Actual figures

The data found in the table below shows that the charge-off and delinquency trends are consistent for most of the six major US credit card companies. Only American Express Co., the biggest credit card issuer by purchases, bucked the trend by managing to maintain the percentage of cardholders who were behind in their payments at the same level as last month’s.

Credit card delinquencies vs. charge-offs

As a general rule, a credit card account is deemed to be delinquent when a payment is already more than 30 days overdue. Charge-offs, on the other hand, are accounts that the issuing company believes it will no longer be able to collect. The slight decline in charge-offs or defaults shown in the above data is a result of the slowdown in delinquencies earlier this year due to tax refunds and government moves to stimulate the economy.

At this point however, the increasing rate of late payments should be a more telling indicator that hard times are still ahead. Unemployment is the biggest factor that can bring about credit card delinquencies, and as jobless rates enter the double digit figure, credit card issuers should prepare for more losses.

Balances increasing as holidays approach

Recent data from two credit card tracking firms, Synovate Mail Monitor and Credit Karma, shows that with the holiday season approaching, average credit card balances for October increased as consumers who had earlier kept their wallets shut, now used their credit cards to make new purchases. The economic crisis was said to have developed in Americans better spending and saving habits, but apparently not enough for some to resist the lure of the busiest shopping season.

As John Ulzheimer, president of consumer education for Credit.com puts it, “It’s silly to expect people to have a complete change in the model of how they buy things forever – and especially in the holiday season.”

If this trend continues over the next two months, it could spell another wave of credit card delinquencies, and ultimately defaults, in the future.

The term “smart card” refers to a card’s use of an embedded chip which serves the purpose of transferring information – with credit and debit cards, it can conduct financial transactions. What many consumers don’t even know is that many of their bank cards have this capability, which has slowed the transition from “swiping” to “waving”. Because you didn’t know you had such cards, you didn’t take advantage of this extra feature of convenience. Since this innovation was created for speed, contactless payment terminals are often available for quick and small purchases in places such as fast food restaurants, drug stores, and gas stations.

Not all banks have implemented contactless technology and it will mostly be found in debit and check cards. We’ll show you how to tell whether or not your bank cards can be waved in front of a payment terminal instead of swiping so you can start utilizing your cards more to your convenience. So, take out your wallet and see which cards can make contactless payments.

Visa payWave

Visa’s version of contactless payments technology is called Visa payWave. The two major banks that currently issues cards that possibly have Visa payWave are Chase and Wells Fargo. To tell if your card has Visa payWave, look at the card (both front and back) for the wave symbol and it can sometimes also say “Visa payWave” just below the symbol. The symbol can often be found at the upper corners of your card or behind the card to the right of the signature area.

MasterCard PayPass

MasterCard PayPass is identical to Visa payWave and two major participating banks are Citibank and HSBC. Again, to see if your card is a MasterCard PayPass card, look for the words “paypass” at the front or back of the card. It is usually found above the hologram and MasterCard logo or behind the card to the right of the signature area.

American Express Expresspay

American Express offers Expresspay on five of their credit cards, including the popular Blue Cash card. Look at the back of your card for the wave symbol or the “expresspay” logo to see if you have this feature. The most evident proof of contactless payments capability on a clear card is the RFID chip.

Discover Network Zip

The Discover Zip contactless payments feature is currently available only to those in the Discover Network, which is separate from the division of Discover Cards that houses the popular Discover More card. If your Discover Network card has the Zip feature, you can find the “zip” logo right beneath the Discover logo on the front of the card.

Where Can You Use Your Contactless Card?

Any merchant that has a payment terminal with the universal contactless logo can accept payment just by tapping your card in front of the reader. You will also often see the logo of the credit network that services your card such as Visa or MasterCard. The typical routine of making a quick payment is identical with the exception that you wave or tap your card to the card reader instead of swiping. This saves little compared to conventional swiping since you still have to pull out your card out of your wallet. But, if only just one of your cards in your wallet can make contactless payments, you can just hold your wallet to a card reader at the counter to buy something without digging into your wallet for 5 minutes to make a 10-second purchase.

Credit Cards

Banks vs. Reps

Representative Barney Frank (D-Mass.) says that banks response to the proposed changes simply proves the need for some sort of regulation that protects consumers.  Banks, however, say that they rely on fees and rate hikes for revenue, and that the increases are merely attempts to protect themselves against regulation that might cause their credit card divisions to become unprofitable and unsustainable. Rep. Frank says that this is untrue, and that the unprovoked raising of rates has become endemic of the credit card industry. The bill was initially created in response to banks raising rates on consumers that paid their bills, a practice that the Act made illegal in August.

Another controversial action taken by Congress is the creation of a separate financial protection agency that takes some of the power from regulators like the Federal Reserve. This central regulation agency is seen by some to be dangerous, as it could get in the way of pre-existing regulatory committees and cause restrictions in the credit industry which can hurt the economy.

A Struggle in Congress

Although the proposal to immediately impose the new rules on credit card companies passed the House, it has met with resistance in the Senate, where politicians like Jeb Hensarling (R-Tex.) say that legislation that bans consumer financial products can lead to restricted, expensive credit and unemployment. Rep. Frank hopes that if a new regulatory agency is implemented, than bills such as these aimed at protecting consumers won’t have to go through Congress, but instead could be passed quickly by an separate agency designed to deal with such issues. This is especially important in the wake of the mortgage crisis, when a lack of direct and immediate regulation eventually led to a situation that grew out of control.

How Your Creditworthiness is Determined

A key ingredient in credit worthiness calculations are the credit ratings calculated by the three major American credit bureaus: Experian, TransUnion, and Equifax. These bureaus compile reports on individual credit status based on details such as payments history, the range of credit options used, the length credit accounts are active, the amount of activity, and credit debts accumulated. The report also includes any legal actions, court judgments or tax liens relating to that person’s finances. The credit bureaus collect this data from banks, credit card companies, and finance companies amongst other sources. As long as you have had one credit account open for more than six months and it has been active in the past six months there is going to be enough data to compile a report.

FICO Scores

Individuals receive a three digit FICO score based on their credit reports and the FICO scores for all these three bureaus are of interest to potential lenders. The score can range between 300 for those with the most problematic credit records to 850 for a top credit rating. It is important to point out that in addition to influencing bank lending decisions FICO scores are also checked by insurance companies and they can affect eligibility for certain jobs. The term FICO comes from the name of the company, Fair Isaac, who developed this particular credit rating methodology.

Although FICO scores are widely used in the USA to determine credit worthiness, they are far from the sole determinant of whether or not the requested loan is going to be granted. First of all there are other credit bureaus that devise credit scores based on different methodologies. Furthermore, lenders are certain to investigate aspects of the potential borrower’s financial situation that are not covered in credit reports. In particular lenders want to know about the borrower’s income and employment history, and each lending institution has their own criterion for determining loan eligibility and the generosity of terms the borrower may be offered.

Gains from Maintaining a Good Credit Rating

In today’s tough economic climate maintaining a high paying job is often outside the employee’s control but with a little forethought and willpower credit ratings can be protected. Paying bills on time and avoiding getting into debt to the point you can no longer meet loan repayments should be sacrosanct principles in handling your financial affairs. A look at the difference in the loan terms offered to people with high and low credit scores should be sufficient motivation. For example, suppose you have a FICO score of under 639 and want to take out a $70,000 thirty years fixed loan. You could expect at current rates to pay an APR of 6.222 % which translates into monthly payments of $430 and the total interest you are going to pay would be $84,702. With a high FICO score of over 760, the APR falls dramatically to 4.633 % and this translates into monthly payments of $360 with the total interest paid eventually equaling $59,684.

Keeping Track of Credit Scores

It makes sense to exercise your right to get a free copy of your credit report from the three major credit bureaus each year, and this right is independent of whether or not you have been denied credit. With all the efforts they put into producing accurate reports, due to the amount of data handled the possibilities of confusing people with similar names or social security numbers and a myriad of other variables means there is always the possibility of error. It pays to check the report carefully to verify that all the details are accurate. If a decision to deny credit is based on your credit report, the lender has to notify you from which bureau they received the report and you have two months to request a free copy.

Although credit history stays on the reports for seven years and in the event of a personal bankruptcy for ten years, the negative impression and score resulting from irresponsible actions and business setbacks can be erased if subsequent actions show responsibility and financial stability.

by word artist

Before you rush to cancel your card, however, you may want to consider a few things first:

• You can actually call your card company if your rate has been raised and speak with a customer service representative or a customer- retention specialist to find out why there was an increase.

• You might want to remember that because of how your credit score is calculated, canceling your card means you then have a higher utilization of your available credit. This would lower your score a bit and taking into account the fact that credit is harder to get, you may be put at a disadvantage if you are seeking a car loan or mortgage in the near future.

• Furthermore, there may even be the possibility that you cancel or change your card company to one that is not accepted at some of the stores where you shop.

Rewards, Balance Transfers and Fees

Sometimes you may want the rewards but just do not want to pay a fee. If you have a card that offers rewards but has an annual fee, you can try to get the fee waived. You should also look at the rewards that you do get. You may want to keep your card and accumulate miles or the one that gives you cash back. Remember that you most likely will pay annual fees for cards that give back the most. Also, you may want to transfer your balance to another card so you should be a bit careful and consider your balance transfer fee before you do this.

Now of course the major factor in your decision should be the interest rate you are paying. As noted before, there are fees for transferring a balance but there may also be a different rate for those transfers as well. There may also be different rates for cash advances if you do get them. Interestingly, when considering interest rates and fees you may find that many big credit unions are lower when compared to big banks. You should note that you would have to join the credit union first and there may not be a variety of them to choose from (there may not even be any in your area) because only a few credit unions do offer credit cards.

Credit Cards, Photo by Galib A.

And no, the Credit Card Act of 2009 doesn’t make plastic any safer now as compared to previous months. It only means that credit card companies now have to find more innovative ways of making up for lost revenue. For instance, Bank of America recently announced it will be imposing annual fees ranging from $29 to $99, right after saying it won’t be raising interest rate hikes before the second phase of the CARD Act goes into effect on February 2010.

Now on top of all these rate-hiking, fee-adding, and credit limit-cutting, card issuers have found another way to improve their bottom line – making changes in how a credit cardholder can avail of rewards points. These policies have become  so stringent that for many consumers, it means saying goodbye to in-flight upgrades, free hotel stays, or that “something” they’ve saved up for and looked forward to.

If you aren’t yet aware of any changes made to your credit cards rewards program, you might find your answer in the following updates:

• Most major credit card companies including American Express, Bank of America, Chase, Discover, Capital One and Citibank will invalidate any rewards points accumulated in a billing cycle during which a cardholder’s account was delinquent.

• Discover Bank goes a step further by revoking all point or miles earned by an accountholder under the rewards program if he is late in his payments for two consecutive months.
• Discover’s three-tier cash back program is now down to just two tiers. In the company’s previous scheme, a consumer earns 0.25% percent for the first $1,500 spent, 0.5% for the next $1,500, and 1% for whatever amount spent above $3,000. Presently, the program has been reduced to just 0.25% for the first $3,000 and 1% for anything over that.

• American Express scaled back the rebate for its Blue Card cash-back program, now offering 1.25% instead of the previous 1.5%.

• American Express is also increasing the maximum fee that accountholders under its Membership Rewards program would need to shoulder to transfer earned points to a U.S. airline loyalty program. From $75, the cost is now at $99 effective last September.

• Citibank has also made changes to its travel redemption program. A domestic round-trip airline ticket worth about $400 used to cost the cardholder 20,000 points. Now redemption for the same item will require 40,000 points.
• Starting next year, the Citi Hilton HHonors Visa will require 12,500 points, up from 10,000, for a free room.
• The Citi Home Depot Rewards MasterCard will be discontinued. Cardholders can only use them until October 31, while rewards points may be redeemed only until January 31, 2010.
• The Citi mtvU Visa card, which allows students to earn points that are convertible to cash for student loan payments, now requires 12,700 points for every $100. That used to be 10,000 points.

What could come as an even more unpleasant surprise for credit card customers is that card issuers have the right to change the terms and conditions of their rewards program – or even cancel it altogether – at any time and for any reason.

And don’t expect these changes to go away anytime soon, because they’re not. As banks need to make difficult decisions about balancing profitability and service, consumers also need to act fast and cash in on their rewards points while they still can.

Bank of America Branch

Charlotte, N.C. based Bank of America may have said only last week that it will not raise credit card interest rates prior to the implementation of the new laws, but that earlier announcement did not categorically state that it will not charge new credit card fees. And so, in a move seemingly designed to recoup anticipated revenue loss, Bank of America revealed Tuesday that plans are underway to impose annual fees on a number of cardholders next year.

According to BofA spokesperson Betty Reiss, the annual fees would range from $29 to $99, and the proposed fee would initially affect about 1% of the bank’s credit card customers. “We’re testing this to see what the feedback is. In terms of any plans going forward, we haven’t made any decisions yet,” said Reiss.

With about 80.2 million credit cards issued and in circulation, Bank of America is one of the largest credit card companies in the country today, third only to Chase with 119.4 million cards, and Citibank with 92 million cards. Customer accounts that could be affected by such fees are being selected based on “risk and profitability,” meaning, cardholders who are in good standing, never pay late, and almost never get charged with interest fees, could find themselves among the first ones to get slapped with the fees.

Customer complaints of steep interest rate hikes and sudden cuts in credit limits came to a head earlier this year, prompting the Congress to take steps in curbing banks’ practices which were detrimental to consumers’ finances, to say the least. The new credit card consumer protection laws include provisions on how and when a bank or credit card company can raise credit card interest rates and fees.

Bank of America explains its decision to charge this additional fee to affected cardholders by stating in its notice that the bank is making such moves “in response to market changes, new federal laws and regulations, and the increasing costs of providing unsecured credit.” Customers who will be affected by these changes in credit account terms and required to pay the annual fee have the option to reject it, but will have to contend with the consequence of having their account closed.

ambeduplito

The House of Representatives Financial Services Committee was scheduled to conduct a hearing on whether to move the new law to an earlier date. Lawmakers are proposing it to be moved as early as December 1 of this year. These as several of their constituents have been complaining of banks raising interest rates and changing their policies ahead of the February deadline.

Bank of America: No Credit Card Rates Hike Ahead of Law

The North Carolina-based bank on Tuesday announced that it will not be increasing its credit card rates. In a letter dated October 5, 2009 Bank of America explicitly expressed their intent not to raise credit card interest rates to House Representative Barney Frank, Chairman of the House Committee on Financial Services.

“In light of the concerns expressed to us by our customers, Bank of America will not implement any change in terms (risk or economic based) re-pricing of consumer credit card accounts between now and the effective date of the CARD Act. We believe that this is the responsive to the concerns we have heard and is consistent with other consumer oriented policy changes we have made recently, like giving customers much more control over the risk of incurring overdraft fees and substantially limiting the application of those fees.” -John Collingwood, Director, Federal Government Relations, BofA

This is definitely a welcome statement for the millions of Bank of America credit cardholders. BofA earlier announced that it will also stop automatic enrollment of their customers in overdraft protection services, a move which has caused widespread complaints from their customers. In an email released by BofA Spokeswoman Betty Riess said the decision not to raise interest rates “is consistent with other consumer-oriented policy changes we have made recently.”

Wells Fargo to Raise Credit Card Rates

In a move seen as anticipation to upcoming policy changes brought about by the New Credit Card Laws, Wells Fargo has announced that it will be raising it rates by November 30. This is one day ahead of the proposed December 1 date being worked in congress.

A company statement said that, “We delayed our decision in hopes that the business environment would change. We took this action at this time in order to continue offering our credit card products to the greatest number of customers possible and keep credit flowing.”

Better Services for the Future

Prior to these announcements banks have already made policy changes regarding credit card use. Last August, Bank of America and Chase bank already changed fixed-rate cards to variable rates in response to wide-ranging changes with the New Credit Card Law. Discover Bank changed their fixed-rates to variable rates earlier this June.

The banks previous moves have dampened the meaning of these new announcements. The fact is that the New Credit Card Laws which are scheduled to take to take effect would have sweeping changes in how banks deal with their customers.

In a release, Democratic Sen. Chris Dodd urged other banks to follow Bank of America’s lead and pledge not to raise rates any further until the law takes effect.

“This Congress has made it clear that abusive credit card practices are no longer acceptable,” Dodd said.

But if you think that simply paying the affordable minimum balance today and making it up with bigger payments in the future when everything would hopefully have righted itself is the practical way to go, you have another think coming. That’s exactly the kind of thinking that got a lot of people mired in credit card debt, leaving them now with few options as to how to get out of it.

Understanding the minimum payment calculation

What most consumers often don’t realize is that the high interest rates and low monthly minimums of credit cards are designed in such a way that if you aren’t too careful, even with prompt minimum monthly payments you’ll still be doing your credit more harm than good. So before you go and dig yourself a hole from using the plastic, it’s important to understand how the minimum balance is calculated.

Different credit card companies have varying methods of computing the minimum monthly payment. It could be within the range of 1% – 5% of your outstanding balance plus finance charges. And with today’s skyrocketing APRs, you can be sure that majority or at least half of your payment would go to interest charges instead of diminishing your balance.

Say for instance, you have a credit card carrying a $1,000 balance, and you are required a minimum monthly payment of 2.5% of that balance. If the APR of that card is 18%, that’s in effect a 1.5% finance charge per month. So if you deduct that 1.5% finance charge on your outstanding balance from your $25 payment ($1,000 x 2.5%) for that month, you would essentially have paid $15 on interest and $10 only the principal.

Assuming you make no other purchases and no changes will be made on the interest rate of your card, and if you continue to pay only the minimum monthly payment asked of you, it would take you 12 years and 9 months to pay off the balance. But what’s even more noteworthy is reality that you would have paid about $1,115.41 in interest for an original $1,000 balance.

While this may seem acceptable to you, think how much worse the situation could be if you were tempted into paying a lower minimum or if you carried a balance of more than $1,000, which is highly likely. And that’s not yet taking into account the higher APRs and fees imposed when you make a cash advance on your credit card.

Consider the bigger picture

While it’s more convenient and seemingly easier on the pocket to just go with the minimum payments set by your credit card issuer, in the long run, it’s not in your best interests to do so. You’ll be paying for so much more than the amount you actually used.

The merits of putting in a few dollars or tens of dollars more for your monthly payment on the other hand, are quite apparent. From those few dollars you pay over the minimum, you’d be saving yourself hundreds in interest payments, plus the fact that you’d get yourself out of debt sooner. In addition, the lower your outstanding balance compared to your credit limit is, the better your credit score will be, consequently increasing your chances of being approved for mortgages and other types of loans.

This is what the Federal Reserve has proposed in its amendments to Regulation Z, a regulation associated with the Truth in Lending Act, which were approved today by the Federal Reserve Board.  These amendments include, among other things, a prohibition on issuing credit cards to people under the age of 21, unless they have signed consent from a parent.

Mom, Can I Be Pre-Approved?

The Regulation Z amendments come almost a year after the Federal Reserve first adopted rules that prohibited a number of what they deemed to be unfair credit card practices.  These new provisions incorporate aspects of the Credit Card Act that was passed in May of this year.  In addition to the minimum age, the new amendments include:

• Prohibiting rate changes during the first year of an account, and rate changes that are linked to another account balance
• Require the issuer of the credit card to obtain the customers consent before charging fees for transactions that exceed the credit limit
• Limit the high fees associated with subprime credit cards
• Ban the use of “two-cycle” billing methods that impose additional interest charges
• Prohibit other payment rearrangement methods that aim to maximize the accrual of interest

Caution: Debt May be Hazardous to Your Health

The regulations are a welcome change, especially for high school and college students (and their parents) who are bombarded with credit card offers that use their financial inexperience against them, and can sometimes ruin their credit scores and leave them in debt at a very young age.  Just as we do not want our children to make uninformed decisions regarding dangerous substances like tobacco and alcohol, in the eyes of the Fed it is important that we do not also expose them to the dangers of credit card debt without adequate preparation.

These introductions are part two of a three stage implementation of the Credit Act provisions by the Federal Reserve.  The remaining provisions will go into effect in August of 2010.