Clearer Disclosures for "Free Credit Reports" Take Effect Friday

The Federal Trade Commission's amendment to the Free Credit Reports Rule takes effect this Friday. This requires much clearer disclosures in ads for "free credit reports."

This provision is needed because consumers have been confused and misled about where to get a free credit report.

The federally mandated free credit reports are available only at AnnualCreditReport.com, but many other websites advertise free credit reports. Beginning Friday, any other website that advertises free credit reports must have a disclosure at the top of every page that tells consumers how to get these free credit reports. The statement must say:

"This notice is required by law. Read more at FTC.GOV. You have the right to a free credit report from AnnualCreditReport.com or 877-322-8228, the only authorized source under federal law."

The amended Rule takes effect for print and Internet ads on April 2. The wording of the disclosures for television and radio advertisements will take effect on September 1.

The FTC amendment is needed because some credit reporting agencies and other companies have taken advantage of the awareness of "free credit reports." They advertise free credit reports to lure in consumers and then sell products and services like credit scores and credit monitoring. This has created confusion for consumers who are only looking to receive their credit score at no cost.

On Google, all of the advertised listings for the term "free credit report" are for companies that charge for these additional services. Some of the top organic listings for this keyword lead the consumer to freecreditreport.com. According to SmartMoney, Experian, the credit report agency that owns freecreditreport.com, spent $70.7 million in 2007 and $19 million in just the third quarter of 2008, an increase of 28% over the same period in 2007. A vast majority of that money, roughly $14 million, was spent on television ads.

Adding to the confusion, the law requires credit bureaus to provide a free credit report to consumers, but this does not include your credit score. Some credit bureaus try to sell credit score or credit monitoring services as you order your free credit report. These promotions have led some consumers to believe they must purchase these products to get the credit reports.

Other websites claim to offer "free credit reports," "free credit scores," or "free credit monitoring" but these are not part of the legally mandated free annual credit report program. "Free" is usually temporary because it means free trial. If you forget to cancel during the trial period, you will automatically roll over to the pay service and the company will start charging fees to your credit card. This could be as much as $14.95 to $29.99 a month.

At CreditCheckTotal.com, the trial period is seven days after you order your free credit score. If you don't cancel the membership during the trial, then you are enrolled in their credit monitoring program. Membership costs $22.95 per month. You may cancel at anytime but you may not be eligible for a refund for your membership fees.

The new rule also requires that consumer reporting agencies cannot advertise products and services on AnnualCreditReport.com until after consumers receive their free annual file disclosures. It restricts other practices that may interfere with the free disclosure process.

The Fair Credit Reporting Act guarantees you access to your credit report for free from each of the three nationwide credit reporting companies (Experian, Equifax, and TransUnion) every 12 months. You can request your free report online (AnnualCreditReport.com), by phone (1-877-322-8228) or by mail (P.O. Box 105281, Atlanta, GA 30348-5281). You can request all three reports at once or one at a time.

"Every consumer should take advantage of these free credit reports. It helps you to know what your creditors see about you and to uncover any suspicious activity. If there are mistakes, you can straighten them out," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "It's a good idea to stagger the free report you are entitled to from each of the three agencies every four months so you can monitor your credit throughout the year."

If you have paid for what you thought was a free credit report, you
can file a complaint: https://www.ftccomplaintassistant.gov/

The statement from the Federal Trade Commission can be found here: http://ftc.gov/opa/2010/02/facta.shtm

Avoid Paying Taxes with a Credit Card

The tax deadline is less than a month away and consumers will soon be bombarded with messages encouraging them to pay their taxes with a credit card. While this may sound appealing to consumers who may be struggling to find ways to pay their taxes in this turbulent economy, it should be avoided at all costs.

The IRS and some credit card issuers both promote the benefits of paying taxes with a credit card. Payment with a credit card is easy and it can be made of the phone or online. It delays the pain of payment for another month. Consumers can even earn reward points on some cards with your tax payment.

But credit card payments of taxes are actually made to third-party providers which are contracted by the Internal Revenue Service. Processors charge anywhere from 1.95%(payUSAtax.com) to 3.93% (FileYourTaxes.com). Most third-party providers charge 2.35%fee for processing your credit card payment, making this a very costly convenience.

The 2.35% processing fee adds $117.50 to an $5,000 tax bill. If you don't immediately pay off the credit card bill, interest charges from your credit card will add even greater penalties. Since interest rates have increased significantly over the past year, this makes paying your taxes by credit card even more costly than last year.

Along with this significant processing fee and possible interest penalties, consumers should also consider other factors if they are considering using their credit card to pay their taxes:

* Know your credit limit before you charge your taxes. If you are anywhere close to your limit, this is not an option for you. Issuers are now very sensitive about debt loads and customers who are close to their limit. This sends a warning to issuers that you are a risk for default. If this payment puts you close to your credit limit, it can raise your credit utilization score, an important factor in your credit score. This can result in a lower credit score and higher interest rates from your lenders.

* Verify that the tax payment will be treated as a purchase and not a cash advance. Cash advances come with a high interest rate and typically a 3% cash advance fee.

* Be careful how you provide your credit card number. The IRS warns filers not to write the credit card number on the return and not to mail in the credit card.

* If you cannot afford to pay your taxes right now, there are less expensive options than a credit card loan. An installment plan with the IRS is one possibility; the interest rate is currently 4% percent for underpayments. Another option is a personal loan with a bank or credit union. You may receive a lower interest rate, and that rate will likely be fixed, unlike the IRS interest rate and a credit card's interest rate, both of which may change.

* Obtaining reward points for using your credit card is not a good reason to charge your income taxes. Several years ago, generous credit card reward programs offered 3-5% cashback and some cardholders were able to make a little money by paying their taxes with a reward card. Since the typical reward card now offers 1% back for cash, points or miles, the 2.35% processing fee will cost more than the rewards you can earn. You are better off saving the money on the fee.

"Consumers should avoid using their credit card to pay their taxes. It is much smarter to use your tax refund to pay off your credit card balance. Paying down your credit card debt will improve your debt utilization ratio, which helps your credit score, which improves interest rates for other loans. That can improve your financial stability," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Credit Card Issuers Still Facing Tough Times

Monthly credit card data released Monday is a mixed bag for issuers. The data shows fewer consumers are significantly late on their credit card payments but major issuers are still having to write off extremely high percentages of their credit card loans.

Delinquency rates are the number of credit card consumers who are at least 30 days late on paying their bill. Of the six major credit card issuers, only Citibank showed a monthly increase in their February delinquency rates. Lower delinquency rates are good for issuers because this indicates they will have to write-off fewer bad loans in the future.

Here are the delinquency rates for the major issuers:

January February
Bank of America 7.35% 7.23%
Citigroup 5.75 5.94
Capital One 5.80 5.51
Discover 5.55 5.50
Chase 4.75 4.67
American Express 3.60 3.60


Last week the Federal Reserve reported that revolving credit, which is primarily credit card usage, fell for the 16th consecutive month, decreasing at an annual rate of 2.3%. Reasons for this include credit card issuers cutting credit limits to reduce the risk of delinquency.

But credit card issuers are still facing challenges. Charge-off rates are still very high. Four of the six major issuers wrote off a greater percentage of their credit card loans in February compared to the previous month.

Here are the charge-off rates for the major issuers:

January February
Bank of America 13.25% 13.51%
Citigroup 9.80 11.29
Capital One 10.41 10.19
Chase 10.91 9.21
Discover 8.58 9.11
American Express 7.00 7.40

The sheer volume and amount of the charge-offs has been a major concern throughout the credit card industry during this economic downturn. According to R.K. Hammer, credit card charge-offs increased 59% in 2009, accounting for $89 billion in losses for banks in the United States. Industry wide, the charge-off rate hit a high of 10.10% in the third quarter of last year according to the Federal Reserve. The charge-off rate was 3.87% in the third quarter of 2006.

Credit Card Usage Continues to Decline

Consumer borrowing increased in January for the first time in a year, the Federal Reserve reported Friday. The increase alone was significant, but the news was even more surprising since it occurred despite another drop in credit card loans.

According to the Federal Reserve, total consumer borrowing rose to $2.456 trillion in January, an annual rate of 2.5%. The increase came from nonrevolving credit like auto, personal and student loans that rose at a 5% annual rate. Revolving credit, which is primarily credit card usage, fell for the 16th consecutive month, decreasing at an annual rate of 2.3%.

Recent studies underscore some clear trends either taking place or projected for credit card usage.

* Credit card usage has dropped substantially over the past three years, from 87% of consumers surveyed in 2007 to 56% in 2009 (Javelin Strategy and Research).
http://www.americanbanker.com/bulletins/consumers-turn-on-cards-1015107-1.html

* Debit card usage is increasing significantly. According to their annual reports, MasterCard's debit card usage increased 10.5% in the United States while Visa reported a 17% increase. MasterCard also reported its credit card usage dropped 13%.

* The number of new credit cards issued declined 45% last year, according to Equifax Consumer Credit Trends.

*The average balance on Visa, MasterCard, and American Express accounts dropped 5% to $5,434 in the fourth quarter of 2009 from $5,729 in the fourth quarter of 2008.

* According to a BIG Research survey in January 2010, 30.5% of respondents said they would pay with cash more often, up from 23.0% a year earlier. http://www.bigresearch.com/news/EBJan10.htm

* The same study showed consumers are concentrating on eliminating debt. 37.9% are prioritizing paying down debt over the next three months, rising from 34.4% in December.

* Issuers will reduce credit card lines by $2.1 trillion in the next 18 months, wiping out nearly 45% of the spending power U.S. consumers now have on credit cards, predicts investment bank Oppenheimer & Co.
https://www.javelinstrategy.com/news/629/91/Banks-are-cutting-back-consumers-credit-card-limits-a-trend-likely-to-accelerate-in-the-coming-months-How-will-online-retailers-close-sales-if-customers-can-t-pay-with-plastic

"We know that over the past 18 months, banks cut credit limits for 58 million cardholders." says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. "If issuers keep this up and cut 45% of the spending power on credit cards, they will be forcing consumers to continue to reduce their usage of credit cards and find alternative forms of payment like debit cards and cash. That might not be a bad thing for the financial well being of the American consumer."

Significant Credit Card Changes Proposed By The Federal Reserve

Today, the Federal Reserve proposed a rule amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable late payment and other penalty fees, as well as requiring credit card issuers to reconsider increases in interest rates. This rule will go into effect on August 22, 2010.

"This proposal addresses two key costs of using a credit card--fees and interest rates," said Federal Reserve Governor Elizabeth A. Duke. "The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year."

The proposed rule would:

* Ban inactivity fees. Some issuers have recently instituted an inactivity fee if there are no transactions on your credit card for a certain period of time.

* Force issuers to evaluate rate increases. At least every six months, credit card issuers must reevaluate annual percentage rates increased on or after January 1, 200. and, if appropriate based on their review, reduce the annual percentage rate applicable to the account. This includes changes in the consumer's creditworthiness, and to increases in the rate due to changes in market conditions or the issuer's cost of funds. However, the statute also expressly provides that no specific amount of reduction in the rate is required.

* Stop credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation of the account terms. Card issuers would no longer be able to charge a $39 late fee for a $20 minimum payment. The fee could not exceed $20.

* Require credit card issuers to provide reasons for increases in rates.

* Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of account terms.

"These are significant changes in the credit card industry that will help every cardholder. But if history is any indicator, credit card issuers will find new ways to make up for the revenue they will lose when these rules take effect in August, and those changes could be in the form of new or increased fees," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

Here is a link to the Federal Reserve's amendment to Regulation Z:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100303a1.pdf

This proposed rule represents the third stage of the Board's implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009. In July 2009, the Board issued a rule implementing the provisions of the Credit Card Act that went into effect on August 20, 2009. In January 2010, the Board issued a rule to implement the provisions of the Credit Card Act that went into effect on February 22, 2010.

New Credit Card Statements Could Help Consumers Decrease Debt

Consumers will soon receive their first credit card bill since last week's implementation of the CARD Act and their statement will look very different.

"The new debt information on your credit card statement is one of the best provisions of the CARD Act and it will benefit every cardholder," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

The most significant change in your statement will be a chart which will clearly show how long it will take and how much you will actually pay should you make just the minimum payment each month. In addition, the chart will display how much you need to pay each billing cycle in order to completely pay off your balance in three years.

Suppose you owe $3,000 and your interest rate is 14.4%. Your statement would show that if you made no additional charges and paid only the minimum payment, it would take almost 11 years to pay off the balance at an estimated cost of $4,745. In addition, it would show that if you wanted to pay off the balance in three years, you would need to pay $103 per month and it would cost an estimated $3,712.

"Consumers will be shocked at how long it takes to pay down a balance and how much interest is actually paid if you are only making the minimum payment. When people see this personal information clearly presented in black and white, it should have a significant impact on getting consumers to pay off their credit card balance in a much more timely manner. Cardholders can't ignore reality when they see the numbers each month on their credit card bill," says Hardekopf.

An example of the minimum payment table can be found on the Federal Reserve website:
http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm

Consumers will see several additional changes on their credit card bills:

* Your statement should be much easier to understand. Fees and interest charges should be highlighted and explained in simple language in a legible font size, not buried in the fine print.

* Your statement should give a toll-free number for counseling assistance from legitimate nonprofit organizations. Issuers are required to provide contact information for three organizations that have been approved by the United States Trustee or a bankruptcy administrator to provide credit counseling services in, at the card issuer's option, either the state in which the billing address for the account is located or the state specified by the consumer. The National Foundation of Credit Counseling (NFCC) has added help lines to meet the expected increase in consumer assistance under the governments new regulation.

* Some issuers will give a summary of total fees and interest paid to date during the current billing cycle and year to date.

Not only will your bill look different, but the delivery and due dates may also be different. Pay attention to the due date because it is possible that your due date has changed as a result of the provision that requires at least 21 days notice before your due date. Your due date now has to fall on the same day every month. The payment cut-off time cannot be earlier than 5 p.m. on the due date. If your payment due date falls on a weekend or holiday (when the company does not process payments), you will have until the following business day to pay without penalty.

These statement changes may be limited to or be most effective for those with paper statements. If you have online banking without a paper statement, you will miss these numbers about your debt. You may have to go looking for it in a pdf file instead of it being delivered directly to you. According to a recent AP story, the biggest banks are not putting the minimum payment on the online account summary page. Bank of America, Chase, Citi and others say they are educating customers through mail and email about the new statements. Capital One is using banner ads about the new disclosures when cardholders log on.

"Banks should act in the spirit of the CARD Act and also make the minimum payment information easily available to online accounts," says Hardekopf.