As people up and down the eastern seaboard continue to clear up in the wake of Hurricane Irene, many are likely to be looking to their credit cards to help pay for repairs and the replacement of wrecked household goods. It’s depressing work, and especially distressing for those who are uninsured, either completely or just for flood damage. Business Insider recently quoted one source that suggested that up to 95 percent of all affected homeowners fall into this group.

Low interest credit cards versus rewards credit cards

Wow! That’s a colossal and genuinely shocking figure. And it suggests that huge numbers of victims may be forced to fall back on their plastic just to restore their lives to something approaching normalcy.

If you’re one of them, you’re likely to be pretty short on silver linings at the moment, and might be attracted by even the minor one offered by rewards credit cards. While you’re spending all that money, you may think, you might just as well get some cash back, travel miles, points or whatever.

Good idea. But it may not be the smartest move for all your purchases. For many of those, you should probably be pulling your low interest credit cards from your wallet instead.

Credit card rates, rewards credit cards and credit card calculators

That’s because, on average, interest rates are higher for rewards credit cards than those for ordinary ones. Indeed, at the time of writing, IndexCreditCard.com’s credit card rates monitor says that the average annual percentage rate (APR) for consumer non-rewards cards is 14.72 percent, while that for consumer rewards cards is 17.30 percent.

You’d need a spectacularly generous rewards card for it to make sense for you to charge items to it that you know you won’t be able to pay down for a long time. Generally speaking, the rule is that it’s good to use rewards credit cards for purchases that you know you can clear quickly, and low interest credit cards for those that are going to take you longer.

You can use credit card calculators to see how long it should take you–and how much it should cost you–to pay down balances at your own cards’ different interest rates. Then you can work out what your personal strategy should be.

Balance transfer credit cards

If your credit’s good and you’re having to load your cards a lot post-Irene, then you might want to consider applying for a balance transfer credit card. There are two reasons why this could be a good idea:

1. A number of these–mostly from Citi–offer zero percent APR on transferred balances for 21 months. Others make a similar offer for 15 months. That could provide you with just the breather that you need to get over the hurricane.
2. Your credit score could suffer if the balance on any of your cards is higher than 30 percent of its credit limit. So even if you can manage paying down your credit card debt easily, you could be better off spreading the load across more plastic.

Credit card companies human!

One tiny positive revelation that emerged in the aftermath of Irene is that credit card companies are human. That’s not necessarily in the sense that the U.S. Supreme Court thinks, namely that corporations are people. No, it’s in the sense that they’re run by real-life, breathing and occasionally sentient human beings. Many of them announced that those affected by the hurricane could see their late payment and/or other penalty fees waived, though only for a strictly limited time. Awww. Ain’t they sweet?

On August 18, the Federal Deposit Insurance Corporation (FDIC) added the Public Savings Bank of Huntingdon Valley, Penn., to its failed banks list. It’s always sad when any bank fails, but this event was more tragic than most, because this Public Savings Bank issued one of the best secured credit cards around.

Secured credit card at risk?

On the same day, Capital Bank, N.A. of Rockville, Md., (no relation to Capital One Bank) announced that it was “to assume all of the deposits of Public Savings Bank.” However, the future of the failed bank’s credit card business is unclear. At the time of writing, the card’s website says:

Thank you for your interest in the Open Sky Secured Visa® Credit Card. At this time Capital Bank has stopped accepting new applications for the secured card product. We have not discontinued the product and this is a temporary action as we work through efficiencies related to the acquisition of the program from Public Savings Bank.

Reading between the lines, there’s a notable lack of any bankable (if you’ll forgive the pun) commitment there to the product’s future, although perhaps enough reassurance to keep existing customers from panicking.

Why secured credit cards are important

This is the second heart-stopper for fans of secured credit cards in less than a month. HSBC’s excellent Orchard Bank-branded secured products seemed similarly threatened right up until Capital One bought them a couple of weeks ago. Luckily, the website is currently taking applications for Orchard Bank Classic Cards, Orchard Bank Online ecosmart MasterCards, Orchard Bank Visa® Cards and the Orchard Bank Secured MasterCard®.

Secured products can be highly effective vehicles for those who can’t get approved (because their credit reports are either patchy or non-existent as a result of financial problems or extreme youth) for mainstream, unsecured credit cards. Generally speaking, cardholders have to deposit upfront a sum, often $300-$500, in a savings account, certificate of deposit or similar, which then becomes their credit limit.

However, the best secured credit cards (not all of them) report activity to the three big credit bureaus, which gives cardholders a chance to build or rebuild their credit. And, after some months or years of responsible behavior, many issuers are willing to replace the plastic with a normal unsecured credit card.

Credit card companies and subprime borrowers

This represents an important opportunity for those whose credit card applications for mainstream products are likely to be declined. Many subprime borrowers have found their credit reports damaged through no fault of their own, perhaps as a result of illness or an unexpectedly long period of unemployment. Their problems are often short-term, and may now be entirely behind them. They deserve a second chance.

At a time when many credit card companies are again irresponsibly issuing plastic to risky subprime borrowers (see Credit card lending: bring on the tripping goldfish), there surely should be a greater role for secured cards. They can help and protect borrowers, lenders and the economy.

It’s a recurring theme of this blog that manageable credit card debt can in some circumstances be good. It can tide a family over during a short-term crisis, and it can give a significant boost to an economic recovery. Some experts reckon that 60 to 70 percent of the U.S. economy is based on consumer spending, so raising that level of activity could prove a prerequisite of a return to good times.

Credit card debt and obvious dangers

However, unmanageable credit card debt can, of course, be a disaster. On a micro level (and especially when coupled with high credit card rates), it can launch families into vicious, downward spirals of despair and ruin. And, as we’ve all seen very recently, it can on a macro level contribute to huge and unsustainable credit bubbles that, when they burst, do incalculable harm to the nation’s prosperity.

What’s needed is a way of encouraging responsible credit card use while steering those who can’t handle debt away from running up balances.

Credit reports that reveal more

On August 2, FICO, the company behind the systems that calculate most credit scores in the U.S., unveiled its Bankcard Growth Solution, which it described as a “unique new analytic solution designed…to help lenders improve decisions based on deeper analytic insight and accelerated learning across all stages of bankcard acquisitions and originations.”

In other words, it’s supposed to help credit card companies be smarter about whom they choose to issue cards and lend money. And it couldn’t have come at a better time. Credit card use is up, and the rate at which consumers are paying down card debt is slowing and may be reversing (see Credit card debt makes a rare uptick). Meanwhile, card issuers are falling over each other to attract new customers.

And all this is happening at a time when nothing about the economy is certain. As Andrew Jennings, FICO’s senior vice president and chief analytics officer, observed in a statement:

The ‘new normal’ in the banking industry is characterized by economic uncertainty and changing consumer behaviors, so banks have to figure out how to grow profitably despite the lack of stability. The most forward-looking banks are adopting analytic solutions that increase their capacity to learn, adapt and innovate. With its Analytic Learning Hub, the FICO Bankcard Growth Solution helps lenders make the decision that’s appropriate for each customer, learn from that decision’s results, and improve future decisions, in much faster cycles.

Much more needed

It’s unlikely that even FICO would suggest that its new offering is going to eliminate problem credit card use. To start with, Jennings says that only “forward-looking banks” are likely to adopt it, and, judging by Wall Street’s performance over the last decade, there are precious few of those around. More importantly, no profiling/data-mining IT solution is currently capable of predicting an individual consumer’s behavior with any great accuracy.

But it’s encouraging that FICO believes there are enough credit card companies out there that are taking credit risk management sufficiently seriously to make its new launch worthwhile. Perhaps they really have learned their lesson.

Many people will recognize it: that dread sinking feeling in the pit of your stomach when your mortgage, auto loan or credit card application is refused. It’s almost as bad when a bank quotes a range of loan or credit card rates in its promotional literature, and you end up with a rate that’s uncomfortably high. You ask yourself: What have I done wrong now?

Credit score information disclosure to improve

Well, soon lenders will be required to tell you what they think you’ve done wrong. Your loan or credit card application may still be turned down, and your credit card rates may still be high, but at least you’re going to know why.

That’s because last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act requires lenders to disclose information about your credit score and credit report when they either refuse your application or charge you rates above the norm. On July 6, the Federal Reserve published the rules that cover this disclosure, and they are due to go into effect 30 days after they’re published in The Federal Register. The Fed says that publication “is expected soon” so it’s likely they could apply starting some time in August.

Get your credit report before you apply

According to FICO, whose scoring system is used by many credit bureaus, the number of recent credit inquiries you have made can have an impact on your credit score. So if you’re wanting a new credit card, you probably shouldn’t start with your dream one, and work your way down your list of preferences until you finally get accepted. All those credit inquiries could drive down your score, and stop you getting one that you might have qualified for before you began the process.

Instead, you should look at your credit report first, and then apply for a card that you stand a good chance of getting. By law, you’re entitled to one free credit report every year, but–with 50-70 percent of credit reports containing errors, not to mention the prevalence of identity theft–many prefer to pay to monitor their reports as often as they like.

Credit score issues remain

These credit report monitoring services can be valuable for many. However, it seems that there are sometimes discrepancies between the scores consumers pay to access and the ones that lenders actually use. That’s why, according to a July 6 report in The Wall Street Journal, the Fed is planning to publish a study later this month that should examine how these discrepancies come about, and perhaps how they can be eliminated.

On July 21, the new Consumer Financial Protection Bureau is due to take over responsibility for regulating credit scores and reports. It’s yet to be seen how effective the CFPB is going to be, but one area that’s on its agenda is the difficulty that many encounter when they try to correct errors in their credit reports. For more information on this subject, see IndexCreditCards.com’s “Credit report inaccuracies can ruin your life” and “Five rules for fixing credit report errors.”

Credit reports important

Of course, credit scores and reports fulfill an essential role in our society, not only allowing lenders to avoid dodgy borrowers, but also protecting those people who are, in financial terms, their own worst enemies. However, the systems that credit bureaus employ have had serious flaws, and many may welcome the steps that are now being taken to correct those.

It’s generally a mistake to lose too much sleep over credit card fraud. Unlike other forms of payment, the law caps your liability for such crime at $50, and in practice many credit card companies waive even that.

A credit card offers protections, but…

This is not to say that you shouldn’t be vigilant in your credit card use. To start with, if your account is compromised, you’re likely to face some hassle, which can be inconvenient. But the real problems arise if you end up a victim of identity theft, which last year cost Americans $37 billion.

Then those hassles can take on mammoth proportions. Your credit report can be ruined, and your credit score can plummet to subprime levels. And a poor credit score is likely to make it harder for you borrow to buy a house or a car, to rent an apartment, to make successful credit card applications. Black marks on your credit can even impact your ability to find a job or get a promotion. Worse, you may well find it hard to prove the negative that you’re not the one who ran up debt in your name.

It would be rare for someone to be able to steal your identity armed just with your credit card details. Normally, a complete hijacking requires at least an address and social security number. However, card information could be a criminal’s starting point, so it’s worth using your plastic with care (see 10 ways to avoid being a victim of credit card crime).

Credit card companies’ roles

So, while you’re doing your bit to protect your identity, how hard are your credit card companies working to achieve the same objective? A new study, published yesterday by Javelin Strategy & Research, suggests that their level of commitment varies considerably.

Javelin didn’t look at “back-office” protections (things like database and network security) because for obvious reasons card issuers keep secret the safeguards they have in place. Instead, the researchers rated companies according to three criteria:

• Prevention–stopping criminals before they start
  
• Detection–identifying fraud while it’s happening
  
• Resolution–sorting out problems after the event

It turns out that most credit card companies are great at resolving issues after they’ve occurred but not so hot at preventing them arising in the first place. Yet Javelin’s Philip Blank said in a press release: “We have found that prevention features offer the highest return on investment, leading issuers to see that it is imperative to prioritize educating consumers on the current technologies needed for protection.”

Javelin made it clear that credit card issuers and users share responsibility for online security:

To find an effective means of ensuring consumers take the proper precautions when conducting financial transactions online, issuers should consider requiring a minimum amount of security software in order to access the full gamut of online financial activity.

Credit card companies: which are best at fraud prevention?

Javelin revealed what it believes are the top-five credit card issuers in identity fraud prevention, detection and resolution. In order of ranking, they are:

1. Discover
2. U.S. Bank
3. USAA
4. Capital One

Regardless of online security measures provided by the credit card issuer, the credit card user can do his or her part by being aware of security risks and taking appropriate precautions when conducting financial transactions online.

Yesterday, The Wall Street Journal introduced its readers to Pete D’Arruda, a man who must give his tailor nightmares. How can his suits look good when he’s carrying a wallet containing 25 different MasterCard and Visa credit cards? Still, at least he doesn’t have to worry about how to pay his clothing bills; he has more than $300,000 in available credit on those cards.

Credit scores boosted by credit cards

Mr. D’Arruda writes and consults on personal-finance matters, and sees his plastic project as an experiment. As a scientist, he may have more in common with Victor Frankenstein than Stephen Hawking, but he’s made some interesting discoveries.

One of these concerns credit scores. In the standard FICO scoring system, the amount you owe, especially as a proportion of the amount of credit you have available, is an important factor. Indeed, this “credit utilization ratio” can account for up to 30 percent of your total credit score.

The fact that D’Arruda uses only 10-25 percent of his available credit (Hang on. That’s $30,000-$75,000!) means that his ratio is well within acceptable limits, and this may have helped him achieve a stellar score, which he claims is in the 810-815 range. However, to have got there he must also have:

1. Maintained a spotless record of prompt payments
2. Had his credit for some time
3. Acquired some new credit relatively recently
4. Kept a good mix of different forms of credit (mortgage, auto loans, personal loans, credit cards and so on)

Credit card rewards and perks

D’Arruda says that he pays for virtually all his purchases using plastic. And, as a result, he quickly builds up worthwhile credit card rewards. This Thanksgiving, the Journal reports, he plans to cash in enough points from his Disney-branded Chase card to cover a Disney cruise for his family. Some–though not necessarily your blogger–would see that as sufficient reward for repeatedly presenting a card emblazoned with a picture of Buzz Lightyear.

Meanwhile, when he flies to meet his cruise ship, D’Arruda can use one of his prestige credit cards that offer airport lounge access to ease a wearisome journey. These tend to come with hefty annual fees, but he recently saved himself $495 by getting a card issuer to waive the charge because his credit score was so high. You might not be that lucky, but it’s worth remembering that credit card companies are often responsive to negotiations.

Credit card use best in moderation

Before becoming too envious of D’Arruda’s lifestyle, it’s worth remembering his administrative burden. Most of us struggle to manage two or three cards, what with tracking charges, reconciling statements and scheduling payments. Would we really want to do that for 25?

To be fair, Mr D’Arruda isn’t advocating that we should try. He’s conducting an experiment. What his experience may suggest is that responsible credit card use can enhance people’s lifestyles, even when it’s practiced on a much smaller scale than his.

If you read tabloid newspapers, you’re probably used to journalists working themselves–and their readers–up into frenzies on the slimmest of excuses. But you expect the somewhat more sober ladies and gentlemen of the fourth estate who write for some of the nation’s (and the world’s) greatest papers to be immune to the temptations of sensationalism.

Not so, it seems. Because The New York Times, The Washington Post and The Modesto Bee (no, really) all carried stories about the recent hacking of Citi’s credit card account database that could have come from Harold “the-end-of-the-world-is-nigh” Camping’s pen.

Credit card companies highly secure

So let’s try to put this story into perspective:

1. Only about 1 percent of Citi’s customers were affected: roughly 200,000 people out of the estimated 154 million Americans who have credit cards.
2. Citi says that only names, account numbers and contact information such as email addresses were potentially compromised.
3. Customers’ social security numbers, dates of birth, and card expiration dates were not accessed.
4. Critically, card verification value (CVV) numbers (the three digit code on the signature strip that is usually required for “card not present” transactions) were also not accessed.
5. Fraudsters lacking a card, an expiration date and a CVV are unlikely to get very far.
6. Even if someone did manage to charge a transaction to your card, your liability is capped by law at $50, and, in reality, it seems inconceivable that Citi wouldn’t fully compensate you.
7. Citi says that it “has implemented enhanced procedures to prevent a recurrence of this type of event.”
8. It is also issuing new cards to those at risk.

Credit card regulation rears its head

On Thursday, The New York Times described a number of legislators as “outraged” by the Citi hacking, and reported that some are planning new credit card regulations that would enforce higher standards of security across the industry. Now, this blog is generally–though by no means invariably–supportive of regulation when it protects the interests of vulnerable holders of credit cards. But how sensible would it be to use the law in this instance?

To start with, it’s credit card companies, rather than consumers, that are more likely to be the victims of hacking. They’re the ones whose money is on the line. And, secondly, it’s tough enough to draft laws that have definable goals without trying to legislate for the vague aspiration of improving anti-hacking measures.

With IT security being a cat-and-mouse game that’s constantly played at dizzying speeds, successfully creating an act of Congress to address the issue is likely to prove about as effective as a drunk trying to contain a vodka spill by encircling the rapidly spreading puddle with thumb tacks. That mixed metaphor is, of course, based on the premise that dizzy and drunk cats can use thumb tacks, which seems unlikely given that, if they could, Mark Burnett would most certainly have already snapped up the concept’s reality television rights.

Credit report monitoring

None of this is intended to understate the importance of foiling identity thieves by keeping personal information as secure as possible. However, it may be that you’re much more vulnerable to such theft through your own careless use of your cards and personal information than through your credit card companies being victims of hacking incidents. If you haven’t already, read “10 ways to avoid being a victim of credit card crime” for key strategies to protect yourself.

In particular, those who are nervous of identity theft can consider closely monitoring their credit reports on a continuing basis through services such as Equifax Credit Watch Gold with Score Power and TransUnion-Three Bureau Credit Monitoring. These can alert you to a threat before it becomes too serious, and are likely to be way more effective than any new credit card regulation that Congress can devise.

When, on Christmas Eve 2009, this credit card news blog reported on the launch of Blippy (Credit Cards And Lifestyle – Now You Can Reveal All About Yours), your correspondent was nonplussed:

“Want your Mom to know how much you squandered in a “gentlemen’s” club last night? Want your husband to know you just booked a motel room? Want your wife to know you’re charging $500 in Victoria’s Secret? Want your friends to know what your booze bill is?

Well, not all of those scenarios are a reality quite yet, but you could share with your family, your friends, and the world many details of your credit card use if you sign up for a new service called Blippy.”

Credit card news unleashed

Even in a world where many seem happy to expose the minutiae of their lives on Facebook and Twitter, the idea of a service devoted to bringing news of individual credit card purchases to a global audience seemed odd, at least to this blogger. Others disagreed, including the investors who put up nearly $13 million to fund the operation, and whoever at one point valued the business at $46.2 million.

In the wake of unwelcome publicity last year, when it was revealed that a few users’ credit card numbers somehow briefly leaked into Google caches, the company tried a new tack. It provided a forum for users to contribute reviews of goods and services. Blippy CEO Ashvin Kumar was remarkably candid when he spoke to a TechCrunch reporter on Wednesday, saying the review service was introduced to increase user engagement, but the effort was so far unsuccessful.

Credit cards should be personal

Sharing details of your credit cards and lifestyle online can be dangerous. Big organizations are often hungry for information about those with whom they’re thinking of engaging. Earlier this month, The Seattle Times quoted a report from the National Association for College Admission Counseling that said 25 percent of colleges now employ Facebook or search engines as “sources of additional information for critical decision making.” And, in an article headlined “Social media can wreck your career”, this month’s Hawaii Business says:

“It’s becoming more common for employers and HR professionals to conduct online background checks on potential hires before making a job offer.”

Credit reports an issue too

At a time when employers increasingly access applicants’ credit reports in advance of job offers (see Credit report inaccuracies can ruin your life), as well as trawling social media sites for lifestyle information, it seems crazy to volunteer further background details online. For most, the loss of Blippy’s credit card service was no loss at all.

Maybe you’re not too worried about your credit report, which is the document used to calculate your credit score. Perhaps you’re not planning to get a mortgage or auto loan. Maybe you aren’t going to fill in a credit card application anytime soon. So you don’t think you should be concerned.

Well, think again. Your credit report isn’t just viewed by lenders. A poor one may make it difficult or impossible for you to rent an apartment, obtain phone service, get a job or land a promotion. Yes, many employers run credit checks before hiring people or promoting existing staff. These are all reasons to take your credit report seriously.

Credit report errors widespread

You should certainly monitor your credit report closely and regularly. The fact is that errors on credit reports are much more common than many think. Addressing this issue in December (Five rules for fixing credit report errors), this blog quoted experts’ estimates that between 50 percent and 70 percent of all reports in the U.S. contain at least one inaccuracy.

As a rule, everyone should check their record at least once a year. Many people are comfortable with services that provide continuing access, including Equifax 3-in-1 Monitoring and TransUnion’s TrueCredit Monitoring.

Credit report errors hard to shift

It’s a mistake to assume that credit bureaus are happy to correct any inaccuracies that arise on your report. They’re paid by credit providers, not you. Often, they won’t accept your word about anything. If you set out to correct an inaccuracy, start out with the assumption that you have a battle on your hands. Treat the credit bureau that has the error as the enemy. Having said that, being rude or confrontational could be counterproductive. Be polite but persistent.

Last week, Tara Siegel Bernard wrote a New York Times piece on this very subject, and her advice closely reflected this blog’s advice:

1. Don’t use a credit bureau’s online dispute resolution service.
2. Mail letters “certified mail, return receipt requested” and keep copies.
3. Don’t provide originals of documents that support your assertions (cancelled checks, old statements, proof of previous addresses, court papers and so on), but do enclose copies.
4. Copy everything, again using certified mail, return receipt requested, to the creditor (credit card company, auto loan provider, mortgage lender, etc.) that originally supplied the incorrect information to the credit bureau. As the bureau’s customer, its request for a change is more likely to succeed than yours.
5. Don’t give up if you fail to correct an error yourself. Find an attorney who has in-depth experience of the Fair Credit Reporting Act, and go to court if necessary. You can find a lawyer through the National Association of Consumer Advocates.

On Tuesday, The Pew Health Group published the latest research from its Safe Credit Cards Project. It examined the impact of credit card regulation (in the form of the Credit CARD Act of 2009) on consumers, and the conclusion reached by the project’s director, Nick Bourke, was summed up in a press release:

“Pew’s research shows that predictions that the legislation would spark new charges and long-term interest rate growth have not materialized. Whatever increases in advertised interest rates we saw going into 2010 have not continued into 2011. The Act created a new equilibrium where interest rates have flattened, penalty charges have declined and a number of practices deemed “unfair or deceptive” have disappeared. Consumers are enjoying safer, more transparently priced credit cards – and banks and credit unions are able to compete on a more level playing field.”

Credit card regulation can be helpful

That’s quite an endorsement of the new law, and it seems to be backed up by at least two of the report’s findings for credit cards issued by banks (as opposed to credit unions):

1. Credit card rates now stable–At the start of 2011, advertised credit card rates for purchases remained in the 12.99 percent to 20.99 percent range, just as they’d been in 2010.
2. Lower penalty charges –Only 11 percent of credit cards now charge overlimit penalty fees, while late fees have dropped from a median $39 each before the act was implemented to a capped $25 this year. However, the new law allows credit card companies to charge consumers $35 for subsequent tardiness if they’re late more than once within any six-month period.

Credit card companies still have a point

When the Credit CARD Act was still being written, credit card companies spent millions on lobbyists who argued vociferously that any interference in their marketplace would likely have unintended consequences that could harm consumers’ interests. Although the Pew data (along with numerous other reports from consumer advocates) suggest that the most dire of those lobbyists’ predictions proved unfounded, they haven’t all turned out to be wrong.

Pew itself acknowledges that the number of bank credit cards that charge annual fees shot up from 14 percent to 21 percent between 2010 and 2011. And uncharitable folk could accuse it of somewhat skating over what happened to advertised credit card rates. It’s true that on average they didn’t change during that one year. However, they did tend to rise in 2009. That was in the run-up to the act’s implementation, when the banks were desperately rejigging their business models to accommodate the new rules.

Credit card regulation’s winners and losers

When this credit card news blog last took a detailed look at regulation (Media split on CARD Act reform) at the end of February, it quoted a report from USA Today that suggested that new annual fees and higher credit card rates were generally targeted at those with lower credit scores; in other words, those who are least able to afford them.

So not everyone necessarily benefits from credit card regulation, and sometimes it’s those whom consumer advocates most wish to protect who suffer most. However, perhaps the final word should go to Peter Garuccio of the American Bankers Association. The February blog quoted him as telling USA Today, “when you look at the regulations, it’s a net positive for consumers. But there have been some trade-offs.”