Credit Card Issuers Make Numerous Changes in first months of 2009

The President and Congress aren't the only ones who have been busy making
changes during the first two months of 2009. Credit card issuers have been
making their own changes as well. Since January, issuers have increased
rates and changed terms for many cardholders.

One of the most dramatic changes was announced this week by American Express. The issuer is offering $300 to a select group of high-risk borrowers to close out their accounts. This will help American Express reduce the accounts that are a risk to default. Cardholders must enroll by February 28 and pay off the entire balance by April 30. If the card has rewards, consumers need to use the rewards before enrolling, because closing their account cancels accumulated rewards.

"Will this buy-out work for cardholders who are struggling to make their monthly payment? These are people with real-life debt problems," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "If they can't pay more than the minimum payment, how will they find the money to pay off their total credit card loan?

"It is interesting how quickly the credit card business model changed. Until recently, credit card issuers were using rewards, intro rates, cheap credit and high limits to grow their cardholder numbers any way they could. Now, that strategy seems to have backfired and we even have an issuer paying off customers to get rid of them," says Hardekopf. "This is a rough time in the credit card industry and issuers are making changes to patch up some of their enormous holes to prevent their institution from becoming a sinking ship. Unfortunately, these changes directly affect the cardholders who are being used as the patches."

Here is a list of changes that have been announced or have taken place
during the first 60 days of 2009.

* Chase added a $10 monthly fee and increased the minimum payment from
2% to 5% for those who carry a large balance.

* Chase changed the reward structure for Chase Freedom. Cardholders once
received 3% cash back in the top three of fifteen everyday categories where
the cardholder spent the most. Now, cardholders receive 3% cash back on
gas, groceries and fast food purchases for the first six months and 1%
unlimited cash back on everything else.

* Capital One increased the rates for new customers on fifteen cards. They
increased the rate for the Platinum Prestige card from 7.15% to 11.9% and
the rate for the No Hassle Points card (excellent credit) from 8.15% to
13.90%.

* Citi announced that it will change its ThankYou reward structure, starting
March 1. Cardholders can currently redeem 20,000 Thank You points for any
domestic flight up to $400 in value. In March, the structure changes to 100
points per $1. You will have to redeem 40,000 points for a $400 flight.

* Citi increased the rate for the Platinum Select card from 7.74% to 8.75%
and the mtvU card from 12.24% to 14.24%

* Citi dropped the intro rate for balance transfers from 0% for 12 months to
0% for 6 months.

* Citi increased the rate for cash advances from 19.99% to 21.99%. The
issuer also increased the default rate from 28.99% to 29.99%.

* Citi and Bank of America began charging a 3% fee for all transactions made
outside the US in US dollars. The fee previously was not added when foreign
transactions were made in US dollars.

* Discover changed its Bonus Miles structure. Discover once offered 12,000
bonus miles with card application. Now you can earn 1,000 bonus miles each
calendar month you make a purchase for a total of 12,000 miles during your
first year.

A Look at the Fed's Survey of Consumer Finances

Last week, the Federal Reserve released its Survey of Consumer Finances2007, the triennial look into the financial condition of American families, including credit card debt.

The survey shows that the average credit card balance for families who carried a balance increased, but the percentage of families who actually carried a balance declined slightly.

"This survey gives good information about how families in the U.S. handle their credit card debt. It's good to look at the trends from 2004 to 2007. However, knowing what has happened to financial institutions and credit card loans since then, some of these statistics are obviously a bit dated," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

According to the survey:

* In 2007, the median balance for those carrying a balance was $3,000, up 25% from 2004. The mean balance for those carrying a balance rose 30.4% to $7,300.

* In 2007, 73% of all families had a credit card compared to 74.9% in 2004.

* In 2007, 46.1% of all families carried a credit card balance, a slight drop from 46.2% in 2004.

* Median number of cards was two per family.

* Median interest rate rose one percentage point to 12.5%.

* Median credit limit rose 21.4% to $18,000.

"Since this survey, credit limits have been cut for many cardholders. In the
latest Quarterly Loan Officer Report, 60% of banks say that they have tightened lending policies for credit cards over the past three months," says Hardekopf.

* Of families with credit cards, 96.1% have a bank-type card, 56.7% have store cards, and 11.9% have gasoline cards.

* Credit card debt was 3.5% of total debt. This is up from 3.0% in 2004 (primary residence is 74.7 percent of total debt).

The Survey of Consumer Finances is a triennial survey and one of the best snapshots of the finances of U.S. families. It interviewed 4,422 families.

"Help With My Credit"--A Good Consumer Tool?

Many credit cardholders a having difficulty making their credit card payments. Today, a group of financial institutions and credit card issuers are launching "Help With My Credit" to educate consumers about debt and assist with credit card payments.

"Help With My Credit" provides a toll-free telephone number (1-866-941-1030) for consumers to call with credit card and debt issues. Operators will listen to the consumer and provide information about contacting credit card issuers and accredited credit counseling agencies. Consumers can also get help and information through a website, HelpWithMyCredit.org. ( http://www.helpwithmycredit.org )

"Help With My Credit" is supported by Bank of America, Capital One, Citi and Discover Card; and payments networks MasterCard and Visa. They will promote "Help With My Credit" with a national advertising campaign.

"This is a good idea and will be helpful for cardholders who are already in debt. However, in some cases, it is the punitive practices of the credit card issuer that helped get these consumers into debt trouble. For the past few years, issuers have been looking for reasons to increase interest rates and gave themselves permission to raise rates at 'any time for any reason'. To issuers, the downside to charging 20-30% interest rates is that it pushes consumers to the financial edge, possibly to the point of defaulting on loans," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "This is somewhat of a self-serving program for
credit card issuers. Credit card loans are unsecure, and as the number of defaults and bankruptcies increase, issuers are losing a lot of money. 'Help with My Credit' is a way to help cardholders pay off their credit card balances instead of defaulting or declaring bankruptcy. It is good PR and can be helpful for some, but the primary motive would seem to be preventing customers from defaulting or filing bankruptcy."

Consumers who use "Help with My Credit" to help debt problems will be offered the opportunity to be transferred directly to the credit card issuer, or to an accredited counseling agency. Consumers will be referred to one of three national counseling agencies: Money Management International, Novadebt, and Take Charge America. Each of these are non-profit agencies that are accredited by the
National Foundation for Credit Counseling and/or the Association of Independent Consumer Counseling Agencies. There are licensed and operating in all fifty states.

"'Help With My Credit' is a good tool for cardholders who are overwhelmed or struggling with debt and don't know what to do or the first step to take. For people with big credit card balances, debt is a painful burden and they don't know how to deal with it, so they deny that debt exists," says Hardekopf. "They purposely do not open letters from creditors, thinking that such action will ease the pain. However, denial only leads to more debt. The only way to start climbing out of debt is to admit the problem and start tackling it. Maybe 'Help With My Credit' will be the first step to help some consumers climb out of the terrible debt trap."

Senate Tackles Credit Card Reform

Yesterday, Senator Chris Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, re-introduced The Credit Card Accountability, Responsibility and Disclosure Act ("The Credit CARD Act").

"The House, the Senate and the Federal Reserve are all tackling credit card reform but there is no legislation to actually help consumers right now during this economic crisis. The Fed passed their regulations, but these don't go into effect until July of 2010," says Bill Hardekopf, CEO of LowCards.com. "Meanwhile, credit card issuers have tightened credit lending and increased rates to protect and help themselves. Cardholders are currently paying the price with higher rates and lower credit limits.

"Out of all of the acts, regulations, and proposals that have been introduced, The Credit CARD Act offers the most protection for consumers," says Hardekopf. "It would be very helpful for consumers if these were passed quickly and went into effect immediately."

Here are a few provisions in the legislation:

* Protect consumers from interest rate increases and account changes for reasons that are unrelated to the card (universal default). This will prevent issuers from increasing interest rates on cardholders in good standing who have done everything right.

"This protection against rate increases 'for any time, for any reason' is needed immediately. Cardholders with good credit scores who pay on time each month are getting hit with big rate increases. A number of the major issuers are increasing rates on their cardholders, perhaps thinking that they will get these rate hikes in before the Federal Reserve regulations take effect. Consumers are understandably angry and want to know what to do about it," says Hardekopf. "If your rate is increased, there aren't many options beyond closing the account and paying off the
balance at the original rate, or transferring the balance to a lower rate card."

* Interest rate increases will only apply to future credit card debt. If the rate is increased, customers may close the account and pay under the existing terms at the time the account was closed.

* If the rate was increased to the default or penalty rate, it requires issuers to lower that rate after six months if the cardholder does not commit any further violations.

* Requires payments to be applied first to the credit card balance with the highest rate of interest. This will minimize finance charges.

* Protects cardholders who pay on time. Prohibits interest charges on debt paid on time (double-cycle billing).

* Limits fees and penalties. Prohibits late fees if the issuer delayed crediting the payment. Requires credit card statements to be mailed out in 21 days before the bill is due, rather than the current 14 days.

* Prohibits the charging of interest on credit card transaction fees, such as late fees and over-the-limit fees.

* Prevents issuers from multiple over-the-limit fees for exceeding a card limit, and allows such fees only when a cardholder's action, not a fee or finance charge, causes the limit to be exceeded.

* Requires cardholders to be given 45-days notice before any rate increase.

* Requires issuers to provide individual consumer account information and to disclose the period of time and total interest it will take to pay off the card balance if only minimum monthly payments are made.

Consumers to Lose Acess to One Credit Score

Credit scores are the only windows that consumers have on how they look to lenders when they apply for a loan and the rates they can reasonably expect to receive. Unfortunately, one window is about to be closed by Experian on February 13, when it discontinues the distribution of Experian based FICO scores and reports from MyFico.com.

FICO is the credit score created by Fair Isaac and the score that is most widely used by lenders. MyFico.com is Fair Isaac's consumer website that allows people pay to see their credit score. Each person has three FICO scores that are based on data provided by Experian, TransUnion, and Equifax. After February 13, consumers will only be able to get two scores--those provided by Equifax and TransUnion.

"If you are about to apply for a credit card, mortgage, or auto loan, it may be a good idea to know all of the scores that the lender will receive and purchase the Experian-based FICO score while you still can," says Bill Hardekopf, CEO of LowCards.com and author of the Credit Card Guidebook. "It is wise to check the details of each report to make sure no mistakes have been made that may harm your credit score.

"Consumers will no longer have this information from Experian, but the score will still be used by lenders in the loan application process. It doesn't seem fair that lenders have access to a score that will be unknown to consumers," says Hardekopf. "Lenders and credit bureaus are becoming more accurate about the segmentation and criteria they use to judge the risk of borrowers. Lenders are quick to use a change in credit score to increase rates and lower credit limits. Since this score is so important, lenders and credit bureaus should make the process a little more transparent to help consumers. In today's tight, sensitive lending environment, even people with good scores are being affected and don't understand why their scores may be changing."

FICO scores are the credit scores most lenders and financial institutions use to determine your credit risk. Each score is based on information the credit bureau keeps on file about you. Your scores go up or down as your information and account history changes. The three FICO scores are important because they affect both the amount of the loan and terms of the loan (interest rate, credit limit, etc.) lenders will offer you at any given time.

"To add to the confusion, there are other credit bureau scores, such as VantageScore, and they have a different scoring system. And, not all creditors report to all three bureaus," says Hardekopf. "Before applying for a card, or a loan, ask the creditor which report they pull. One way you can help protect your credit score is by regularly getting copies of your credit report to make sure there are no errors. You can get a free report each year through AnnualCreditReport.com."

FICO Introduces New Credit Scoring System

Forget the score of the Super Bowl. Your most important score is your credit score, and one of the most widely used scoring models, FICO, is making changes to provide lenders a more accurate evaluation system.

Fair Isaac's new scoring system, FICO 08, helps lenders assess what kind of credit risk you are. This determines how much interest you pay when you take out any kind of loan. The new system has the same scoring range, 300-850, but it is expected to increase the accuracy of lending decisions by 5% to 15%.

According to FICO, the former credit score evaluates consumers based on the worst performance on any credit obligation. FICO 08 will evaluate consumers based on the degree of negative performance across all credit obligations.

"This will be helpful for creditors. The more accurately they can predict the consumer's borrowing and payment behavior, the more accurately they can control the terms and amount of the loan and reduce their lending risk. This new system will no longer harshly penalize responsible borrowers who have had one or two small issues, like late payments, in their recent credit history," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Another improvement for cardholders is a minimized risk of minor infractions. Small amount collection agency accounts, such as judgments and tax liens (under $100) will no longer be evaluated by the FICO 08 score. Consumers will not be penalized for minor infractions like parking tickets and library fines.

To better predict the risk of default, FICO 08 will increase the scoring model segments from 10 to 16. More specific segmentation allows for a more accurate assessment of risk for those with credit problems.

The company is also creating solutions to resolve some of the issues from the manipulation of authorized user accounts, commonly know as "piggybacking." It recently considered banning piggybacking due to abuse by credit repair scams that created a loss for lenders. Fair Isaac says that its analysts have developed patent-pending technology that includes authorized user data in the calculation of scores, while reducing the potential impact from tampering. "This means they will continue to account for authorized users, such as spouses and children, in score calculation. Piggybacking gives a person with limited credit history the benefit of being
added to the account of a borrower with a more established credit history."

Transunion is the first agency to offer the score. Equifax is expected to offer it by the second quarter 2009.