Monday, December 31, 2007
Winona Daily News had an interesting article today on merchant credit card practices. Many people have seen the signs stating that credit card purchases under a certain dollar amount (or all credit card purchases in some places!) in order to cover their costs. However, all merchants are required to sign the same agreement with credit cards which specifically makes this practice illegal and subject to fines of up to $100,000. For example, on page 2-19 of Mastercard's agreement, it says that: "A merchant must not directly or indirectly require any MasterCard cardholder to pay a surcharge … in connection with a MasterCard card." So, next time you are charged, maybe you should try and argue it!
From Winona Daily News:
In response to letters regarding some merchants adding surcharges over the amount of purchase, I believe this practice is improper. Merchants enter into a contract with Master Card, Visa or Discover in order to accept these cards. In this contract, it shows that surcharges are against policy.

12/31/2007 8:27:38 PM UTC  #    Comments [0]  |  Trackback
The holiday season has left many consumers with gift cards that they do not care to use, and this has created an entire secondary market around such gift cards. Along with a new market comes a new breed of criminals that are trying to scam consumers. Many small-time consumers are stealing gift cards and sell them on websites such as Storefrontbacktalk.com, which enables people to trade and sell gift cards. Others steal the numbers off of gift cards and then call in later on to see how much is left on the card - they then create counterfeit cards and sell them online. It's a growing problem that stores are just now trying to address...
From TheState.com:
The guy trying to unload his Cold Stone Creamery gift card on eBay because he says he's lactose intolerant might be a scam artist. Gift cards are more popular than ever, and this time of year Web sites are flooded with sellers hoping to unload unwanted cards, often at significant discounts. Some experts recommend that shoppers avoid such sites entirely.

12/31/2007 8:20:53 PM UTC  #    Comments [0]  |  Trackback
 Friday, December 28, 2007
Credit card pricing schemes can prove to be extremely complicated and they may be partly to blame for the problems that consumers are facing. The Chicago Tribune provides a great example: It's entirely possible that under a common cardholder agreement provision called a universal cross-default clause that your dispute with the cable company over lousy service constitutes an event of default on your credit card. The default bumps your interest rate up to 32 percent, which is applied retroactively to your existing balance and (under another common practice called "two-cycle billing") to the balance you paid off last month. Clearly, changes are needed!
From the Chicago Tribune:
Pop quiz: what's the interest rate on the credit cards you're carrying? How about the default rate? Do you know what constitutes an event of default? What will trigger a penalty fee or surcharge? How much are those fees? If you're like most Americans, you probably cannot answer many or all of these questions. Credit cards have a complicated price structure. Cards have multiple price points -- annual fees, merchant fees, interest (at several different rates), and assorted back-end fees, such as late fees, over-limit fees and currency conversion fees. This pricing structure makes it virtually impossible to determine the potential costs of carrying a balance.

12/28/2007 3:56:35 PM UTC  #    Comments [0]  |  Trackback
The IRS announced today that repairing a glitch in the alternative minimum tax may delay tax refunds for more than three million U.S. citizens, according to the Internal Revenue Service. Lawmakers moved to shield millions of upper and middle class taxpayers from falling under the minimum tax. The move was designed to ensure that very wealthy citizens did not claim so many tax breaks that they avoided paying taxes entirely.
 
The move forced the IRS to re-program its computer systems, however, which means that the IRS won’t be able to process AMT-related returns until February 11th for the three million plus taxpayers who typically file early in the year.

12/28/2007 3:50:01 PM UTC  #    Comments [0]  |  Trackback
 Thursday, December 27, 2007
Brick-and-mortar retailers have been hit hard this holiday season by both online retailers and a poor credit environment that has tightened consumer spending. Many are now hoping that consumers will head back to the stores after Christmas in order to utilize gift cards and make additional purchases at new lower prices. Online retailers like Amazon.com are also making a quick move to try and bolster sales one last time before consumers fall into more normal spending trends.
From the Associated Press:
The nation's retailers slashed prices further Wednesday in hopes that a post-Christmas shopping rush will salvage holiday sales that, so far, have fallen below even modest expectations. They're waiting in particular for legions of shoppers armed with gift cards to snap up bargains and buy new merchandise that has just hit store shelves. Merchants in past years have received a late bounce during big clearance markdowns, and they find themselves again in the position of hoping that bargain-hunting consumers will come through in the end. Gift card sales are not recorded until shoppers redeem them.

12/27/2007 11:26:21 PM UTC  #    Comments [0]  |  Trackback
Debt is on the rise in the UK and many banks around the world are preparing for a similar decline in other Western markets like the United States. Mortgage problems that began in the United States have quickly extended into the UK and other markets, which has switched much of the spending from home equity to credit cards. The result has been a huge increase in the amount of credit card debt outstanding and (thanks to the mortgage crisis) a rising number of defaults. This is a trend that is only continuing to get worse both domestically and around the world.
From TimesOnline:
Debt charities are gearing up for the busiest January on record as the financial hangover from an expensive Christmas kicks in. The Consumer Credit Counselling Service and Credit Action, two leading debt charities, predicted that they would receive more calls from borrowers worried about their finances this January than in previous years. The credit crunch, coupled with five interest-rate rises, has left tens of thousands of borrowers struggling. It was hoped that the 0.25 per cent cut in the interest rate at the beginning of the month would ease the burden on homeowners, but many mortgage lenders have yet to pass it on. In addition, shoppers have spent an estimated £34 billion on their credit cards this month, up from £31 billion last December, according to the Association of Payment Clearing Services, the credit card industry body.

12/27/2007 11:22:06 PM UTC  #    Comments [0]  |  Trackback
 Wednesday, December 26, 2007
Holiday spending may be great for online retailers, but it disappointed many brick and mortar retailers. These stores not only lost sales to the internet, but also had to combat lower consumer spending amid a tough credit and housing market. Many customers that tapped home equity lines are switching to credit cards and reducing their spending. It will be interesting to see whether the default rates on any of the store-based credit cards increase along with the default rates associated with the larger credit card banks...
From the New York Times:
American consumers, uneasy about the economy and unimpressed by the merchandise in stores, delivered the bleak holiday shopping season retailers had expected, if not feared, according to one early but influential projection. Spending from Thanksgiving to Christmas rose just 3.6 percent over last year, the weakest performance in at least four years, according to MasterCard Advisors, a division of the credit card company. By comparison, sales grew 6.6 percent in 2006 and 8.7 percent in 2005.

12/26/2007 8:53:20 PM UTC  #    Comments [0]  |  Trackback
Did you spend hours in line at retailers this Christmas? It turns out tha many people simply turned to websites like Amazon.com in order to get their holiday shopping done from the comfort of their own home. Amazon called this season its best ever and released some interesting statistics:

Amazon Worldwide 2007 Holiday Facts (Includes www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp, and www.amazon.ca)
  • Amazon shipped more than 99 percent of orders in time to meet holiday deadlines worldwide.
  • On the peak day this season, Amazon's worldwide fulfillment network shipped over 3.9 million units.
  • Amazon shipped to over 200 countries.
  • One of our most remote shipments was “Full Metal Panic Fumoffu - Full Metal Pandemonium” (Vol. 1) DVD and “Full Metal Panic Fumoffu - Full Metal Fracas” (Vol. 2) DVD delivered to Barrow, Alaska.
  • Amazon shipped over 160,000 shipments to APO/FPO addresses.
Amazon.com 2007 Holiday Facts (www.amazon.com Only)
  • Amazon.com sold Nintendo Wii systems at approximately 17 per second when they were in stock.
  • Amazon.com sold enough high-def DVD players to cover seven football fields.
  • If you lined up all of the GPS units Amazon.com sold this holiday, they would make a trail from New York to Philadelphia; however, a new trail wouldn’t be necessary with the use of a GPS.
  • Amazon.com sold enough auto wrenches to stretch all the way around the Daytona 500 track.
  • Amazon.com sold enough Hannah Montana wigs to outfit the entire audience at her December 20th show in Providence, RI.
  • Amazon.com's One-Day Shipping was extended an extra day through Sunday, December 23rd for Prime members this holiday season.
  • The last Prime order placed on December 23 in time for Christmas delivery contained "Futurama, Vol. 1" DVD, "Lost in Translation" DVD, "A Charlie Brown Christmas" CD, "The Fountainhead" by Ayn Rand paperback, "Bridge Over Troubled Water" CD, and "Pulp Fiction” (Two-Disc Collector's Edition) DVD delivered to Herndon, VA on December 24th.
Amazon.com's Hot Holiday Best Sellers (Nov. 15 through Dec. 19 Based on Units Ordered)
  • In Toys, top sellers included Jakks EyeClops Bionic Eye, IlluStory Make Your Own Story Kit and Spinmaster Air Hogs Havoc Heli.
  • Top sellers in video games and hardware included Nintendo Wii, “Super Mario Galaxy” and “Call of Duty 4.”
  • In DVDs, top sellers included “Harry Potter and the Order of the Phoenix,” “Planet Earth: The Complete BBC Series” and “Pirates of the Caribbean: At World's End.”
  • Top sellers in books included “Eat, Pray, Love” by Elizabeth Gilbert, “The Dangerous Book for Boys” by Conn Iggulden and Hal Iggulden and “I Am America (And So Can You)” by Stephen Colbert.
  • In music, top sellers included “Noel” by Josh Groban, “Raising Sand” by Robert Plant and Alison Krauss and “As I Am” by Alicia Keys.
  • Top sellers in consumer electronics included the Garmin GPS, Canon PowerShot digital Elph cameras and Samsung LCD HDTVs.
  • Top sellers in the Beauty Store included Burt's Bees Head to Toe Starter Kit, Imju Fiberwig mascara and Bare Escentuals Get Started Kit.
  • In PCs, the top sellers included Apple MacBook, Nokia Internet Tablet PC and HP Pavilion Entertainment Notebook PC.
  • Popular shoes and handbags at Amazon.com and Endless.com included the FEED bag, FRYE women's Campus tall boot and FRYE women's Adrienne Button tall boot.
  • Top sellers in apparel and accessories included Kenneth Cole Reaction men's Eden wool pea coat, Gruppo Italiano women's cashmere-lined leather glove and Red Moon women's long sleeve cashmere turtleneck.
  • The top-selling products in Amazon's Automotive Parts & Accessories Store included Black & Decker Simple Start battery booster, Actron diagnostic code scanner and Highland waterproof car top carrier.
  • Top sellers in home improvement included Black & Decker auto wrench, Black & Decker Gecko grip level and Leatherman Micra multitool.
  • The top-selling items in the Sports and Outdoors Store included the Ripstik caster board, Perfect Pushup and Bowflex Series 7 treadmill.
  • Jewelry top sellers included sterling silver open double flower pendant, sterling silver Filigree circle pendant and 14k yellow gold four prong oval peridot stud earrings.
  • Top-selling watches included the Timex heart rate monitor watch, LEGO Kids' Star Wars Darth Vader watch and Skagen women's Silver Dial mesh bracelet watch.
  • The top-selling home and garden items included KitchenAid stand mixers (various colors), Pinzon Microtech throw (various colors) and Foreman removable-plate grills.
  • Top-selling items in the Baby Store included Munchkin Mozart Magic Cube, Lamaze Spin & Explore Garden Gym and Lamaze Musical Inchworm.
  • Top-selling items in Amazon's Grocery Store included Numi's Bouquet bamboo gift set, Lavazza Crema e Aroma coffee beans and Senseo Douwe Egberts dark roast coffee pods.
  • Top-selling items in Amazon’s Gourmet Food Store included Soup's On gift basket by Wine Country Gift Baskets, Starbucks assortment gift basket by Wine Country Gift Baskets, and Fireworks popcorn and seasoning set.
  • Top-sellers in health and personal care included the Braun Pulsonic system with LCD screen, Farouk CHI ceramic flat hairstyling iron and Homedics Therapist Select quad-roller massaging cushion with heat.

12/26/2007 8:47:12 PM UTC  #    Comments [0]  |  Trackback
 Monday, December 24, 2007
The consumer credit markets may be the final nail in the coffin for the US economy, sending it into the recession that so many economies were predicting. Problems began in 2005 when the US reformed its bankruptcy laws and made it more difficult to file. This resulted in fewer defaults, which meant that lenders could afford to send more money to questionable borrowers. Unfortunately, this caused a bubble in both the mortgage and consumer credit markets and only one has exploded so far... Rising defaults in the consumer credit markets may be a signal that we are at the crest of a new wave of problems for financial institutions in the US.
From the AP:
Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. An Associated Press analysis of financial data from the country's largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears.

12/24/2007 8:29:20 PM UTC  #    Comments [0]  |  Trackback
 Friday, December 21, 2007
President Bush signed a new bill today that will give tax relief to families facing foreclosures. The driving force behind this plan is a strategy designed to incentive lenders to refinance bad loans instead of simply "call" them. That is, those with subprime adjustable rate mortgages will be eligible for a refinancing at a lower rate rather than simply put into foreclosure. It's a good move that could help curb the problems we are seeing today with foreclosures, but many more near-prime and prime mortgages may still see problems.
From AHN:
President George Bush on Thursday signed a bill allowing families facing foreclosure from paying higher taxes, months after the U.S. housing market began its steep decline. The Mortgage Forgiveness Debt Relief Act of 2007 gives homeowners a 3-three-year window to refinance their mortgage while enjoying a tax break. The current tax code recognizes debt relief obtained from refinanced mortgages as taxable income. The new law, which was sponsored by Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, increases incentives for lenders and homeowners to refinance bad loans.

12/21/2007 10:41:29 PM UTC  #    Comments [0]  |  Trackback
 Wednesday, December 19, 2007
Consumers may finally receive a break after the European Union ordered MasterCard to drop its international fees for cross-border purchases or face steep fines amounting to 3.5% of global revenues daily. The move comes as the EU is attempting to make all transactions across its borders free from any fees or extra charges. While this is only one fee being dropped, it is definitely one of the more expensive fees for those living in Europe or traveling abroad.
From the WSJ:
Credit-card company MasterCard Inc. must drop the fees it charges stores for cross-border credit card purchases within six months or face massive daily fines, the European Commission ruled Wednesday. The charges are incompatible with European Union antitrust rules, the commission said. The fees charged on payments customers make abroad with MasterCard credit cards or Maestro debit cards inflate the cost of card acceptance for retailers, said Competition Commissioner Neelie Kroes.
Call 866-559-DEBT for a free debt settlement consultation today!

12/19/2007 6:20:25 PM UTC  #    Comments [0]  |  Trackback
 Friday, December 14, 2007
America's consumer debt problem may seem like a huge problem, but it's quickly becoming a worldwide problem. The UK reported not long ago that they were seeing record levels of insolvancy as credit card companies worldwide make a push to get consumers more and more into debt. Unfortunately, the problem is only likely to compound as lenders becoming increasingly tight with their lending standards. The best thing for consumers to do now is work to overcome their debt problems by seeking help to keep current on due debts and work to repay old debts.
From the Guardian:
Millions of Britons are trapped in a cycle of debt, using their credit cards to fund Christmas purchases before they have even repaid last year's spending, a survey claimed today. Around one in 10 consumers - the equivalent of 4.4 million people - admit they are still repaying debt they ran up last December ... At the same time, 9% of people said it took them five months to clear their festive credit card bill, according to financial website MoneyExpert.com ... More than a quarter of these people plan to borrow money from friends and family members, while one in five will take out an additional loan.
Call 866-559-DEBT for a free debt settlement consultation today!

12/14/2007 8:30:01 PM UTC  #    Comments [0]  |  Trackback
 Thursday, December 13, 2007
Most people are aware of the problems with the mortgage markets, credit markets and consumer spending but there may now be more things to consider on the horizon. Business capital spending may start to decline now that credit is a lot tougher and revenues are taking a hit. Meanwhile, overseas growth appears to be slowing down and may not be great enough to offset the slowing domestic growth. These could very well be the key ingredients to a recession next year...
From Reuters:
"U.S. employers have yet to slash jobs in any great number and the mighty consumer hasn't forgotten Christmas, but Corporate America is retrenching in anticipation of a slowdown, and that may hasten the fall. While malls are packed with holiday shoppers, the import docks in California are quieter than usual as retailers trim inventory. U.S. airlines are flying with the fewest empty seats on record, yet many are cutting capacity. Some economists worry that it will be this scale-down in business investment that tips an already wobbly U.S. economy into a recession next year."

12/13/2007 11:06:28 PM UTC  #    Comments [0]  |  Trackback
 Wednesday, December 12, 2007
How often have you seen offers that guaranteed lower monthly credit card and loan payments? It’s a tough offer to refuse if you are deep in debt, especially since you know non-profit company isn’t trying to make a buck off of you… or are they?

Many con artists run debt relief organizations that do not deliver on their tall promises to reduce your debts by more than half. They use attractive advertising to draw customers into a program that can set them back hundreds of dollars without making any further progress to reduce their debts. These fraudulent providers are not really non-profit at all.

It is important that consumers carefully verify that any institution that they are dealing with is reputable. This can be done by checking their status with the Better Business Bureau or other industry organizations. Legitimate counselors will also sit down with you and conduct an initial free and objective assessment of your financial situation. It is important to shop around and make sure all the good ones are making the same recommendations.

Many credit card companies may also be willing to negotiate with you directly; however, this can be difficult at times. Debt settlement companies offer a better solution that can help you consolidate and reduce your debts for a low fee. These companies can typically reduce your debts by as much as 50% by working with your creditors. We recommend Knockout Debt that can be reached at 866-559-DEBT.

12/12/2007 9:13:24 PM UTC  #    Comments [0]  |  Trackback
 Tuesday, December 11, 2007
One of the best ways to have more money is to limit your spending, especially during this time of year when we are accustomed to spending so much. Here’s a simple process that you can use to limit your spending and increase your cash on hand:
  1. Examine. Take out a calculator and figure out exactly how much you owe, except for your mortgage. Now, subtract the indulgences that you could get rid of without much trouble. For example, do you really need those chocolate chip cookies? Probably not. Also, resist the temptation to purchase these items during your next trip to the store – stick to your list!

  2. Cut Back. Now, stop all unnecessary spending and focus on paying down the amount that you owe on loans and debt. Make it into a game: How quickly can you pay down your debts? This phase won’t last forever, but it’s one of the most important steps in the process.

  3. Plan. Now that you have cut all of the unnecessary items from your shopping list, you can return to business as usual – except with a plan! Divide your cash into three piles: (1) short-term fun spending, (2) medium-term planned expenses for food, living and big purchases, and (3) long-term retirement funding so you won’t have to work forever.
Following these three easy steps can help you reduce the amount of money you owe and prevent problems in the future by establishing a spending plan to curb your consumption. Get started today!

Need debt settlement help? Call 866-559-DEBT (3328) today for a free consultation!
12/11/2007 7:43:48 PM UTC  #    Comments [0]  |  Trackback
 Monday, December 10, 2007
Credit reports and scores have an enormous impact on the interest rates lenders offer us, which is why it is important to make sure that your credit report is in line. Those looking to take out an auto loan or mortgage should study their credit reports early in the process in order to allow time for possible corrections to be made before a lender sees it.

So, how can you check your credit report? Well, there are three main credit reporting agencies: Equifax, Experian, and TransUnion. All three of these organizations offer fee-based services online that allow you to check your credit report whenever you wish. Other websites like MyFICO.com offer a cheaper service that lets you access all three of your credit reports to check for errors.

There are some cases in which you are eligible for a free credit report. First, if you have been turned down for credit or employment due to your credit report during the last 60 days, you can get yours for free. Second, if you believe your credit report contains fraudulent information, you have the right to check it for free. Third, if you are on public assistance, you can get it for free. And finally, if you are unemployed and plan on filing for unemployment benefits within the next 60 days, then you can also access it for free.

Some of the common mistakes to look for on your credit reports include the use of your maiden name, inaccurate or old addresses, past due accounts that are paid off in full, and other similar issues. Obviously, clearing up these issues before they are viewed by a lender can substantially enhance the odds of a lower interest rate for your next loan. This is why it is important to always check up on your credit reports!

Need debt settlement help? Call 866-559-DEBT (3328) today for a free consultation!

12/10/2007 3:47:28 PM UTC  #    Comments [0]  |  Trackback
 Friday, December 07, 2007
Credit cards are very useful tools that many of us have become reliant on over the years, but having too many of them can make your life a lot more complicated than it has to be. One way to simplify your financial life may be to cancel your old credit cards. Here are some tips to keep in mind:
  • Only cancel credit cards with empty lines of credit as you’ll want to keep the account open until you pay it off.
  • Don’t let the credit card company know that you are thinking about leaving until you have paid off your balance, else they might increase interest rates if you try to cancel.
  • Don’t cancel credit cards before taking out a loan, as it may hurt your credit rating in the short-term.
Canceling your credit card is easy, simply contact your credit card company and request to cancel your account. Some companies even make this an automated process that can be done by pressing a button on the phone! Sometimes, you will be forwarded to a service rep will try to convince you to keep your account - particularly if you are a heavy spender. Often times, they will offer discounts or special rates, but it is important to make sure that they are not temporary discounts if you plan on keeping your account active.

12/7/2007 6:42:08 PM UTC  #    Comments [0]  |  Trackback
Stock markets rallied today after the president announced a new deal under which mortgage lenders would ease the pain experienced by subprime borrowers by lowering and freezing rates. The move is designed as a last ditch effort to avoid another run of foreclosures that could cripple the economy even further by putting increased pressure on a market that is already well-classified as a seller’s market. Unfortunately, the problem isn’t quite contained yet as new economic reports surfaced indicating that the subprime mess may be a side-effect rather than the reason for the economic decline we’ve seen.

So, what’s the major issue? Bad debt. Banks that traditionally made money through the difference in lending and savings have recently made money by packaging securities and selling them off to the secondary markets. This shifted the focus to profitable loan origination to simply as much loan origination as possible regardless of the rate. To that end, we’ve seen significantly lower interest rates as banks worked to give access to credit to everyone regardless of their income or existing debts.

The hedges worked out in a computer program as investors thought they could reduce their risk in this market by simply buying derivatives in another. Unfortunately, investors tend to constantly forget about one thing: liquidity. That is, there is no market if nobody is willing to buy and sell the securities. We saw this in the credit market after people started realizing that a lot of these loans were about to default. While they are hedged properly according to a model, there was simply nobody on the other end to take the trade regardless of intrinsic value.

The underlying reasoning, of course, is the simple fact that the median household income has not budged since 1999 while the amount of debt taken on has only increased exponentially. The predictable outcome is a lot of people that are unable to keep current on their bills. And that is why we are in the subprime mess as we see it now.

Need debt settlement help? Call 866-559-DEBT (3328) today for a free consultation!

12/7/2007 1:04:54 AM UTC  #    Comments [0]  |  Trackback
 Wednesday, December 05, 2007

Carl Levin, Chairman, U.S. Senate Permanent Subcommittee on Investigations Hearing: Credit Card Practices: Unfair Interest Rate Increases.


Opening Statement:

"This hearing is the second in a series of Subcommittee hearings examining unfair credit card practices. Today's focus is on credit card issuers who hike the interest rates of cardholders who play by the rules—meaning those folks who pay on time, pay at least the minimum amount due, and wake up one day to find their interest rate has gone through the roof—again, not because they paid late or exceeded the credit limit, but because their credit card issuer decided they should be "repriced." To add insult to injury, credit card issuers apply those higher rates retroactively to consumers' existing credit card debts, which were incurred when lower interest rates were in effect.

Let me give you a few examples taken from the Subcommittee investigation into the interest rate practices at the five major credit card issuers who handle 80% of U.S. credit cards. These examples are also summarized in a set of eight case histories in Exhibit 1, that is a part of the hearing record.

Janet Hard of Freeland, Michigan is a registered nurse, married with two children, whose husband is a steamfitter. She has had a Discover credit card for years. In 2006, out of the blue, Discover increased the interest rate on her card from 18% to 24%.

Discover took that action, because Ms. Hard's FICO score had dropped. FICO scores, developed by the Fair Issac Company, are numbers between 300 and 850 that are generated by a complex mathematical model designed to predict the likelihood that a person will default on their credit obligations within the next 90 days. FICO scores are compiled by credit bureaus who supply them upon request to credit card issuers seeking the scores of their cardholders. Discover's policy is to put more weight on a computer-generated FICO score than on the fact that, for years, Ms. Hard had always paid her Discover bills on time, never exceeded her credit limit, and always paid at least the minimum amount due.

After increasing her rate, Discover even applied the higher interest rate to her existing credit card debt, which in my book fits the definition of a retroactive rate increase. The 24% rate boosted her finance charges and the minimum payment she was required to make each month. It took Ms. Hard some months to realize that, despite making larger payments, her debt was hardly decreasing. When she saw her interest rate had been hiked to 24% and complained, Discover lowered it to 21%, still above where she started.

The higher interest rates have made it more difficult for Ms. Hard to pay off her debt. Under her old rate of 18%, when she made a $200 payment, about $148 went to pay for the finance charges and $52 went to pay down her debt. With the 24% interest rate, out of that same $200 payment, about $176 went to finance charges and only about $24—less than half the amount previously—went to pay down the principal debt.

Over the last twelve months, Ms. Hard has kept her credit card purchases to less than $100 and has made steady monthly payments of $200 to reduce her debt. At the end of a year, her payments totaled $2,400, but due to those high interest rates of 21 to 24%, almost all of her money went to pay for finance charges. In fact, out of her $2,400, about $1,900 went to finance charges and she was able to pay down her principal debt by only about $350.

Millard Glasshof of Milwaukee, Wisconsin, is a senior citizen living on a fixed income. For years he faithfully made a $119 monthly payment to Chase to pay off a credit card debt that is now about $4,800. In December 2006, a year ago, out of the blue, Chase decided to hike his interest rate, from 15% where it had been for years, to 17% and then in February to 27%.

Why? Chase had decided to conduct an automated review of all its closed credit card accounts where balances were being paid off. Because that automated review found that Mr. Glasshof's FICO credit score had dropped, it hiked his rate. Think about that. His account was closed. He made no new purchases. All he did for years was send in his payments like clockwork. But his interest rate was automatically hiked from 15 to 27%. Not only that, to rub salt in the wound, the new 27% rate was applied retroactively to his existing credit card debt, and his finance charges skyrocketed.

Under the 27% interest rate, out of his $119 monthly payments to Chase, about $114 went to pay for finance charges and only $5 a month went to pay down his principal debt. And even those $5 reductions were wiped out by sky-high fees. For example, Mr. Glasshof was often charged a $39 per month over-the-limit fee, until at our last hearing in March Chase ended its policy of charging repeated over-the-limit fees for going over the credit limit once. In addition, in August 2007, Mr. Glasshof got a confusing letter from Chase indicating that his minimum payment would change. He called Chase, was advised he could pay $111 instead of his usual $119, paid it, and got hit with a $39 fee for not paying enough.

The end result, as shown in this chart, Exhibit 2(b), was that, over the last twelve months, Mr. Glasshof made payments totaling about $1,300, but was charged about $1,100 in interest and $200 in fees, which meant that none of his $1,300 in payments reduced his debt at all.

Then there's Bonnie Rushing of Naples, Florida. She has two Bank of America cards, one of which is affiliated with the American Automobile Association ("AAA"). For years, she paid both credit card bills on time. For years, both cards carried an interest rate of about 8%. But in April 2007, out of the blue, Bank of America increased the interest rate on her AAA card—not by a handful of points but by tripling it from 8% to 23%. Bank of America tripled the rate, because Ms. Rushing's FICO score had dropped, and the bank used that FICO score to raise her rate, ignoring the fact that, for years, she had paid her credit card bills to Bank of America on time.

Ms. Rushing, by the way, like Ms. Hard and Mr. Glasshof, doesn't know why her FICO score dropped. She speculates that it may have been because, in January and March 2007, she opened Macy's and J.Jill credit cards to obtain discounts on purchases—15% off some cosmetics and 20% off some clothes. She didn't realize then that simply opening those accounts and receiving those cards could negatively impact her FICO score and hike her interest rate.

When Ms. Rushing first saw the higher rate on her April billing statement, she called Bank of America, explained she'd never received notice of a rate increase, and wanted to opt out by closing her account and paying off her debt at the old rate. Bank of America personnel responded that she had already missed the opt out deadline and pressed her to accept a higher interest rate. Ms. Rushing resisted. She closed her account. She wrote to the Florida Attorney General; she wrote to this Subcommittee; and she called AAA. Bank of America finally agreed to restore the 8% rate on her closed account, and refunded the $600 in extra finance charges it had collected in just two months.

Linda Fox of Circleville, Ohio is a working grandmother. She has had a Capital One credit card for more than ten years. In April 2007, out of the blue, Capital One increased her interest rate from 8% to 13%. Capital One raised her rate, not because her FICO score had dropped (Capital One doesn't use FICO scores to raise rates), but because Capital One had decided to pass on so-called additional borrowing costs to its cardholders. Capital One's automated system selected accounts whose interest rates had not been increased in three years and had what the system deemed a "below market" interest rate. Ms. Fox's account was one of many selected, and the higher rate was applied retroactively to her existing credit card debt. She tried without success to opt out and get her old rate back. Six months later, in November, after a Subcommittee inquiry, Capital One allowed Ms. Fox to close her account and pay off her debt at the old 8% rate.

We have additional case histories, but I'll stop with just one more. In 2007, Gayle Corbett of Seattle, Washington was hit with interest rates hikes on three separate credit cards in three separate months. Bank of America increased her rate from 15% to 24%; Citi more than doubled her rate from 11% to 23%; and Capital One hiked her rate from 15% to 19%. Bank of America and Citi acted because her FICO score had dropped, while Capital One had selected her account as part of its practice to unilaterally pass on borrowing costs to its cardholders. After many calls, Ms. Corbett was able to convince each of the companies to partially or fully retract its rate increase. As a result, the interest rates on her three cards have settled for the moment at 10%, 19%, and 15%. She told the Subcommittee that contesting these multiple increases, none of which were her fault and all of which threatened her ability to repay her debts, had left her exhausted and worried about what happens next.

These case histories cause me a lot of worry too. In the United States, December is a big shopping month. Stores, advertisers, and sometimes even the President, are urging shoppers to spend more. But if you shop with a credit card, as most Americans do, dangers lurk that few consumers realize could damage their financial future.

Suppose, for example, you spend up to—but not over—the credit limit on your credit card. Most Americans don't realize that if they get too close to their credit limit, their FICO score could drop and trigger an interest rate increase on their credit cards—even for credit cards that they've paid on time for years—even for closed cards whose debts they're paying off. And the same lower FICO score could trigger interest rate hikes on more than one credit card, increasing the debt on each one. At least 50% of U.S. credit cards carry debt from month to month, and the average American family today has five credit cards. Interest hikes on multiple cards at once could spell financial disaster for working families.

Among the issues the Subcommittee has been investigating are who determines an individual's FICO score, who decides when a lower FICO score will trigger a higher credit card interest rate, and who actually sets those higher interest rates. What we found is that most interest rate decisions are not made by individual employees, but by computer systems programmed to react to credit scores.

It works like this. Take a look at this chart, Exhibit 2(c). FICO scores are generated by three so-called credit bureaus, Equifax, Experian, and TransUnion. To produce the scores, each credit bureau collects credit data from a variety of sources, including payment data from companies administering mortgages, car loans, utility bills, and credit card accounts, and information taken from bankruptcy and tax proceedings, debt collectors, and others. This credit data is fed into the credit bureaus' computer systems on a continuous basis.

The credit bureau computers take in, store, and organize the information so that a "credit report" can be called up for any one of hundreds of millions of individuals. Each credit report identifies the individual by name and address; lists what types of credit that person has, including any mortgage, car loan, or credit card; and describes whether the person is current or behind on the payments. The report also indicates whether that person has been the subject of debt collection efforts or has declared bankruptcy. In addition to compiling the credit reports, the credit bureaus apply a complex mathematical model, developed by Fair Issac Company, to analyze the data in each report in an attempt to predict how likely the person is to default on their credit obligations in the next 90 days.

The model focuses primarily on such factors as the extent to which a person is past due in paying their bills, the level of debt incurred, and the extent to which the incurred debt is close to the person's credit limits. Recent debt collection actions and bankruptcies are considered key factors that predict a greater likelihood of default. After analyzing the data in each credit report, the model assigns each person a FICO score, that number between 300 and 850 that is supposed to predict the likelihood of a default in the next 90 days.

Fair Issac has designed the FICO scoring system so that the lower the number, the more likely the person is to default in the next 90 days. A person with a 720 FICO score, for example, is seen as having odds of roughly 1 in 22 that they will default in the next 90 days; a person with a 680 score has 1 in 9 odds of defaulting; and a person with a 620 score is seen as having roughly 1 in 4 odds of defaulting. So the lower the score, the greater likelihood a person will default.

Major credit card issuers typically check the FICO scores of each of their cardholders every 30-90 days. Since each issuer has millions of cardholders, millions of FICO scores are fed into the issuer's computer systems on an automated basis. If a cardholder's FICO score drops, the issuer's own automated, risk analysis system automatically flags the account for additional review. The issuer's system then uses the person's FICO score and actual payment history at the issuer to generate an internal credit score evaluating the cardholder's likelihood of defaulting in the near future. If that internal credit score falls within designated criteria—even if that cardholder has a perfect record of making on-time payments to the issuer—the credit card issuer's computers use other criteria to select a higher interest rate for that cardholder. The system then sends a notice to the cardholder that the increased rate will be applied by a specified date, unless the cardholder follows certain procedures to opt out of the increase by closing the account.

The automated process I've described, capable of making credit decisions on millions of accounts, has been in operation for years. Today, in most cases, no human being is involved at any point in deciding who will get an interest rate increase, selecting the interest rates to be imposed, and notifying the affected cardholders. While human beings do program the computers and sometimes are brought in to decide a small portion of individual cases, the vast majority of credit card interest rate increases today are being decided and imposed on an automated basis. And those automated rate increases can and do hike the interest rates of people with excellent histories of on-time payments.

To make interest rate decisions, the issuers' automated systems are driven by numbers, primarily FICO scores. What the Subcommittee has learned is that the mathematical models generating the FICO scores are so complex that even experts have trouble predicting what actions will increase or lower an individual's score. Take, for example, the situation where a person opens a new credit card account in order to obtain a discount on a purchase. Opening a new credit card could increase a person's FICO credit score if they have only a few credit cards and don't use up a lot of the available credit on the new card. But the same action could lower another person's score if they already have a handful of credit cards and buy a big ticket item that uses up or comes close to the credit limit on the new card. As the FICO experts explain, every factor depends upon every other factor to determine a person's score, so it is difficult to predict how specific actions affect an individual's FICO score.

The Subcommittee also learned that, although credit bureaus typically transmit not only a person's FICO score, but also the underlying credit report containing the information justifying that score, credit card issuers typically do not review or keep that credit report. The credit bureau does not retain the credit report either, because its automated systems are continually updating all of its credit information with the latest data streaming in. That means, unless a cardholder requests a credit report soon after a FICO score is transmitted to an issuer, the specific information used to generate the specific score may be lost.


In most of the case histories we examined, when a credit card issuer was asked by the Subcommittee to explain why a particular cardholder's interest rate was increased, the issuer pointed to the person's lower FICO score. When we asked why the FICO score was lower, usually the only information the credit card issuer provided was a list of up to four "reason codes" supplied by the credit bureau at the time the lower score was transmitted. These reason codes provide generic statements on why a score is reduced, using such phrases as "balance grew too fast compared to credit limit" or "total available credit on bankcards is too low," without identifying the specific facts that support or explain these statements.

By law, credit card issuers who rely upon a credit score to increase an interest rate must inform the cardholder of the identity of the credit bureau who supplied the score, how to contact that bureau, and the cardholder's right to review their credit report and correct any wrong data. Issuers often include that information in the same notice that informs a cardholder of an upcoming interest rate increase. The Subcommittee's investigation has found, however, that few cardholders understand that their interest rate hike was caused by a lower credit score. And even for those who do make that connection, the investigation has found that it is difficult to look at the person's credit report and identify what factors caused their score to drop.

None of the cardholders contacted by the Subcommittee had known that their interest rates had been triggered by a lower FICO score. Janet Hard, for example, said she'd asked Discover why her interest rate had been increased but was never been informed that it was because her FICO score had dropped and so never requested or reviewed her credit report. In response to the Subcommittee's request, Discover provided the three reason codes transmitted by a credit bureau to explain Ms. Hard's lower score, which stated that the "proportion of balance to credit limit" was "too high" on her credit cards, she had too many "established accounts," and she had "accounts with delinquenc[ies]." But Discover didn't know what balances were "too high," how many accounts were too many, or what accounts had delinquencies. Ms. Hard felt the stated reasons were inaccurate, since she has always been careful to pay all her bills and is current on all of her accounts. When we examined Ms. Hard's credit report, we were also at a loss to explain these references, since her accounts are all paid up to date. We did notice that, just before her 2006 rate increase, the credit report showed she was 30 days late paying a J.C. Penny credit card bill, but it is unclear if that lowered her score. We had the same difficulty in the case of Bonnie Rushing; Bank of America was unable to confirm whether her credit score dropped because, in early 2007, she opened Macy's and J.Jill credit cards to obtain discounts on purchases. The bottom line is that the credit scoring process is at times akin to a black box; no one knows exactly how it works or what lowers a score, yet it has become the primary driver of interest rate increases for tens of millions of Americans. To me, if a person meets their credit card obligations to a credit card issuer and pays their bills on time, it is simply unfair for that credit card issuer to raise their interest rates.

Equally offensive is the practice of credit card issuer's applying the higher interest rate, not just to future debt, but retroactively to a cardholder's existing debt. Take the case of Ms. Hard again, a woman who faithfully pays her bills on time. For the last year, she kept her purchases on her Discover card to less than $100 and paid $200 every month to reduce her debt. When Discover hiked her interest rate from 18% to 24%, it applied the higher rate to her existing debt. After she complained, Discover lowered her rate to 21%, but that was still above where she started. Over the past twelve months, she has paid Discover a total of $2,400—more than a quarter of her $8,300 debt. But $1,900 of those dollars did not go to pay down her debt; they were eaten up by the sky-high interest rates. At the end of twelve months, despite paying $2,300, she reduced her debt by only $350. If that isn't unfair, I don't know what is.

One last point, which has to do with the appearance of arbitrary credit card interest rates. Credit card issuers have attempted to set up automated systems that assign interest rates using objective criteria based upon cardholders' credit risks, represented by their FICO scores. But look at the case histories we've investigated. Over the course of the last year, even though his credit circumstances didn't change, Mr. Glasshof's credit card with Chase was assigned interest rates of 15%, 19%, 27% and 6%. That 6% rate, by the way, came after the Subcommittee inquired about his account. Another case history, which we haven't mentioned so far, involves Marjorie Hancock of Massachusetts. She has four Bank of America cards, carries similar amounts of debt on each, and presumably presents each with the same credit risk. Yet all four cards have different interest rates, 8%, 14%, 19%, and 27%.

The bottom line for me is this: when a credit card issuer promises to provide a cardholder with a specific interest rate if they meet their credit card obligations, and the cardholder holds up their end of the bargain, the credit card issuer should have to do the same. That's why I've introduced legislation with Senator McCaskill and others, S. 1395, aimed at putting an end to these and other unfair credit card practices, and ensuring that cardholders who play by the rules are protected from unfair interest rate increases, including rate increases that are retroactively applied to existing credit card debt.

Senator Coleman, I would like to thank you and your staff for your ongoing participation in the Subcommittee's investigation into unfair credit card practices. That participation has greatly assisted in the Subcommittee's understanding of the industry practices being discussed today.

12/5/2007 2:09:10 PM UTC  #    Comments [1]  |  Trackback
 Tuesday, December 04, 2007
Christmas is the most expensive holiday of the year and often means a substantial hit to consumer finances. The season is also a great time for lenders to peddle credit, particularly to those who have less than perfect credit histories. However, recent difficulties in the credit market have made it difficult for many mainstream creditors to limit their lending to those with bad credit. Many subprime lenders know this and will take the time to tempt you to borrow from them.

It is easy to fall into this trap, but can be extremely difficult to get out. Many credit cards provided by these subprime lenders charge annual interest rates in excess of 39.9% to 59.9% - compared to the 15% APR charged by the typical credit card company. These companies typically target consumers that have County Court Judgments (CCJs) along with those that are unemployed and retired and on limited incomes. It is important for consumers to realize that these companies should almost never be used.

Need debt settlement help? Call 866-559-DEBT (3328) today for a free consultation!

12/4/2007 2:47:53 PM UTC  #    Comments [0]  |  Trackback
Several credit card companies have begun to automatically increase credit card holder interest rates when their customers’ credit scores drop, according to an investigation that will be the focus of a US Senate subcommittee hearing on Tuesday. According to the report, Bank of America and Discover Financial Services monitor credit reports and use “universal default” clauses in customer contracts to justify raising interest rates, even for customers with a good payment history.

Credit card companies contend that they have to “price risk” and this is best done through the use of credit reports – which are the closest thing they have to a risk measure. However, consumer activists say that customers should not face any “penalties” since they have not committed any mistakes yet – that is, they have no late payments. The arguments against such provisions gained traction after Citigroup and JP Morgan recently pulled their own programs doing the same thing amid controversy.

Is this excessive or simply a prudent business move? Well, that is a question that the US Senate will have to answer during their next subcommittee meeting.

12/4/2007 2:47:08 PM UTC  #    Comments [1]  |  Trackback
 Monday, December 03, 2007
It is frightening to think that around two million subprime mortgages, worth around $350 billion, are expected to reset to a higher interest rate over the next 18 months. Meanwhile, resets on near-prime loans are expected to continue to climb until at least 2010. So, how can consumers work to avoid a crushing level of defaults by home owners who find themselves overextended?

Arnold Schwarzenegger, governor of California, has one idea that many other states may adopt. The strategy is based on the premise that foreclosures are expensive for banks, with the average one eating up more than 20 to 25 percent of the mortgage balance. As a result, it may be worthwhile for lenders to modify loan terms to be more accommodating. While this may reduce cash flows, it will likely mean fewer defaults.

This sounds good in theory, but some preliminary data is troubling. Some analysts have noted that 35 to 40 percent of modified loans still experience a re-default over the next two years. Obviously, this is due to interest rates that only continue to rise. So basically, in order for this strategy to work, interest rates would have to decline over the period of the re-negotiated rates in order to make the house as affordable as it was when the original mortgage was taken.

There is also concern that many consumers may view the process as unfair. After all, only those in a dire situation will be permitted to re-negotiate their loans to a lower rate despite their existing contracts in place. So, why should the government bail out the people who made dumb mistakes and spent above their means in the first place? It’s a good point that is likely to draw substantial criticism.

In the end, this strategy is likely to draw some heat while many doubt that it will work. However, there are very few other options for homeowners that are increasingly likely to default once their rates are reset higher. This will only compound the problems that we have already seen and send the market into a further tailspin. So, all we can do now is wait and hope…

Need debt settlement help? Call 866-559-DEBT (3328) today for a free consultation!

12/3/2007 3:29:50 PM UTC  #    Comments [0]  |  Trackback
There is a growing fear in the markets that the damage from the mortgage markets may spread to consumer credit. Recently, a Goldman Sachs analyst suggested that credit card losses could reach $99 billion if worry spreads to the consumer credit markets. The concern stems from rises in both the charge-off and delinquency rates, which measure the share of balances that are uncollectable or more than 30 days late. HSBC alone noted that it had taken a $1.4 billion charge in its American consumer-finance businesses, partially due to weakness among credit card borrowers.

It may be a little too early to panic, however, as delinquency rates are still almost a full percentage point below the historical average at 3.98%. Industry reports also cite solid repayment rates and continued confidence on Wall Street in credit card backed securities. In fact, some analysts predict that issuance volumes for these securities will be up around 25% in 2007 alone. It is also worth noting that the credit card industry is not likely to experience a subprime-like meltdown because they are able to adjust interest rates and alter credit limits much easier than mortgage lenders.

So, what does this mean for credit card companies and consumers? Well, it is unlikely that the credit card industry will see a downturn like the mortgage markets. However, there is a risk that a sustained downturn if lower housing prices and contractions in credit continue to make for a dimmer future. This would equate to higher rates and less lenient terms for credit card consumers.

12/3/2007 3:28:56 PM UTC  #    Comments [4]  |  Trackback