growing.
If you know anything about statistics, however, you know that averages dont really tell the tale.
Consider what would happen if you and 17 of your friends and family were in a room with Bill Gates and Warren Buffett. The average net worth of a person in that room would be north of $4 billion. The fact that everybody elses personal net worth was just $100,000, or $1 million, or even $10 million, wouldnt affect the average that much because the big boys are sooooo much wealthier than you.
Take heart: Were actually frugal
In much the same way, a relatively small population with huge credit card balances can skew the average to make it look like the typical American is carrying a much bigger debt load than he or she actually is. Consider:
23.8% of American households have no credit cards at all -- no bank cards, no retail cards, nothing.
Another 31.2% of the households the Fed surveyed paid off their most recent credit card bills in full.
So together, the households that owed nothing on credit cards equaled 55% of the total.
Heres some better news: Paying off balances actually became more common between 1998 and 2001. The proportion of households that had bank cards (Visa, MasterCard, etc.) who reported that they regularly paid off their balances in full rose 1.5 percentage points to 55.3%.
We dont carry that much debt
Of the households that did carry a balance, the median amount owed was $1,900. That means half of the households with a balance owed more, and half owed less. (Medians are less subject to the skewing phenomenon that plagues averages; thats why economists tend to favor them.)
Bill Whitt at the VIP Forum, a Washington D.C. research firm, helped me dig even deeper. By analyzing the credit card debts of all the households the Fed surveyed, Whitt discovered:
Only 29% of households owe $1,000 or more on their cards.
21% owe $2,000 or more.
6% owe $8,000 or more.
4% owe $10,500 or more.
1% owe $21,400 or more.
The Fed statistics pretty much gibe with what Fair Isaac, the creator of the FICO credit score, discovered when it reviewed millions of credit reports.
There are a few differences between the universe the Fed examined and the one looked at by Fair Isaac. For one thing, credit reports are individual -- theres no such thing as a household or even a joint credit report. Also, you have to have and use credit to have a credit report. Finally, credit reports dont typically distinguish between balances you pay off and those you carry each month.
But again, Fair Isaacs statistics show a world in which most people are light to moderate users of credit:
About 48% of credit card holders owed less than $1,000
About 10% of card holders had total card balances in excess of $10,000.
More than half of all people with credit cards use less than 30% of their total credit card limit.
Just over 1 in 8 people use 80% or more of their credit card limit.
Theres still plenty of trouble out there
Does this mean all the hand-wringing over consumer debt is so much noise? Hardly. Although most Americans seem to be avoiding the credit card trap, there are still plenty of people on the financial edge:
More than a third -- 36% -- of those who owe more than $10,000 on their cards have household incomes under $50,000, according to the VIP Forum analysis.
13% who owe that much have household incomes under $30,000.
The percentage of disposable income used to pay debts is still near record highs.
The median value of total outstanding debt owed by households rose 9.6% between 1998 and 2001.
Bankruptcies set another record in 2003, with 1.6 million personal filings, the American Bankruptcy Institute reports.
All of that is more than enough evidence to suggest that a large number of people are overdosing on debt. The average American, though, seems to be doing just fine.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money.
Monday
FICO 08
There is a much needed change in the way your FICO score will be calculated by Fair Isaac Corp., which calculates credit report scores for millions of Americans.
Fair Isaac claims its new credit scoring formula will be able to signal more accurately borrowers who are likely to default or get behind on payments. The new formula, called FICO 08, will be less stringent on consumers who rarely have late payments, but will more strict on consumers who are repeatedly late. Lenders expect this new scoring system to reduce defaults by consumers from 5% to 15%
A consumers FICO score, is a tool estimated to be utilized by a significantly large portion of the banking industry. Banks and financial institutions use them to analyze if a consumer is worthy of receiving lines of credit, home loans, auto loans, opening a checking account, insurance, mobile phone, getting hired, turning on utilities and more.
The new FICO 08 will not look or feel new to either consumers or creditors. The scores will still range from 300 to 850. The new system will continue to look at the same determining factors, including payment histories, large or small debts, length of credit histories, quantity of credit inquiries, and the credit type, to determine consumers scores.
The difference in the new FICO 08 system is it will work harder to separate the creditors who are a good risk from the creditors who looks like a bad risk. It targets those borrowers with sub-prime credit; people who are just starting to get credit; and consumers who are inquiring for new credit.
A benefit is that consumers who are categorized as less likely to default on loans or "low risk" will receive better scoring using the new FICO system, and people who have had past or recent credit problems will score lower than today's system. The consumers who are in the center with less-risky profiles will begin to see better offers from lenders.
Normally, most credit scoring formulas categorized people with sub-prime credit into one large bowl. According to Fair Isaac's new model, a borrower who is behind on payments on one account along with having other credit accounts in good standing will receive a higher score than before. On the other hand, an individual's score could drop significantly more if they have numerous delinquent accounts.
Despite the new scoring model, people will still have to confirm the information in their credit reports to be accurate, error-free. If there's inaccuracies, or unauthorized use, you may be a victim of the ever rising problem called identity theft. To combat identity theft, there is a new company called LifeLock that backs their product with a $1 million dollar guarantee that your identity will not be stolen under their watch. Their boss is even so bold as to give out their social security number without any fear. For normal check-up on your credit, you can contact the credit bureaus directly, Experian,TransUnion, and Equifax., to request a credit report copy. If there are any errors, misinformation, or ID theft be sure to contact the credit bureaus or the financial creditors.
FICO 08 is also targeting the growing half-truth business of permitting consumers to raise their credit scores by becoming an authorized user on another person's good credit account. Recently, and even discussed on popular radio personal finance shows, credit repair companies are selling people with bad credit a chance to boost their scores by becoming authorized users on accounts held by strangers with better credit. The new FICO 08 will not award higher scores on credit card accounts for authorized users. In addition, it hurts the primary user who opened the account. This even applies to a child or a spouse. Now, you must stand on your own to raise your credit score which can certainly be done if you follow the principles.
Fair Isaac claims its new credit scoring formula will be able to signal more accurately borrowers who are likely to default or get behind on payments. The new formula, called FICO 08, will be less stringent on consumers who rarely have late payments, but will more strict on consumers who are repeatedly late. Lenders expect this new scoring system to reduce defaults by consumers from 5% to 15%
A consumers FICO score, is a tool estimated to be utilized by a significantly large portion of the banking industry. Banks and financial institutions use them to analyze if a consumer is worthy of receiving lines of credit, home loans, auto loans, opening a checking account, insurance, mobile phone, getting hired, turning on utilities and more.
The new FICO 08 will not look or feel new to either consumers or creditors. The scores will still range from 300 to 850. The new system will continue to look at the same determining factors, including payment histories, large or small debts, length of credit histories, quantity of credit inquiries, and the credit type, to determine consumers scores.
The difference in the new FICO 08 system is it will work harder to separate the creditors who are a good risk from the creditors who looks like a bad risk. It targets those borrowers with sub-prime credit; people who are just starting to get credit; and consumers who are inquiring for new credit.
A benefit is that consumers who are categorized as less likely to default on loans or "low risk" will receive better scoring using the new FICO system, and people who have had past or recent credit problems will score lower than today's system. The consumers who are in the center with less-risky profiles will begin to see better offers from lenders.
Normally, most credit scoring formulas categorized people with sub-prime credit into one large bowl. According to Fair Isaac's new model, a borrower who is behind on payments on one account along with having other credit accounts in good standing will receive a higher score than before. On the other hand, an individual's score could drop significantly more if they have numerous delinquent accounts.
Despite the new scoring model, people will still have to confirm the information in their credit reports to be accurate, error-free. If there's inaccuracies, or unauthorized use, you may be a victim of the ever rising problem called identity theft. To combat identity theft, there is a new company called LifeLock that backs their product with a $1 million dollar guarantee that your identity will not be stolen under their watch. Their boss is even so bold as to give out their social security number without any fear. For normal check-up on your credit, you can contact the credit bureaus directly, Experian,TransUnion, and Equifax., to request a credit report copy. If there are any errors, misinformation, or ID theft be sure to contact the credit bureaus or the financial creditors.
FICO 08 is also targeting the growing half-truth business of permitting consumers to raise their credit scores by becoming an authorized user on another person's good credit account. Recently, and even discussed on popular radio personal finance shows, credit repair companies are selling people with bad credit a chance to boost their scores by becoming authorized users on accounts held by strangers with better credit. The new FICO 08 will not award higher scores on credit card accounts for authorized users. In addition, it hurts the primary user who opened the account. This even applies to a child or a spouse. Now, you must stand on your own to raise your credit score which can certainly be done if you follow the principles.
Frank Collins is knowledegable in the area of Mortgage Loans and Improving Credit Scores.
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