Credit Card Regulation–New Proposals a Step Nearer

Representatives of the Senate and House pulled an all-nighter on Thursday/Friday to resolve their remaining issues with the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes a number of credit card regulation provisions. It is now hoped that the bill will reach the President’s desk for signature early next month.

In a statement issued yesterday, the House Committee on Financial Services sought to justify the new measures, saying:

We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them. We must create a sound foundation to grow the economy and create jobs.

Credit Card Companies Relieved

However, it is still unclear just how effective the legislation will ultimately prove. One commentator called it a 2,000 page memo to federal regulators that only empowers–rather than requires–them to act. And, earlier this month, Elizabeth Warren, a Harvard professor and Congressional Oversight Panel chair, told Fox Business that the consumer protection elements of the new law will only work properly if those who head up the regulators are prepared–as some of their predecessors haven’t been–to side with the public against powerful financial institutions.

Credit card companies and other financial institutions were happy that the regulations were less tough than some had predicted. On Friday, the Associated Press reported, “Bank stocks soared as investors appeared relieved that the rules were not as strict as they’d feared.”

Credit Card Use Protections

According to yesterday’s House Committee on Financial Services statement, among many other things, the bill:

Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.

However, just how valuable the new law’s protections for credit card users will turn out to be is likely to depend entirely on whether that watchdog learns how to bark–and bite. Credit card companies, with their armies of lawyers, are notoriously adept at finding loopholes in regulations and it would take a nimble and tenacious canine to contain them.

Credit Card Rewards Still at Risk

Although the new bill does not seek to regulate “interchange” or “swipe” fees (the cut credit card companies and payment networks take from every merchant credit card transaction) on credit cards, it does do so on debit cards. And, as many credit card companies are also banks, that may well mean some juggling of revenues and cutting back on some credit card rewards programs.

More on Credit Card Rewards

One person who already has issues with his card’s rewards program is Adam Lasnik, who’s a web master and program manager for Google. In his personal blog, which was picked up by Payment News, Mr. Lasnik complained not about the actual rewards he was receiving, but about his card issuers’ marketing. When one of his Chase credit cards was upgraded to the company’s Ultimate Rewards program, he received a glossy brochure containing 23 pages of information that could have been summed up in a very few paragraphs. He said: “I’d rather Chase, oh, I don’t know, cut out the lame marketing, saved a bunch of money on postage and stopped filling our landfills with stupidly wasteful mailings.”

Mr. Lasnik’s Chase card offers one percent cash back and no annual fee, which, he acknowledged, is pretty generous. The Discover® Motiva(SM) Card also has no annual fee and offers up to one percent cash back, but additionally has a deal on rates. Every time your payments are on time for six consecutive months, you qualify to have one month’s interest refunded. That could be useful if you carry over balances.

Similarly, Costco members pay no annual fee on the True Earnings(R) Card from Costco and American Express, which has an exceptional cash-back program–three percent cash back on gas and restaurant purchases, two percent on travel purchases, and one percent everywhere else. And you even receive a $25 statement credit after you make your first purchase on the card. Check it out.

Credit Score Tightening

Yesterday, TransUnion, one of the big-three credit bureaus, unveiled an enhanced form of credit score that could make it more difficult for some Americans to obtain credit cards. According to TransUnion, credit bureaus traditionally calculate credit scores using four main forms of historical data:

1. Past delinquencies
2. History of responsible use
3. Debt level
4. Utilization (the proportion of your credit limits that you actually use)

However, the company is now able to offer–in partnership with ID Analytics–a fifth dimension based on people’s “stability.” And it claims that this additional perspective can, in some circumstances, reduce bad credit decisions by up to 46%.

Credit Card Debt Problems Down Again

Also yesterday, Moody’s Investor Services published its monthly survey of credit card charge-offs, which is industry jargon for the balances that credit card companies write off because they think the debts have become noncollectable. That doesn’t, of course, mean that nobody will try to retrieve the money; anyone whose balance is charged off should expect to hear fairly soon from a collection agency.

The first bit of good news is that Moody’s says that charge-offs on credit cards in May fell for the second month in a row. Jeff Hibbs, an analyst with Moody’s, says that the company believes that “…credit card charge-offs have passed their peak levels of this credit cycle.”

Credit Card News–Things Are Getting Even Better

The second piece of cheerful credit card news to arise from the Moody’s report concerns delinquencies, which are overdue payments on balances that are yet to be written off. In May, these fell to their lowest level since November 2008. Early stage delinquencies (accounts overdue by 30-59 days) were even healthier, and the company says: “The rate is approaching its historically low ranges of 2006-7.”

All of this suggests that fewer Americans are getting into trouble over credit card debt. And that has to be a welcome thought for card holders, credit card companies, and anyone who cares about the health of the U.S. economy as a whole.

Prepaid Credit Card Swipe Fees to Be Unregulated?

Regular readers may recall that legislators on Capitol Hill are currently deciding whether to regulate “swipe” (or “interchange”) fees, which is the cut taken by credit card companies and payment networks every time a merchant swipes a card. A House-Senate conference is currently hammering out the details, but it appears that lobbyists have won a concession over plans to limit swipe fees on prepaid credit cards–as they’re oxymoronically called.

Earlier today, the Washington Post reported that the conference had decided not to regulate these fees, mainly because to do so could harm poor users who often receive state benefits through fee revenue. If swipe fee revenues are reduced, issuers might make up the difference with higher fees for users.

Credit Card Use Without the Credit

As discussed in previous columns, prepaid credit card use can prove expensive because they often have high fees. However, if chosen with care, prepaid cards can provide a convenient payment method for those for whom traditional credit cards are not appropriate.

One such group is teenagers, and Discover offers a useful product that’s tailored for the young, the Current by Discover Teen Prepaid Debit Card. Other groups include those who cannot–or do not wish to–access mainstream cards. People in that position could check out the ACE Visa Prepaid Debit Card or The Mango™ MasterCard® Prepaid Card.

Credit Card Debt: the Helpers Who Harm

When you’re up to your eyes in credit card debt, any port looks welcome in the storm. But Friday’s New York Times told harrowing stories of those who, in desperation, had turned to businesses who promised to help them only to find themselves way worse off.

The airwaves, print media, and Internet are full of ads from companies offering to free you from credit card debt. And, the Times says, last year 425,000 Americans asked these firms for help with a total of about $11.7 billion in card balances. But there’s a good reason why, in the last six years, 21 states have brought 128 enforcement actions against debt settlement companies–all too often these are predatory scams.

And countless consumers have found themselves both poorer and in deeper trouble–sometimes bankruptcy–as a result of being too trusting when it comes to those who promise help eradicating the balances on their credit cards.

Credit Cards After Collapse of Credit Scores

Those who are already beyond the “help” of debt settlement companies often find that their damaged credit score means they can no longer enjoy the benefits of traditional credit card use. But they still need a convenient payment instrument, so they turn to prepaid credit cards.

Previous editions of this column have recommended a number of pre-paid cards (which can often be used to repair credit scores), including the ACE Visa Prepaid Debit Card, the ACE Pink Visa Prepaid Debit Card, and The Mango™ MasterCard® Prepaid Card.

Prepaid Cards to Be Exempt from Swipe Fees?

But, last week, the Center for Financial Services Innovation (CSFI) wrote to Rep. Barney Frank (D-MA) and Senator Christopher J. Dodd (D-CT), who are the chairmen of the house and senate committees that supervise financial services. The CFSI argued that current proposals to limit so-called “swipe” or “interchange” fees (the amount of a transaction taken from merchants by credit card companies and networks every time a card is swiped) could “substantially” harm the consumers who use these products. The letter continued:

We believe an explicit fee limit on interchange will effectively prevent millions of low- and moderate-income households from accessing a financial product that has emerged to enable poor, underbanked families to access the financial mainstream.

Credit Card Rewards Programs–Cash-Back Cards

If you’re in happier financial circumstances, you may be more interested in another New York Times piece, published just hours after last Monday’s edition of this column. The Times looked at the best cash-back credit card rewards programs, and confirmed the attractiveness of one of the picks featured here earlier in the day. It said:

You may also want to look at Blue Cash® from American Express, which after the first $6,500 of purchases, pays 5 percent for certain “everyday purchases” and 1.25 percent for all other purchases.

That’s a great deal, so it’s getting plenty of recommendations.

Credit Card Regulation–The Latest News

On Tuesday, the Federal Reserve unveiled the latest credit card regulation to arise out of the Credit CARD Act of 2009. The new rules, which come into effect August 22, seek to protect consumers from the worst excesses of card issuers in the areas of rate hikes and penalty fees.

Credit Card Rates–New Rules

Up until now, credit card companies could hike your rates with no explanation, and were under no obligation to review the increase in the future. Under the new rules, they’re obliged to tell you why you’re paying more, and must “re-evaluate” the increase every six months. If they find during a re-evaluation that your credit card rates are no longer “appropriate,” they should, within 45 days, reduce your rates to ones that are.

Some suggest that the new credit card rates rules are disappointing because they’re too vague. Are “re-evaluate” and “appropriate” meaningful in any legal or regulatory sense? By now, pretty much everyone knows that credit card companies find loopholes that give them a way out of any regulation that isn’t airtight.

The jury will be out for some time before we know whether Tuesday’s rate rules are sharp-toothed or all-gum-and-no-bite.

Credit Card Penalty Fees–an Incisor Shows

The second area the Fed addressed was penalty fees levied on credit cards. Last week, the Center for Responsible Lending issued a report that questioned whether the existing fee structure is based as much on consumer default risk as credit card companies like to pretend, and concluded that it “…appears designed to create an illusion of low and proportional fees while instead allowing for hidden price increases.”

The new Fed rules (remember, they don’t apply until August 22) should help here. They say:

Your credit card company cannot charge you a fee of more than $25 unless:

• One of your last six payments was late, in which case your fee may be up to $35 or
• Your credit card company can show that the costs it incurs as a result of late payments justify a higher fee

And they go on to say that you can’t pay more in late fees than the minimum payment that was overdue, nor in over-the-limit fees anything higher than the amount you’ve gone over.

Credit Card Use–Tips for the Comfortably Off

CBS MoneyWatch yesterday gave good advice for best-practice credit card use, although some of it only really applies if you’re financially comfortable. In an excellent article (it must have been good; it quoted the Index Credit Cards site), Linda Stern suggested three rules:

1. Don’t carry a balance: credit card rates are high now and–unless you have a fixed-rate card–may well rise
2. Never make late payments: they cost you hard cash and hurt your credit score
3. Use credit cards rather than debit cards: you get the interest-free period of the billing cycle, and usually receive better rewards

Balance Transfer Credit Cards and Charge Cards

If you are comfortably off, you could consider using a charge card, such as the American Express® Premier Rewards Gold Card. This card gives you many of the same benefits of a credit card (except the credit), and–if you use it properly–can make sure you never pay a cent in interest. The credit card rewards on this particular product are phenomenal.

If clearing your existing credit card balance seems an impossibility, you could
always explore balance transfer credit cards. The Citi® Platinum Select® MasterCard®, for example, offers a zero percent APR on purchases and balance transfers for up to 24 months, which could be just the breather you need to eliminate your credit card debt. Even though you have to pay a three percent fee to transfer your balance, this card could well be very advantageous for you.

Credit Card Regulation–More to Come?

ABC News reported yesterday that, this week, the U.S. Congress may debate Senate proposals to limit the amount that Visa and MasterCard can charge merchants every time credit cards that carry their branding are swiped. The new credit card regulation would empower the Federal Reserve to ensure that such fees (known as “swipe” or “interchange” fees) are fair and reasonable.

At the moment, the fees–which vary considerably depending on what’s being bought, how, and where–average about two percent of the value of each transaction. Those two percents add up, and in 2008 amounted to roughly $48 billion.

And that’s close to $150 for every man, woman, and child in the country. Although merchants complain about the impact of this on their margins, it seems likely that much of the burden is passed on to consumers–rich and poor, cardholders, and the unbanked–in higher prices.

Credit Card Companies Losing Battle?

Unsurprisingly, credit card companies, which are already being squeezed by high “charge-offs” (industry jargon for the writing off of bad debts) and the provisions of last year’s Credit CARD Act, have lobbied hard to resist Congress’s proposal. But–so far at least–they seem to be losing the battle.

The problem is that most of the money levied by Visa and MasterCard isn’t retained by those organizations (they only keep five or six cents per transaction) but is passed on (”kicked back”, according to critics) to their client credit card companies, which use it to cover costs, boost profits, and fund credit card rewards programs.

Credit Card Rewards Programs at Risk?

So will the proposal that legislators are currently considering put credit card rewards programs at risk? Well, nobody is yet saying for sure, but it’s hard to see how they can continue to be so generous unless credit card companies find other ways to raise revenue. And their options for doing that are constrained by recent regulation that prevents them from levying unreasonable fees and hiking existing credit card rates without cause.

That may explain why IndexCreditCards.com reported May 31 that: “One year after sweeping new credit card reform rules were signed into law, credit card rates for new consumer accounts hit their highest level since IndexCreditCards.com began tracking them in late 2005.”

Credit Card Rewards Programs and You

It’s too early to tell whether your credit card companies will be forced to cut back on your rewards programs. But, if you’re selecting a new card, you might want to bear in mind that legislators are currently thinking of regulating swipe fees levied only by Visa and MasterCard. That means that other issuers that don’t use those transaction processing networks are unlikely to be affected.

American Express is just such an issuer, and there’s a good chance that its rewards programs will be untouched by the current bill. It’s worth exploring the full range of products from this issuer, but why not start off with two stand-out credit cards?

Blue Sky from American Express® is perfect for those who value travel rewards. You get one point per dollar spent, which you can then use toward direct savings on travel purchases, right up to the full cost. And you receive a very generous $100 value for every 7,500 points earned.

Meanwhile, Blue from American Express® offers one percent cash back on gas, groceries, and drug store purchases, and 0.5 percent on other purchases for the first $6,500 spent with the card. After that, you get a full five percent cash back on gas, groceries, and drug store purchases, and 1.5 percent on on other purchases.

Credit Card Debt–Moving Forward

The last edition of this column provided some advice for those who are struggling with credit card debt. It was directed toward people who still have some hope of digging themselves out of their hole, but ended up suggesting a way forward for those who’d hit bottom, and were now seeking ways to rebuild their credit scores.

It recommended signing up for a secured credit card, such as the Public Savings Bank Secured Card, the Applied Bank® Secured Visa® Credit Card, or the New Millennium Bank Secured Gold Visa® or Mastercard®. Secured credit cards usually report your account activity to the big 3 credit bureaus (make sure that the one you pick reports to all three) so you have an opportunity to repair the damage to your credit score.

Credit Card Use Without the Credit

But the problem with secured credit cards is you have to lodge an upfront deposit with whichever of the credit card companies you choose. Hence the “secured” bit. And many people who’ve recently had debt problems struggle to find spare cash for such a deposit.

They may find it easier to go for a prepaid credit card. You don’t need a deposit for these, and you can spend money that you credit to the card as soon as it shows up on your account. You don’t get to fix your credit report or score, and you don’t get to spend any money that you don’t have, but you do receive many of the convenient payment services (though not for car rentals and hotel rooms) that cards issued by mainstream credit card companies provide.

Services Improving All the Time

Indeed, the facilities offered by prepaid credit cards are improving all the time. Just yesterday, MasterCard announced a new bill payment service that it plans to introduce for those with prepaid cards that carry its branding. According to the company’s press release: “…the service enables delivery of electronic bill payments to more than 6,000 national and regional U.S. merchants via MasterCard RPPS – the largest online database of billers available…”

Read Prepaid Credit Card Terms Carefully

It really is important to read prepaid credit card terms and conditions carefully before you sign an agreement. Last year, the New York Times ran a feature warning that some cards come with fees hidden in the small print that can make them extremely expensive to use.

The trick is to understand how you’re likely to want to use your card, and then find one that suits your personal circumstances. Three that are well worth considering are:

• ACE Visa Prepaid Debit Card
• The MangoTM MasterCard® Prepaid Card
• ACE Pink Visa Prepaid Debit Card

1. Credit Card Debt: Remember You’re Not Alone

It’s easy to feel helpless–and to see your situation as hopeless–when you’re up to your neck in credit card debt. But for most it doesn’t have to be like that.

The first thing to remember is that you’re not alone. Millions of Americans are in similar situations. Indeed, Fitch Ratings reported Friday that 4.18 percent of all credit cards are at least 60 days overdue, while 5.53 percent are 30 days late. You don’t have to be ashamed. You don’t have to feel helpless. You don’t have to give up hope of regaining control.

2. Time to Stop Being an Ostrich

It’s natural to bury your head in the sand when you’re facing seemingly-insurmountable difficulties. But with that comes a feeling of hopelessness that gnaws at your spirit and creates that knot in your stomach. Steel yourself for a few hours of misery as you open those still-sealed envelopes–from credit card companies and all your other creditors– and compile a list of all you currently owe.

Then write out a budget. List your monthly income and your minimum necessary payouts–rent/mortgage, utilities, food, travel, clothes, and anything else truly unavoidable. Then add in your minimum debt repayments–credit card bills, auto loans, lines of credit, personal loans–everything.

Which of the following tips you follow depends on how bad things are. However, even if the process was painful and the situation looks disastrous, you should now feel better, just for having taken the first step toward regaining control of your life.

3. If You Have Any Discretionary Cash

If you’re lucky, you might be surprised to find that you have–after cutting out luxuries–a few spare dollars a month, which you can use to pay down debt. If that’s the case, there are two golden rules:

1. Stop using your credit cards
2. Prioritize your repayments

Always pay the minimum on every debt, but pay off any small credit card balances and other liabilities first. As you stop having to make minimum payments on those, you should soon find you have more available money each month.

Don’t spend it! Use it to pay more on the remaining balances, starting with those that charge the highest rates. It may take a while, but you should ultimately be able to end up owing nothing to credit card companies–or anyone else.

4. If You’re a Bit Short

If your budget reveals that you’re close to being able to pay all your minimum balances, but can’t quite, then you should phone your credit card companies to negotiate lower payments. There are rules for these calls, too:

• Don’t expect an instant “yes.”
• Be persistent; make repeated calls if necessary.
• Always be polite and remain calm.
• Be honest, but don’t volunteer information that could set off alarms bells. Admitting that you think you may soon be made redundant could be a mistake.

5. If You’re Way Short

Don’t panic if your budget shows your situation is dire. Consult a credit counselor who can help you find the best way forward and, ultimately, achieve that elusive peace of mind.

However, remember that some credit counselors are nothing but ruthless con artists who could take your money in return for zero assistance. The Federal Trade Commission (FTC) advises that you should avoid people who:

• Promise miracles. If their offer sounds too good to be true, it probably is.
• Ask for high upfront or monthly fees or “voluntary contributions.”
• Want your credit card details too early on.
• Offer to enroll you in a debt management plan (DMP) before they’ve studied your situation closely, and taught you budgeting skills.
• Ask you to pay into your DMP before your creditors have agreed it.

6. If You Need to Start Again

If your credit score’s been shot to pieces and your credit card accounts closed, then secured credit cards may be a way forward. These require a deposit, but they usually report to credit bureaus so they provide a chance for you to restore that credit score.

Three secured credit cards that are well worth exploring are:

• Public Savings Bank Secured Card
• New Millennium Bank Secured Gold Visa® or Mastercard®
• Applied Bank® Secured Visa® Credit Card

Credit Card Regulation Failing?

The Credit CARD Act of 2009 has some simple objectives. For example, according the White House’s website, the legislation:

• Bans Unfair Rate Increases
• Prevents Unfair Fee Traps

But today’s Wall Street Journal raises real questions about whether this latest wave of credit card regulation has seriously prevented card issuers from gouging customers, even in these two respects.

Credit Card Companies “Outflank Law?”

Take credit card rates. The new law says that credit card companies can raise them only in exceptional circumstances. But at least one card issuer has issued an ultimatum to some of its customers–waive your rights so we can raise your rates or we’ll more than double your monthly minimum payments.

Another of the credit card companies circumvented fee restrictions by hiking rates before the act came into force. Those who are late paying or who exceed their limits now pay penalty fees that are lower than before, but they don’t receive the rate “refund” that they would have received had they not breached their credit card terms. To mangle Shakespeare, “That which we call a fee by any other name would stink as high.”

A third issuer has also been clever in manipulating its credit card terms. It charges a $95 “processing fee” before a credit card is even issued, thus avoiding the law’s restrictions on how much they can charge in fees during the first year after an account has been opened.

Business Credit Cards to Remain Unregulated?

Tuesday’s BusinessWeek discussed a new report from the Federal Reserve that argues that business credit cards should remain unregulated. The Fed says that credit card companies:

…have more difficulty assessing the creditworthiness of small businesses than consumers. Therefore, the willingness of issuers to extend the relatively large credit card lines that small businesses require may depend importantly on issuers’ ability to adjust prices in the future, as they learn through experience about businesses’ ability and willingness to pay. Restricting the ability of card issuers to adjust interest rates may lead to higher initial interest rates, which would harm those firms that borrow on small business credit cards.

That sounds convincing until you remember that Bank of America announced April 1 that it was voluntarily extending the protections offered by the Credit CARD Act to its business customers. Are we supposed to believe that BoA is subject to different economic laws from the rest?

Credit Card Rewards Offers–Two Hot Tips

Today’s Chicago Tribune contains advice for those who are looking out for great credit card rewards deals. The article is particularly keen on the Chase Freedom Card, which has no annual fee, pays a full one percent cash-back on every purchase, and can pay up to five percent cash-back on some defined goods and services.

The writer also mentioned–but was less keen on–the Discover® More® Card. It’s true that the Chase product can suit some lifestyles better but the Discover card could be a winner for the right person. Check it out.