Recent Practices Show Promising Results for Credit Card Users

Several studies released during the past two weeks provide some insight into what has taken place in the credit card industry during 2009. The studies show that some of the practices instituted by issuers may have helped the credit card companies turn the corner on their recent financial struggles.

Two common practices that have occurred in 2009 are the cutting of credit limits and the tightening of lending standards.

A FICO study shows how widespread the reduction of credit limits has been. Issuers cut credit limits for approximately 58 million credit cardholders. 24 million customers had their limits reduced despite a good credit history. For these 24 million, the average reduction in the credit limit was $5,100, more than double the reduction that FICO observed for comparable consumers six months earlier.

According to the Federal Reserve's quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, lending standards are still tighter than average and none of the banks in the survey have loosened the lending standards or raised limits.

"It is still difficult for anyone with less than good credit to get a credit card loan with a low rate," said Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Moody's Credit Card Index shows that cutting credit limits and tightening lending standards may be getting some results for issuers. In July, the charge off rate dropped to 10.52% from 10.76% in June. The overall delinquency rate declined to 5.73%, the lowest level of 2009. Moody's Index also shows that the payment rate in July was 17.43%, the highest rate since October. The payment rate measures the average amount of principal that cardholders repay each month as a percentage of total outstanding principal.

A TransUnion report shows that credit card payments 90 days or more overdue amounted to 1.17% in the three months that ended in June, down from 1.32% in the first quarter.

First Phase of Credit CARD Act takes place today

The initial provisions of the Credit CARD Act go into effect today, giving consumers more notice on interest rate hikes, more time to receive their bills and the ability to say no to APR increases.

The more significant aspects of the bill, signed into law in May, don't go into effect until February of 2010. Those provisions include restrictions on interest rate increases and marketing credit cards to people under 21.

Three changes go into effect today:

* Issuers must now give a 45-day notice instead of 15 days before a rate increase. This gives the cardholder a chance to shop around or pay off the card.

"The extra month of notification is good for consumers but it is still our responsibility to notice these changes. Rate increases are fairly widespread right now, so pay attention to your bill inserts, email notifications, or the plain white envelopes in your mail. This is how most issuers will notify you about a rate increase," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "This longer period also gives you time to shop around for a card with a lower rate and possibly transfer your balance to a different card. Keep in mind that balance transfer offers aren't as generous as they once were and most cards now charge at least a 3% fee for a balance transfer.

"Surprisingly, the CARD Act requires advance notification of a rate increase, but does not require advance notification if an issuer closes your account or decreases the credit limit on your card," says Hardekopf. "Cardholders are being caught off guard by these practices. The cash register is not a good time to learn that your card has been cancelled or that you have exceeded your limit. It seems that both of these changes should have been included in the bill."


* Monthly statements now have to be mailed to consumers at least 21 days before it is due. Previously, issuers could mail the bill 14 days before the due date.

"Don't look at this as an extra week to wait and pay your bill. Keep your regular payment schedule and be appreciative for the extra cushion to make sure your issuer receives it on time," says Hardekopf. "If you use this extra time to procrastinate paying your bill, you may forget and incur a costly late fee."


* The right to opt out of rate hikes and fee increases. Currently, many issuers allow consumers to opt out, but the CARD Act makes it mandatory.

If you decline the increase, you can no longer make new purchases with the card and you must pay off the balance under the existing rates within five years. If you opt out, you must let the issuer know in a timely manner by mailing an opt out letter to your issuer declining the rate increase. Send the mail registered receipt and keep a copy of the letter for your records. You will then pay off the balance at the original rate. The closed account will appear on your credit report.

Credit Card Fraud--How to Protect Yourself

This week, Albert Gonzalez was charged with involvement in the biggest case of credit/debit card data theft in United States history. Federal prosecutors allege that he was part of a group of hackers that seized access to 130 million credit and debit accounts. This is a startling number and a good reminder of the importance of protecting account information.

According to a Javelin Research study released in February, the number of identity theft victims in 2008 increased 22% over 2007 levels to 9.9 million adults in the United States. The total annual fraud (the amount criminals were able to obtain) increased only 7% in 2008 versus a year ago to $48 billion. Surprisingly, the average fraud amount decreased by 12% to $4,849 and the consumer costs of fraud dropped by 31% to $496 per incident in 2008, down from $718 the previous year.

"The cost of fraud is dropping because consumers and businesses are catching and resolving fraud more quickly. This indicates people are paying more attention to their accounts and credit reports, and are faster to report suspicious activity," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "If you think something is not correct, contact your issuer as soon as soon as possible."

While cases like the Gonzalez arrest get the headlines and scare the public, the Javelin study says that low-tech methods of theft, such as stolen wallets, checkbooks, credit and debit cards, are still the most likely methods of fraudster attacks.

"Unfortunately, the possibility of fraud and identity theft is now one of the risks of life. You can't eliminate it, but you can take steps to protect yourself," says Hardekopf. "Pay attention to the notices you receive from your issuer. If your account information has been stolen, your issuer will notify you by letter or email. These letters can come in plain white envelopes and might be easy to miss. If you receive a notice, it is a good idea to contact your bank or issuer and verify the authenticity of the notice. This will help avoid scams. The issuer may offer you free monitoring service to notify you if there is suspicious activity in your account. It is a good idea to sign up for this free service."

Here are some tips from the FTC and FBI to guard against fraud:

* Sign your cards as soon as they arrive.

* Carry your cards separately from your wallet in a zippered compartment, a business card holder, or another small pouch.

* Keep a record of your account numbers, their expiration dates, and the phone number and address of each company in a secure place.

* Keep an eye on your card during the transaction, and get it back as quickly as possible.

* Void incorrect receipts.

* Open bills promptly and reconcile accounts monthly, just as you would your
checking account.

* Report any questionable charges promptly and in writing to the card issuer.

* Notify card companies in advance of a change in address.

* Be cautious when responding to special offers (especially through unsolicited e-mail).

* Be cautious when dealing with individuals and companies from outside the country.

* The safest way to purchase items via the Internet is by credit card because you can often dispute the charges if something is wrong. Make sure the site you are using is a secure site.

* If you bank online, don't use the "automatic sign on" for bank or credit card sites.

* Never provide your credit card number or other personal information on the phone, unless you are able to verify that you are speaking with your trusted financial institution or a reputable merchant.

* Don't give your account number to anyone who sends you an email or calls you on the phone.

* To make sure store or restaurant employees aren't skimming your card, keep an eye on your card as they swipe your card for payment. The devices used for skimming are sometimes disguised to look like cell phones.

* After the purchase, check to make sure you were handed back the right card.

* If you are traveling to a foreign country or making a large purchase with your card, notify your credit card issuer in advance so your account won't draw attention for possible fraud.

* Cover the keypad with your hand when entering your PIN at an ATM. There may be cameras or someone watching as you enter this information.

* Occasionally change your account number (one can change an account number without closing the account). Also change your PIN from time to time.

If fraud does occur, or your cards have been lost or stolen, immediately call your issuer. You are protected by law so that once you report the loss or theft, you will not be further responsible for unauthorized charges. Your maximum liability for credit cards is $50 per card. After you report the fraud, you will be sent a fraud affidavit to fill out and return.

New Fee Added on Some Credit Cards

As we approach the enactment of the first phase of the Credit CARD Act next week, credit card issuers continue to make changes that could have a significant effect on consumers.

In September and October, some cardholders can expect more fee increases, some may lose reward points because of a late payment, and more cards will be introduced with high annual fees.

"We feared issuers might make some of these changes and now we see them starting to take place," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "These changes will continue as issuers try to find new ways to generate revenue and do anything they can to regain profitability. Many households can expect changes so we should all pay attention to the white, non-descript envelopes that we receive in the mail and the stuffers in our monthly credit card bill. This is how issuers notify their customers about changes to the terms of their credit card."

Here are some changes that have recently been announced:

* Starting in September, American Express Blue and Blue Sky cards will cancel the points that cardholders earn in the month they have a late fee. Points are not available for redemption until your account is again in good standing, and you pay an additional $29 fee for each month of points that you want to recover. (Note: in most cases, a consumer would have to spend $2,900 to have earned $29 in rewards.) Citibank has also added this policy of cancelling points, but has yet to add a reinstatement fee.

"Cancelling reward points is a very concerning change," says Hardekopf. "This opens a door to adding new fees to the reward program and holding reward points hostage. If this works, others could follow and find additional ways to introduce new fees for rewards."

* American Express just notified customers of upcoming changes that it says are being made in response to the current business and economic environment. It is raising the cash advance fee from 21.24% to 25.24% after October 1. The notice also said that it was raising the APR on any balance that has a penalty rate because of a late payment. In addition, they are increasing the late fee.

* United and Chase credit card services are offering new cards that may point to the future of reward cards. They are aimed at the "savvy traveler" who wants added comfort, more reward miles, and a chance to earn elite status more quickly. The annual fee ranges from $130 for United Mileage Plus Select Visa to $375 for United Mileage Plus Club Visa. While you
earn more for United purchases, you still only earn one mile per $1 spent
on all other purchases.

"Reward cards are the first cards that seem to be adding annual fees. We expect new reward cards to follow these United and Chase cards, which
are advertised as offering a little more than the typical reward card and marketed to those with the best credit," says Hardekopf.

* There is one positive change for some cardholders. Discover and American Express are eliminating the over-the-limit fees. American Express announced this will occur in October; Discover said this will take place soon.

Major Trend Continues--Credit Card Debt Decreasing

A significant trend has developed since the economy weakened during the fourth quarter of 2008: consumers continue to decrease their credit card balances.

According to the Federal Reserve's G.19 monthly report released last week, the amount of revolving credit has decreased for the third consecutive quarter. In addition, the revolving credit figure has declined on an annualized basis for a record nine straight months. Credit card debt makes up the great majority of the revolving credit category.

Revolving credit decreased at an annual rate of 8.2% during the second quarter of 2009. This follows annualized declines of 8.9% during the first quarter of the year and 6.5% in the fourth quarter of 2008.

The total amount of revolving credit at the end of June was $917.0 billion, down $5.3 billion from the May number and $10.1 billion from April's figures.

A number of factors seem to be playing into this decrease:

* Consumer concerns about their finances. "Consumers realize the fragile nature of their own financial situation. There are a tremendous number of people that have seen significant APR increases on their credit cards. They realize they simply can't afford to charge more on their cards," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

* Issuers are cutting back on the credit limits extended to many customers. "Credit card companies are trying to minimize their risk as much as possible. A significant number of credit card customers have had their limits slashed. This obviously restricts the amount of money that can be charged on a credit card," says Hardekopf.

* Issuers are also closing accounts. A number of issuers have terminated accounts that have seen little or no activity for a prolonged period of time.

The Federal Reserve's latest G.19 report can be found here:
http://www.federalreserve.gov/releases/g19/Current/

The Changing World of Student Credit Cards

Millions of students will go to college in the next few weeks, making this the perfect time for parents to talk to their son or daughter about the correct usage of credit cards and the dangers of debt.

But it is also the last full semester before the Credit CARD Act goes into effect in February of 2010. At that time, the marketing of credit cards to students will have a number of new restrictions.

The Credit CARD Act will prohibit issuers from lending to anyone under the age of 21 unless he or she has a co-signer or has proof of the ability to make payments. Unsolicited card offers will be prohibited to everyone under 21. Credit card companies cannot try to lure students into signing up for a credit card with any tangible item anywhere on or near a college campus or a college-sponsored event.

These regulations will make it much harder for responsible college students to get a credit cards and begin building their credit score. In general, credit scores are growing in importance for young adults. Lenders, employers, and apartment managers are using credit scores to help make judgments about the applicant and reduce their own risk. A low or non-existent credit score could mean higher rates for loans or a missed job opportunity at a time in life when a young adult needs a break.

So the law places an unintended penalty on those financially responsible students. But in looking at a recent Sallie Mae study, it is easy to see why lawmakers put these restrictions in place.

84% of college students have at least one credit card, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173 which represents a 46% increase over the 2004 figure of $2,169. The average number of cards per student is 4.6. Only 17% pay off their entire balance each month and 22% make just the minimum payment.

Issuers have aggressively marketed cards to college students because they know that many parents will pay off the bill if the student runs up debt. In addition, brand loyalty is determined early in life, so many young cardholders keep their first card for many years.

These Sallie Mae statistics show the importance of teaching college student how to correctly use a credit card. If parents don't teach them, the young adult will be forced to learn from their own mistakes.

Parents should teach their student how to budget, spend wisely, and use credit. Start with your credit card bill and use it to explain interest rates, grace periods, and minimum payment. Explain the high rates of cash advances and how to avoid these loans. Show them examples of how much they will pay in interest by only making the minimum payments. Tell them what is a good time to use a credit card for payment (textbooks, emergencies) and what isn't (clothing, food, entertainment). Advise how to avoid credit card theft: keep the card with you and don't let someone else use your card. Explain the fees and penalties. Use online payment with reminders to help avoid late payment. Know your credit limit and if you must carry a balance, keep it under 30% of your credit limit.

Make it clear that credit cards are loans that have to be repaid in full each month. If you can't afford to pay for the item with cash, then you can't afford the item. Credit cards aren't to be used to purchase something you can't afford. Show them a copy of your own credit report and use that as an example of building a good (or bad) payment history with credit cards."

The CARD Act will force parents to take more responsibility for credit cards for their college students. Co-signing is one of the options to help your student get a card. The card is in his/her name and they pay the bills, but your name is also on the card. If your co-signer makes a late payment or runs up a balance, this impacts your credit score. If they can't pay the loan, you are responsible.

You can also make your student an authorized user on your account. As an authorized user, they can make charges to your account. If you have good credit and they use the card responsibly, this will help build their credit score. However, if the parent or student has late payments or a high balance, it will pull down all credit scores. Authorized and co-signed accounts give parents a chance to monitor the student's spending.

Another option is a secured card. These have more fees and the interest rate is high--so pay it off each month--but secured cards are relatively easy for anyone to get because it is secured by a prepaid deposit. Make sure that the card reports to a credit agency. Secured cards from Orchard Bank and First Option Visa both report to credit agencies.