Personal Finance By The Book » Credit Cards

“18 Months Same as Cash!” … Really?

Joe Plemon — Wed, 25 Jan 2012 11:00:28 +0000

Run...Don't Walk...Away from these offers!

Is zero interest for 18 months REALLY zero interest? If you can walk a tightrope while juggling flaming torches, then maybe. But beware — many of these offers are fraught with conditions that will make your head spin.

Best Buy, for example, is currently offering 18 months zero interest on all purchases over $429. However, the fine print describes the tightrope:

You are required to take out a Best Buy credit card.

If you are late for a single payment, interest will be charged from the purchase date.

If you do not pay the full amount within 18 months, interest will be charged from the purchase date.

The annual percentage rate (APR) for your credit card is variable and based on your creditworthiness.

The Reward Zone Program Card has a standard APR of 24.24% – 27.99%; the penalty APR is 29.24% – 29.99%.

Vendors expect you to fail.

According to Dave Ramsey’s Financial Peace University, 88% of buyers who purchase with zero percent interest payments will not keep their end of the agreement. Vendors who lure you with “same as cash” offers are keenly aware of this statistic; they are literally banking on these failures. According to the fine print, if you are one hour late on your very last payment for your $500, 18 month contract, you will pay over 29% APR for the entire term – at least a $126 finance charge. Of course, additional fees and penalties could and likely will apply.

Why cash is king.

Instead of shopping for the best financing offer, why not save up your cash and shop for the best price? The very act of saving money will help you develop the character traits of patience, delayed gratification and solid money management. Once you have that cash, you will have:

Negotiating power. With those five Ben Franklins in hand, you will be able to make some deals. Sellers listen to the rustle of money.

Time to shop. You have learned patience by saving up for your purchase. Use that patience to do plenty of looking before buying. By taking your time, you will find a great deal.

Time to change your mind. It is very possible that by the time you save the money for your purchase, you will no longer be so hyped up about buying it. If you go ahead with the purchase, do so with no regrets. However, because you are keenly aware of what was required to save that money, you may opt not to buy. Either way, the time factor works to your favor.

Zero risk. No one who is deeply in debt started out with a plan to get there, but they nevertheless arrived. When you buy on time, even with no interest, you are always inviting the unexpected to happen. Those who save and buy with cash never, ever end up in debt.

Is 18 months same as cash? Hypothetically, it could be. Practically, it seldom is. It certainly isn’t worth the risk.

The prudent shopper will take his time, save his money and make a wise purchase. I hope that is you.

Readers: what experiences (good or bad) have you had with “same as cash” purchases?

Are Your Credit Card Rewards Really Rewarding You?

Joe Plemon — Wed, 12 Oct 2011 10:00:07 +0000

When my friends tell me how much money their credit card companies pay them each month, I ask myself, “What is the catch?” After all, credit card companies are not in the business of losing money. Is it possible…really possible…to make credit card companies pay? Even though I don’t own any credit cards, I am hoping that my friends are right. Why? Because, knowing how punitive these credit card companies are to those who stumble only slightly, I would like to see a bit of justice.

So…can people really beat the credit card companies? Let’s run a hypothetical study on a hypothetical credit card (called a Joe Credit Card) which is modeled after a popular cash back card. My card will offer one point or one mile reward for each dollar spent. You can also earn an additional 4% on special offers which will change every three months. I am offering this card for a zero annual fee. My APR is 0% during the six month introductory period, but will then change to a variable rate of 9.99% to 22.99%, depending on your credit score. By the way, you need an excellent credit score (750 and above) to qualify for a Joe Credit Card.

The big picture.

Obviously, if you want some cash back rewards, you need to spend some money. How much money? If your monthly expenditures are $3,500, and you are able to charge every penny to your Joe Card, you will have earned 3,500 points basic points. But if $750 qualifies for bonus points, you have just earned an additional 3000 points…6,500 all together. Because a point is worth a penny, you have just received $65 rewards. Not bad.

What if you miss a payment?

If, for any reason, you are not able to pay that $3,500, you will not pay any interest during the six month introductory period, but you will be charged a $35 late payment fee and your new APR is 29.99%. Next time, that indiscretion will cost you $123 in fees and interest, so don’t ever do it again.

Is overspending an issue?

You are actually beating the system as long as you are staying on your budget, but that could be the rub. Studies have shown that people tend to spend more with credit cards than they do with cash. If you factor in the added incentive of earning rewards with your credit card, the temptation to overspend increases. If one overshoots his budget by only $100, even if he is receiving $65 in reward money, he isn’t winning. Why? Because he is robbing his retirement investments or emergency fund or debt reduction of $100 in order to receive a $1 reward. Not smart.

Conclusion

If my buddies are staying completely within their budgets and never missing a credit card payment, then I applaud them. They are evidently beating the system.

On the other hand, earning rewards comes with a risk. Those who miss even a single payment can jeopardize any rewards they have earned. Credit card companies would not make these offers unless they knew that a certain percentage of their customers are going to occasionally slip.

Am I going to take out a Joe Credit Card so I can start earning rewards? I don’t think so. I will stick with my proven cash envelope spending which I have been using for many years. It pays me the rewards of knowing I am in control of my money, that I will never overspend and that I have zero risk of being assessed late fees and interest charges.

That is a reward I can live with.

Readers: tell us about the rewards you receive. Does the allure of rewards cause you to overspend your budget?

Is Dave Ramsey Wrong? With No Loans and No Credit Cards, I Still Have a Credit Score.

Joe Plemon — Wed, 03 Aug 2011 10:00:01 +0000

When Janice and I became gazelle intense about getting out of debt, we did so hook, line and sinker. Once we paid our credit cards off, we either quit using them or cancelled them. Over the years, I have sporadically checked my credit report, but had never become curious enough to obtain my official credit score.

However, because I have often heard Dave Ramsey touting his zero FICO score, and because it has been several years since I have used any credit of any kind, my curiosity finally got the best of me. I, of course, took Dave’s claim with a grain of salt. After all, isn’t the minimum FICO score anyone can get something like 300? Still, I began to wonder: is my lack of any active credit hurting my score? If so, how much?

First: My Credit Report

Before giving you the details of my credit report, allow me to make a recommendation for those of you who will be checking your own credit reports: Save it as a pdf file. This is much easier to navigate than the multi-page printout I made last time. If, after you save the pdf file, you still want a printout, go for it.

So — here is the credit report info:

I have a credit history of 21 years and 9 months.

I have a total of one open account.

My most recent activity for that account is 01/2005.

I have a closed mortgage account because I made my last payment on 08/2004.

I also have 8 revolving accounts which are all “Paid and Closed”, some with the comment “account closed due to inactivity.”

Now: My Credit Score

With only one open line of credit, and zero activity in six years and eight months, what is my credit score?

Drum roll please: 801.

But wait! This isn’t a FICO score. It is something called a VantageScore Report (from Experian). “What is going on?” Evidently, both Experian and Transunion are now issuing VantageScores instead of FICO scores. Who knew? Well, actually, anyone who has recently checked his credit score.

What does VantageScore of 801 mean?

According to the report that was included with the score, I am rated a “B”. My credit category is Prime Plus (but not Super Prime) and I rank higher than 61.64% of U. S. consumers. I could, according to this report, improve my score by having “more open, recently reported accounts as part of my credit history.” In addition, “having open, recently reported bankcard accounts as part of my credit history can have a positive impact on my credit score.”

How does VantageScore compare with FICO?

This is a very pertinent question because (according to my understanding), Experian gives consumers the VantageScore number while giving potential lenders the FICO number. Not that I plan to borrow any money, but wouldn’t it be nice for consumers to see the same number that the lender is looking at? Because the top VantageScore is 990 while the top FICO is 850, I suppose I could estimate my FICO score by taking 86% (850/990) of my 801 score, which would give me a pro-rated FICO score of 688. For sake of comparison, I tried the FICO Score Estimator from BankRate.com. After answering 10 simple questions, I learned that my estimated FICO score is 725 – 775. Hmmm.

Am I going to work toward improving my score?

Naw. To do so would mean either borrowing money or using a credit card, and I am just too content (and hard headed) to change how I do things. My wife and I love our cash envelope system; we don’t like credit cards (although we each have a debit card) and we disdain debt of any kind, so we will keep on doing what we have been doing. I know: my credit score could eventually cause a hike in my auto insurance premiums, but I have been monitoring those rates for some time and have seen no obvious jumps.

By the way, I would like to point out to my credit card user friends that I never said a single word in this post which remotely implies that I think you should do anything differently. Personal finance is personal, and if you do well by using your credit cards, I applaud you.

They just aren’t for me.

Readers: how often do you check your credit report? Your credit score?

Credit Card Airfare Rewards: The Good, Bad & Ugly

Joe Plemon — Wed, 27 Jul 2011 10:00:26 +0000

Is it just me or does anyone else think there are way too many TV commercials lately touting credit cards? You’ve also probably noticed that most of them are peddling air travel rewards and at first glance, their programs may seem extraordinary. However truth be told, some of these commercials aren’t exactly forthright in explaining to you how their mileage/travel programs actually work. So I’m going to cut through the hype and show you the good, bad, and ugly behind five of the most heavily advertised offers of 2011

(1) Capital One Venture

Their current spokesman, Alec Baldwin, says the Capital One Venture gives “double miles on every purchase, for any airline, anytime, with no seat restrictions” which sounds impressive, right? Well it is a generous program, but it may not operate how you think…

How much the miles are really worth: These are not your typical airline frequent flyer miles. Rather, the Capital One miles are worth exactly a penny each – no more, no less – which can be used to purchase airfare/travel. For example, if you want to get a free $450 flight, it will take 45,000 miles. For a $771.40 flight, it will be 77,140 miles.

How the miles are redeemed: Let’s say you want to buy an airline ticket using your miles. What you would do is buy it (say, on Priceline or Orbitz) just as you would any other purchase. Then after the charge shows up on your credit card account, you would request a statement credit, using your accumulated miles to offset the cost (and every 1 mile redeemed = 1 cent statement credit)

Verdict: So even though it’s technically correct, is their claim “any airline, anytime, with no seat restrictions” a bit misleading? I’ll let you be the judge. Regardless, the $59 Capital One Venture still offers rewards which are definitely well above-average, since it is essentially paying 2% cash back.

(2) Chase Sapphire

This is another credit card you see a lot of commercials for lately. There are two versions of the Chase Sapphire; the regular has no annual fee and the “Preferred” is $95 per year.

How much the points are really worth: At least Chase doesn’t call them “miles” but the program still may come across as a bit confusing, since this one is also marketed as having “no travel restrictions” and “no blackout dates.” But the reason for that is because it operates in a manner similar to the Capital One Venture, where you are merely buying your own travel. On the basic version each point = 1 cent. For the Sapphire Preferred, you can get a 25% bump in value when spent on travel, so 1.25 cents per point.

How the points are redeemed: Straight up cash back is one option, but if you would like to spend the points directly on travel, then you have to use something called the Ultimate Rewards travel tool (basically it’s Chase’s branded travel website). At first I was skeptical of it thinking the prices would probably be inflated, but fortunately that’s not the case. They appear to just be re-branding the feed from somewhere else, because the prices I’ve checked are pretty much the same as what I see on Kayak.

Verdict: Again, it would also be helpful if this system was better explained. Of course it’s in the fine print, but I would imagine some folks probably don’t pay much attention to that when they see the current offer for 50,000 bonus points ($625 in travel) that’s being peddled for the Sapphire Preferred version.

(3) U.S. Bank FlexPerks Travel Rewards

My roommate receives solicitations in the mail for the FlexPerks Travel Rewards on what seems like a monthly basis. Sometime in the past, Kiplinger’s Personal Finance reportedly dubbed it the “best credit card if you want travel perks” which surprised me, given the pitfalls of its rewards program.

How much the FlexPoints are really worth: The value is above average but just take a look at the fine print and I’m sure you can guess what I don’t like about it:

20,000 FlexPoints = Up to $400 ticket value
30,000 FlexPoints = Up to $600 ticket value
40,000 FlexPoints = Up to $800 ticket value
50,000 FlexPoints = Up to $1,000 ticket value

So that would mean a $395 ticket would cost 20,000 points, but a $405 ticket would be double at 40,000 points. Being that you earn 1 point per dollar spent, the value of your rebate would be a max of 2% and go down from there.

How the FlexPoints are redeemed: U.S. Bank uses a proprietary online travel tool, similar to what the Chase Sapphire uses. From what I have gathered, the U.S. Bank program is also fair in the ticket prices it gives you.

Verdict: As you can tell, I’m not the biggest fan of the tiered rewards structure but this credit card does come with a couple unique benefits: (a) each reward ticket comes with a $25 allowance to cover baggage fees and/or in-flight meals (b) charitable donations made with the card earn 3x points which I commend them for doing.

(4) United Mileage Plus Explorer card

So far every card we have looked at has offered generic airline rewards (as in, not affiliated with a specific carrier). Now let’s compare and contrast those with the United Airlines credit card (officially called the “Mileage Plus Explorer card”) which uses actual frequent flyer miles. Being that the merger of United and Continental created the world’s largest airline, I thought it would be fitting to use their new Mileage Plus Explorer card for this example, but most airline-branded credit cards operate in a similar manner, too.

How much the miles are really worth: As with most frequent flyer programs, there are different tiers for ticket prices. For United, roundtrip domestic flights will typically cost 25k, 37.5k or 50k miles for economy class. Of course, finding seats at the lowest tier isn’t always easy. However if you book far in advance, the odds should be in your favor. Most sources I’ve read seem to peg the average value at around 1.5 cents per mile for United Airlines.

How the miles are redeemed: The United Airlines credit card, as well as most airline affiliated cards, usually have the same model for redemption: you book the award flight yourself through the airlines website directly. Doing it over the phone is also an option, but you may be charged an extra fee to do so.

Verdict: The value per mile is good, but when you take into account the $95 annual fee, something like the Capital One Venture would probably make more sense for light/moderate spenders and infrequent travelers. With that said, United tosses in a free checked bag perk for you and your companion (that’s a $100 roundtrip savings for 2 people). If that benefit is regularly used it might make the card more attractive for some lifestyles.

(5) American Express Gold

Technically speaking, the American Express Gold is not a credit card, but rather a charge card, because the balance normally has to be paid in full each month. I haven’t seen any commercials for it lately but during the first and second quarter, AmEx was tirelessly running ads for it on channels like Fox News, CNBC, CNN and probably many others (but I only watch the news, so I wouldn’t know).

How much the points are really worth: The American Express Gold, as well as the Green and Platinum, participate in a program called Membership Rewards. With it, cardholders can convert their points to miles on over a dozen airlines and more often than not, the conversion is a 1 point = 1 frequent flyer mile. Therefore the value depends on the given airline the points are being transferred to.

How the points are redeemed: Done through the AmEx website or customer service can be called to assist.

Verdict: The 1:1 transfer to multiple airline programs is a perk unique to American Express cards and there’s no arguing the potential usefulness of that, however at the same time you have to take into account the high costs (the Gold and Premier Rewards Gold are $125 and $175, respectively). In a nutshell, unless you are an avid traveler and above-average spender, you would probably be better off skipping the bells and whistles and sticking with your basic no annual fee rewards card instead.

This article was written by Mike, the founder of the forum/blog CreditCardForum.com. He reminds you to not get caught up in the credit card hype if it will lead to overspending. When that’s the case, stick with debit or just good ol’ cash.

The Grass Definitely Isn’t Greener with NPSL Credit Cards and Charge Cards

Joe Plemon — Mon, 02 May 2011 10:00:44 +0000

You are undoubtedly familiar with the old adage that “the grass is always greener on the other side of the fence” , but you probably don’t know why this cliche—which speaks to the natural inclination people have to value the unknown over the known—is relevant to credit and charge card use. Interestingly, many of the most popular credit cards for people with excellent credit are so blindly sought after because of their assumed potential (the unknown) and not because of their practical benefits (the known) which can actually hurt consumers’ credit standing.

NPSL:What it is and what it isn’t

The Visa Signature credit card, the World MasterCard credit card and the charge cards from Chase and American Express all have a feature known as No Preset Spending Limit (NPSL), which drives their popularity. Some people gravitate toward these cards because they understand NPSL to mean no spending limit. Others may realize that NPSL cards have spending limits which are determined on a monthly basis but are still intrigued by the ever-present possibility of a higher limit next month.

The hidden downside of NPSL cards

However, unbeknownst to most consumers, an NPSL card’s true potential is decidedly negative, and by using such a card, you are essentially playing a game of Personal Finance Russian Roulette. According to a study conducted by Card Hub, credit card companies don’t report their NPSL cards’ actual spending limits to the major credit bureaus. They either report proxy limits or no limits at all, and exactly which method an issuer uses is often indeterminable.

As a result, it’s in turn often difficult to predict the effect an NPSL card will have on your credit utilization … a factor which reflects the percentage of your available credit and is a prominent factor in calculating your FICO credit score. Therefore, misleading limit reporting can spark a chain reaction causing misleadingly high credit utilization and an inaccurate credit score.

A misleading credit score can produce real problems

The decision makers who use consumer credit scores most likely won’t be aware of this, however. They will simply accept your score on face value and use it to determine whether you deserve a loan, a mortgage, an apartment or even a job, among other things. And you do not want to be shut off from these things or be stuck with bad rates because of a misleading credit score shaped by unusual credit card company reporting practices.

Besides, it would really add insult to injury knowing that you couldn’t buy a house or land your dream job because a credit card company wanted to protect its golden goose. Oh yeah, I forgot to mention that credit card companies go out of their way not to report NPSL cards’ true limits in order to perpetuate the myth that NPSL equates to unlimited spending. All in all, NPSL cards therefore just aren’t worth the risk. The only things that differentiate them from other credit cards for excellent credit are the false hope they provide and the potential for credit score damage they create. So, now that you’ve hopped that proverbial fence, checked out the grass and realized it wasn’t so green after all, wouldn’t you agree that you’re better off just sticking with a standard rewards credit card?

This guest article comes from Odysseas Papadimitriou. Odysseas is the CEO of Card Hub, a website that helps consumers get the best credit card deals and buy discounted gift cards.

Do We Spend More With Credit Cards? A Study Proves … Maybe

Joe Plemon — Mon, 12 Jul 2010 09:43:37 +0000

Do people really spend more with credit cards than with cash? This topic has been beaten until blue and there seems to be no documented study which proves one way or another. Yes, many of us have heard of the Dunn and Bradstreet study (oft quoted by Dave Ramsey) that indicates people spend 12-18% more when using credit cards, but evidently, according to Money Myths and the Importance of Thinking for Yourself at Get Rich Slowly, that study hasn’t exactly ever happened.

Another research project indicates people do spend more with credit cards

A published study by researchers at Carnegie Mellon, Stanford and MIT, indicates that people “spend money ’til it hurts”. The study appears in the journal “Neuron” and is the most recent from the emerging field of neuroeconomics, which looks at the mental processes that drive economic decision-making.

However, before any of you credit card advocates start overdosing on your blood pressure medications, let me quickly assert that this study DID NOT prove that people spend more with credit cards than with cash; it only gives credence to the theory.

“Credit cards effectively anesthetize the pain of paying,” said George Loewenstein, Carnegie Mellon professor of social and decision sciences (SDS) and co-author of the paper. “You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”

OK. How exactly did the study work?

Remember that these people are, uh, brainy.

In the study, 26 adults were each given $20 to spend on a series of products that would be shipped to them. If they made no purchases, they would be able to keep the money. The participants viewed the products while lying in a functional magnetic resonance imaging (fMRI) scanner while the researchers studied which regions of the brain activated during each participant’s decision-making process.

With the study participants all wired up, the researchers goal was to learn if their brains would register pain when they saw higher prices. Guess what? They did.

An electric moment

“We were so excited when we got the results from the first scans, and saw that the insula, a section of the brain associated with pain processing, activated when subjects saw prices that were too high,” said Loewenstein. “It was an electric moment.”

Scott Rick, the SDS graduate student who worked with Lowenstein on the project, was especially excited when they found that insula activation discouraged spending.

“It suggests that prices do not deter spending purely through thoughts of foregone pleasures, as assumed by standard economic theory, but also through immediate pain,” added Rick.

Restated in my words: “The findings indicate that people decide not to buy because they intrinsically know the purchase. while giving some pleasure, will also cause pain. When the fear of pain overrides the anticipation of pleasure, people decide not to buy. ”

Loewenstein and Rick, along with Cynthia Cryder, also a graduate student in SDS, are continuing their research on the “pain of paying” — the pain one experiences when paying for purchases.

My thoughts

Far be it from me to second guess brainy researchers, but I think they overstated the results of the study. While giving strong credence that the brain does register pain when prices are too high, Loewenstein took a leap in logic when he said that the study explains why people spend more with credit cards (less pain than cash). The problem is that he never actually tested the pain using credit cards versus cash; he only proved there is more pain when prices go up. I wish the researchers, while they had these 26 adults’ brains all wired up up, would have required them to pay cash and then swipe plastic for the same value purpose. At least we might have been able to have learned if the credit card pain theory was valid.

In the meantime, I suppose we will have to wait for another study to actually prove whether people spend more with credit cards than with cash.

How about you? Do you personally spend more using credit cards than using cash? How do you know?

How Minimum Credit Card Payments Will Keep You in Debt Forever

Joe Plemon — Wed, 12 May 2010 09:05:36 +0000

Did you know that making your minimum credit card payment every month will take you as much as four times longer to get rid of debt than making a fixed payment? I recently ran across a nifty calculator at Bankrate.com that I recommend looking at. When I plugged in $5,000 debt at 12% interest with a minimum payment of $100 I was shocked to learn that this $5,000 was going to take 259 months to pay off! The same numbers on my financial calculator showed only 70 months for a pay off. “OK”, I muttered, “What goes?”

Make sure you read the fine print about minimum payments

photo credit: TheTruthAbout…

Question: Obviously, something was haywire, but what was it?

Answer: I didn’t understand how minimum payments are figured.

Explanation: The minimum payment decreases as the payoff amount decreases.

In the scenario I tried, the minimum payment was based on the interest owed for that month plus 1% of the payoff. For the $5,000 debt, the interest for the month 1% (1/12 of 12%), or $50 and of course the 1% of the payoff is also $50 for a total minimum payment of $100 the first month.

The Minimum Credit Card Payment Strategy

Now: follow along with me, for this becomes a bit diabolical: using this same formula (the interest plus 1% of the payoff), the minimum payment the following month becomes $99. As the payoff becomes less, the minimum payment continues to likewise decrease, thus stretching the debt for years and years. The 259 months (21 years and 7 months) is based on never borrowing any more money and never being late on a payment. Of course either of these events will lengthen the payoff even more.

The calculator gives different choices for calculating a minimum payment, but they are all based on the same premise: the minimum payment decreases as the balance decreases, thus keeping the borrower in the grips of the credit card company for years more than needed. I should point out that all credit card companies do not figure their minimum payments the same way. This post at Credit Card Chaser answers the question, “How do credit card companies figure the minimum monthly payment?”

This chart compares various minimum payment plans with fixed rate payments. All are based on $5000 debt and 12% interest rate.

	Beginning Minimum Payment	Months for Minimum Payment Payoff	Fixed Rate Payment	Months for Fixed Rate Payment Payoff
Interest Rate + 1% of Balance	$100	259	$100	70
3%	$150	155	$150	41
4%	$200	114	$200	29
5%	$250	92	$250	23

Concluding Thoughts on Minimum Credit Card Payments

The numbers are obvious. Do you want to be paying on that same credit card until your newborn is out of college? Of course not. This math is not rocket science, but it can be deceiving. The more you pay, month in and month out, the quicker your principle will drop, the less interest you pay and the faster you can get rid of your debt.

Remember: your credit card company doesn’t want you to get your debt paid off. The longer you drag it out, the more you end up paying and the greater risk of adding to the debt or being late on a payment.

Escape their tentacles by sacrificially making huge payments! If you could bump that payment to $400 a month, the debt will be gone in only 14 months. Get an extra job and pay $600 a month to see it disappear in only 9 months! You will be able to breathe knowing that the debt has lost its grip on you.

And 9 months sure beats 259 months!

Readers: Do you make minimum payments on your credit cards? Before reading this post, did you know how long it will take you to get your credit card debt paid off by making minimum payments? Are you currently attacking your credit card debt? If so, what are you doing that works? That doesn’t work?

Expect Rate Hikes Even After the New Credit Card Act Takes Effect

Joe Plemon — Mon, 15 Feb 2010 10:10:28 +0000

photo credit: TheTruthAbout…

The major changes required by the Credit Card Act of 2009 will kick in on February 22. But just because Congress has tried to stifle the less than stellar side of the credit card industry, don’t think for a moment that banks have been sitting on their heels.

Here’s how the new laws on credit cards of 2010 effect you.

First, an Overview of the Changes

Limits on interest rate changes.

Increases on existing balances will be limited to some certain criteria: the cardholder is 60 days behind in minimum payments, a promotional rate has expired, or the card carries a variable rate. Hint: remember “variable rate”. We will come back to that one.

Elimination of “universal default” and “double billing” cycles

These shady practices will be outlawed.

More time to pay bills.

Card issuers are required to mail statements at least 21 days before they are due.

Higher interest balances paid first.

When cardholders have accounts with different interest rates (common with 0% balance transfer credit card accounts), any amount above the minimum payment must go toward the highest interest rate (instead of the industry practice of using that extra money on lowest interest portion of the debt).

Limits on over-limit fees.

Transactions that would place the card holder’s account over their limit cannot be processed without prior permission.

Plain language disclosures

Card companies must state clearly how long it will take the card owner to pay off the balance – and the total interest charge – if minimum payments are made.

Restricts credit to minors.

Card issuers must either verify ability to pay or obtain the signature of a parent or other adult before giving credit to anyone under 21 years old.

Now: What to watch for

Rate hikes

“Whoa”, you say, “I thought the new law greatly limited rate hikes. I always pay on time, so how can my rates go up?”

Good question. Remember the phrase “variable rate”? The majority of card holders, even under the new changes, will experience rate hikes due to the variable rate clause. Here’s why: variable rates are meant to follow the rise and fall of the prime rate index. The problem is that the prime rate is currently 3.25%, an historic low. Therefore, when it changes, there is only one direction it will go: up. And so will credit card rates, which currently average 14.9%.

Of course the banks have been pushing variable rate cards. According to CNN Money, 94% of all new credit cards offered in recent months are variable credit, compared to only 67% in the same period two years ago. Admittedly, the prime hasn’t gone up in recent months, but stay on your toes. Your card is most likely a variable rate card, so when prime rate goes up, so will your rate and this could lead to more credit card debt defaults.

Establishing minimum rates

If you ran the bank and a new law greatly restricted your ability to raise credit card rates, you would not only promote the variable rate cards, but you would ensure that rates won’t fall below a set floor rate. The logic? “I want the rate hike when the prime goes up, but I don’t want the risk of lower rates.” Very clever, and that is exactly what banks are doing. A year ago, only 10% of banks had enacted such a floor, but a recent study shows over one-third of banks now have established minimum rates.

Unfair? Consumer groups are crying “Foul”, appealing to the Federal Reserve Board to rule against these floors, but no decisions have been made yet.

What should you do?

First and foremost, don’t charge anything you can’t pay for. If you always pay your credit card bill in full, you don’t have to worry about rising rates.
If you have outstanding credit card debt and a decent credit rating, check into switching cards. You can get an objective comparison at the credit card web site.
Make a plan to get all of your credit card debt completely paid off. Make a budget, talk with your spouse and get focused.

Debt free is the way to go!

Credit Card Alert: Read the Fine Print

Joe Plemon — Wed, 06 Jan 2010 09:51:19 +0000

photo credit: xJasonRogersx

Credit card legislation and new Federal Reserve rules which passed last year are consumer friendly, but don’t expect credit card companies to make things easy for their customers. Some of the changes have already gone into effect, but the majority of the them will take effect on February 22, with more scheduled for this summer. As these deadlines close in, you can expect banks to step up efforts to seize advantages before the rules change. According to Adam Levin, co-founder and chairman of Credit.com, the banks’ philosophy toward their customers is, “It’s not our job to teach you the law; it’s our job to comply with the law.” Stated differently, they will keep the letter of the law while sidestepping the spirit of the law. You can therefore be expecting some mailings which could resemble junk mail and read like gibberish. Watch for such mailings and be sure not to pitch them; ignoring the fine print could cost you money.

According to the Wall Street Journal, these are some things you should be watching for:

Did your interest rate go up?

Many companies have been raising rates to as high as 29.99%. Do you have to accept that change? No. You have the right to “opt out”, which effectively cancels your card for new purchases while continuing to pay off the balance at the old interest rate. This could also affect trying to do 0% balance transfers on your cards.

Why are credit card companies raising rates before the changes go into effect? Because, if they notify you before February 22 and you do not opt out, you will be stuck with the higher interest rate for both new and existing balances. After the Credit Card Act goes into effect on February 22, any interest raises affect only new transactions unless you are at least 60 days behind in your payments. Their ploy of raising rates now is to make you pay the higher rates on all existing balances.

You may be asking, “Will opting out hurt my credit score?” Possibly, but what is more important to you: a slight drop in your credit score or paying more money (all interest) to the credit card company? Suppose you owe $5,000 on your card and you are paying $250 a month. The current interest rate is 11.99% and the company informs you that they are raising it to 24.99%. Opting out will keep that interest at 11.99% until the balance is paid off, saving you over $900 in additional interest fees compared to the 24.99% rate. Stated differently, would you pay $900 in order to avoid a slight dip in your credit rating? I hope not.

My thoughts? Don’t worship your credit score scale or check your credit score too often. It is only a number which allows you to go into debt. If you avoid debt, your credit score has little relevance to your life. Not sure what your credit score is? You can always get a free FICO credit score.

Has your credit limit been lowered?

Starting in February, the new law will not allow credit card companies to charge fees (commonly up to $39) for exceeding the credit limit unless the borrower “opts in”. If you do not opt in, your card will be rejected when you try to charge a purchase which will put you over the limit. I like this rule: it forces consumers to pay attention to what they charge. But it could create problems if you bust your limit with a hotel stay or while renting a car.

Whether you have opted in or not, you can avoid fees – or rejection – by setting up e-mail and text alerts with your credit card issuer to notify you when your near your limit.

Is the bank changing how it handles overdrafts on your debit card?

New credit card rules that take effect this summer will not allow banks to charge overdraft fees on debit card transactions unless you opt in. These fees, marketed by banks as conveniences, normally cost consumers up to $35 per overdraft. Not opting in would presumably cause any debit card transaction that creates a negative checking account balance to be refused. Again, I like this idea because it forces the customer to be responsible for knowing his checking account balance at all times.

If tracking your checking account is problematic, you should set up email and text alerts to notify you any time your balance drops below a set threshold. Another idea: you can link your checking account to your savings account as a backup for mistakes. Yes, there will be a small fee (maybe $10) involved if this backup is activated, but $10 is better than a $35 overdraft fee.

Concluding thoughts

While the new laws will benefit consumers, now is the time for vigilance. It is your job to know the laws and to keep a wary eye on your credit card correspondence, especially between now and February 22 when many of the rules kick in.

One easy alternative to watching for credit card trickery is to cut up your credit cards. Yes, I really did say that and I challenge you to consider doing so. My wife and I have not owned a credit card in nearly five years and we love the peace in knowing that we no longer do business with slimy companies who have proven themselves to be less than honorable.

Credit Cards: The New Rules

Joe Plemon — Tue, 15 Sep 2009 10:19:52 +0000

This is a guest post by Jeff Rose. Jeff Rose is an Illinois Certified Financial Planner™ and co-founder of Alliance Investment Planning Group. He is also the author of Good Financial Cents, a financial planning and investment blog and he is currently working on his first book entitled Soldier of Finance. You can see more about his mission at the same titled blog Soldier of Finance.com.

With the stroke of a pen on May 22, President Obama authorized major changes to the way American credit card issuers do business. In the President’s view, these are “common-sense reforms designed to protect consumers.” Consumer advocates are rejoicing, but banks are already contending that the reforms might be bad for cardholders in the long term. Here is a rundown of the notable changes within the Credit Card Accountability, Responsibility and Disclosure Act (CARD). Some of these changes will happen in 2010; others will occur within 90 days.

No surprise interest rate increases.

If your credit card company wants to hike interest rates, it will now have to inform you at least 45 days beforehand and tell you why in writing.

New restrictions on retroactive rate increases.

Under the new law, the interest rate on an existing balance cannot increase unless the customer is more than 60 days behind on a payment. Get this, though: even if that happens, the credit card company will have to restore the prior, lower interest rate if you pay the minimum balance on time for the six months that follow.

Statements mailed 21 days in advance.

The new rules say that your monthly bill has to be mailed to you by the credit card company at least 21 days prior to the payment due date.

Pay before 5:00pm EST and you are on time.

That’s right: all credit card payments made before 5:00pm Eastern Standard Time will be considered paid on that day. If your payment due date falls on a holiday, a weekend, or any day on which the credit card issuer is closed for business, your payment cannot be subject to late fees.

You can choose to attack the highest interest rates.

Do you pay different rates for different kinds of credit card transactions? Under the new law, you will be able to apply any payment above the minimum to your highest-rate balance.

More protection for teens and young adults.

The new legislation bars companies from issuing cards to most people under age 21. Those younger than 21 will only be able to use a credit card under one of the following conditions:

They can prove they have the means to pay the debt (or their parent or guardian promises to pay it off if they default)
They are emancipated minors
They are designated secondary cardholders on a parent or legal guardian’s account.

No exploitation of college students.

College-age Americans will still be able to get credit, but within reason. Account limits will be either 20% of their annual income or $500, whichever is greater. So the market for student credit cards will grow less attractive for credit card companies.

An end to universal default.

If you make a late payment to one credit card issuer, other issuers will not be able to hike your rate as a consequence.

Cardholder permission for over-limit fees.

Credit card companies now have to get your OK before they can process a transaction that would put your account over its limit.

Why are credit card companies crying?

Cut out all the nickel-and-diming, and credit card issuers will be left with lower revenues. So where are they going to get the money back? Think reduced rewards for cardholders. Think new and inventive annual fees.

Just because new credit card rules have been implemented doesn’t mean you shouldn’t read the fine print. With the recent changes, you can bet that credit card companies are already looking for loop holes. Tread cautiously. And keep double checking to make sure your best credit cards don’t change the rules on you.

Jeff Rose is an independent financial advisor who loves Crossfit workouts, writing about Roth IRA Rules and craves In-N-Out burger. You can follow his updates on Twitter: @jjeffrose.