Students and credit cards

Thank heavens for the Credit CARD Act of 2009. Not only did it stop credit card companies from employing all sorts of dubious marketing practices to lure students into signing up for cards they didn’t need, but it also says that those who are under 21 years old can only get a card if an adult co-signs the agreement–unless, that is, the youngster can prove that he or she has enough independent income to make repayments unaided. Parents across America heaved a collective sigh of relief when that law was passed.

But they sighed too soon. This is credit card regulation. And that means, of course, that no loophole goes unexploited. So it’s no surprise that some card issuers’ armies of lawyers have already circumvented the law.

Credit card regulation fails again

When the act was signed, consumer advocates begged the regulator, the Federal Reserve (who else?), to define what constituted an “independent ability to make required minimum payments.” It refused. And they asked it to force companies to verify whether or not students making credit card applications really had the resources they needed to support the card. It turned down that one too.

So at least one big bank says that it will issue credit cards to students under 21 years old if they have an annual income of…$2,000 or more. And it will count parental contributions, grants, and scholarships when it calculates that income. Oh, and it won’t ask for any proof.

Adam Levin, who used to be director of the New Jersey Division of Consumer Affairs, told The Washington Post, Friday, that, before the Credit CARD Act: “If you were a student and you could fog a mirror, you could get a credit card.” It looks like nothing has changed.

Student credit cards–some responsible ways forward

Assuming that you’d prefer your beloved offspring not to be lured into a debt trap, your first step is to avoid telling her or him about this loophole. What, you’ve never covered up an uncomfortable truth for a good reason before?

Then act as if the law is working just fine. If your child is financially responsible, you could offer to co-sign a credit card application for a specialist student product, such as the Citi® Dividend Platinum Select® Visa® Card for College Students or the Discover® Mix Tape Student Card.

However, you risk your own credit score taking a ding if the fruit of your loins defaults. So, if you think there’s a real chance of that happening, you could opt for a secured credit card, such as the Public Savings Bank Secured Card. These require a deposit to be paid up front (think of it as a security deposit on an apartment rental), but have the advantage of allowing youngsters to build up their own credit scores while keeping them well away from yours. Just make sure that the card you choose reports to all three of the big credit bureaus.

Of course, the safest route is to opt for a prepaid card. These don’t report activity to anyone, and shouldn’t allow a student to access any credit at all. But some of them have very high fees, so shop around. A good choice for many is The Mango™ MasterCard® Prepaid Card.

Credit Card Rewards: Reverse Robin Hood?

Robin Hood used to steal from the rich in order to give to the poor. Now a public policy discussion paper from the Federal Reserve Bank of Boston gets close to suggesting that credit card rewards programs achieve much the same–except in reverse.

The paper, published last Wednesday, says: “On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year.” And it goes on to show that it’s low-income households that tend to use cash and high-income families who receive most through using their credit cards.

Credit Card Companies and Swipe Fees

The Fed’s hypothesis is based on how “interchange fees” (also known as “merchant fees” and “swipe fees”) are levied and funded. These interchange fees are the cut of the transaction value paid by merchants to credit card companies every time a card is swiped. And the paper’s authors argue that merchants pass the fees to all customers in the form of higher prices. They contend:

This retail price markup for all consumers results in credit-card-paying consumers being subsidized by consumers who do not pay with credit cards… cash buyers must pay higher retail prices to cover merchants’ costs associated with the credit cards’ merchant fees. Because these fees are used to pay for rewards given to credit card users, and since cash users do not receive rewards, cash users also finance part of the rewards given to credit card users.

Credit Card Rewards and You

Whether or not you believe the swipe fees system is fair, it is the system. Government can yet change it (it’s been on the agenda for some while), but, in the meantime, there seems little point in your denying yourself the benefits that a good rewards program can bring. So here are three cards that could be of interest:

• Chase Sapphire Card. This card has no annual fee and a generous rewards program that gives you 10,000 Bonus Points after your first purchase. You also get double points on all airfare purchases booked through Ultimate Rewards. And there are no blackout dates, earning caps, or point expiration periods.
• Chase Freedom Card. This card, too has no annual fee. You can earn $100 Bonus Cash Back if you spend $799 on purchases in the first three months you have the card. And there’s five percent cash back on some popular categories and a full one percent on everything else.
• Iberiabank Visa® Platinum. This could be the card for you if you sometimes carry forward a balance, because its rates can be as low as 9.25% APR. You earn a bonus point for every dollar in qualifying purchases, which you can redeem as hotel, gift, or experience rewards. No annual fee with this one either.

Credit Card Use Overseas

On Monday, this blog mentioned the difficulties that some Americans experience when trying to use a U.S.-issued credit card overseas because so many other countries have dumped swipe-and-sign cards in favor of chip-and-pin ones. As the latter’s name implies, these cards have replaced the magnetic strip so familiar over here with a microchip. Some retailers and virtually all automated payment machines can no longer handle American cards. The exception is ATMs, which should still work.

The Kansas City Star addressed this issue Wednesday, and suggested that it may be possible in some countries for tourists and business travelers to obtain–possibly from their hotels–a prepaid card. The card is loaded with euros and contains a chip, which could solve this problem. Why not ask your concierge or check when you book your room?

It’s not yet clear whether American credit card companies are likely to adopt chip-and-pin technologies. A payments risk analyst at the Atlanta Fed wrote a blog earlier this week that suggested that fraud would be cut significantly were they to do so, but also quoted one industry estimate of the likely cost–$8.6 billion. That’s a big investment, although making credit card use easier and safer would be a valuable prize.

Credit Scores–an Important Change

Wednesday, the House approved the new financial regulatory bill that came out of conference last week. Assuming the Senate also votes it through, a whole new wave of credit card regulation should soon be taking effect.

The bill, of course, covers much more than just credit cards, and one small corner of it contains an important change concerning credit scores. If the legislation is passed, anyone who is turned down for any form of credit, or who receives a less attractive deal (for example, by being offered worse mortgage, loan, or credit card rates), because of a poor credit score should be able to legally demand to see that score.

In fact, there’s nothing to stop you from asking for your credit score even if a loan or credit card application is approved, and you like the deal you’ve been offered. The lender may not be legally obliged to provide it, but many may be happy to oblige.

Credit Reports and Scores–Why They’re Critical

Of course, someone’s credit score and report are likely to determine how good a deal (if any) that person can get on mortgages, loans, and credit cards. But they can be even more important than that.

Yesterday, an Oregon law came into force that stops employers in the state from using credit scores and reports as a factor in any decision to hire, suspend, demote, or fire an employee unless the company can show that the score is directly relevant to the job in question. The law addressed a nationwide problem–some employers routinely (and often unfairly) use credit histories as a way of filtering job applicants and punishing existing employees.

And the situation could become even more critical over here if the U.S. government picks up on an experiment that the British are currently undertaking. The U.K. government has, according to this morning’s Independent, asked a credit bureau to use credit histories to determine whether those in receipt of means-tested state benefits are living an appropriate lifestyle. So, for example, a person who receives housing benefits (has their rent paid) and also has a cable or satellite television subscription could be flagged as someone who may have more resources than they’re declaring, and might thus be cheating the system.

Problems with Credit Reports and Scores

Campaigners in the UK and consumer advocates over here point to the fact that all too many credit reports contain material inaccuracies. John Watts, of the Watts Law Group of Birmingham, AL, said last week that he has recently had several clients whose credit reports contained false information.

Mr. Watts, an attorney with a specialization in debt matters, advises that anyone in a similar position should immediately write to the credit reporting agency–copying the creditor that supplied the information–informing the creditor that the entry is wrong, and giving detailed, precise, and specific reasons in support of that assertion. He goes on:

And if they don’t treat you right? Well, then if you sue them they will be in a position where a judge and jury will be wondering why they mistreated you after you gave them detailed information to show that the company was wrong. In other words – after your precise warning/dispute/request to them.

Making the Most of Stellar Credit Scores

If you’ve been clever enough–or lucky enough–to have kept your credit score at the very top end of the scale, then you should take advantage of your privileged position. Many American Express charge cards and credit cards offer exceptionally good deals for those with exceptionally good credit reports.

And Simmons Bank similarly specializes in catering to the needs of the financially secure. The Simmons Bank Platinum Visa card, for example, currently has a 7.25% variable rate, no annual fee, no balance transfer fee, free travel accident coverage, and free car rental loss/damage waiver.

Low credit card rates are a hallmark of Simmons products, and the Simmons First Visa Platinum Travel Rewards card has a 9.25% variable rate. It has many of the same characteristics as the Platinum Visa card, but also has a credit card rewards program that offers one point a dollar. You can redeem points for free travel on all U.S. airlines.

Credit Card Regulation Extending to Gift Cards and Similar

According to the National Retail Federation, gift cards will be–for the third year running–the most requested gift this holiday season. Meanwhile, the New York Times recently quoted analysts who believe that, by 2012, Americans will be loading more than $100 billion on all forms of pre-paid card, including Visa- and Mastercard-branded pre-paid “credit” (more accurately “debit”) cards, and retailers’ gift cards.

Given this appetite for these types of cards among consumers, it is unsurprising that the Credit CARD Act of 2009 included provision for their regulation. And, last week, the Federal Reserve published its proposals for protecting the public.

Credit Card Rates Not an Issue

Of course, most of the things that bother consumers most about traditional cards–credit card rates, spending limits, late payment penalties, and so on–don’t apply to pre-paid and gift cards. But that doesn’t mean that these financial instruments don’t raise concerns of their own.

The Fed’s discussion document points to a number of these:

Concerns have been raised regarding the amount of fees associated with gift cards, the expiration dates of gift cards, and the adequacy of disclosures. Consumers who do not use the value of the card within a short period of time may be surprised to find that the card has expired or that dormancy or service fees have reduced the value of the card. Even where fees or terms are disclosed on or with the card, the disclosures may not be clear and conspicuous.

The Fed’s Proposals

Unfortunately, any new consumer protections will not be in place in time for this holiday season. However, it is the Fed’s intention that they are going to be active for the end of 2010. And the principal areas that are likely to be covered are:

• Restrictions on dormancy, inactivity, and service fees
• Expiration date restrictions
• Additional disclosure requirements regarding fees

Credit Card Companies Calm

Credit card companies that issue pre-paid cards responded to the Fed’s discussion document with surprising–not to say worrying–equanimity. In a statement, Kirsten Trusko, who is president of the Network Branded Prepaid Card Association, said:

While we are still digesting the full impact of the Federal Reserve Board’s newly proposed rules related to gift cards, our general feeling is that the Fed’s proposal seems tough but fair and reasonable. In fact, much of what is being proposed related to expiration dates, clear and conspicuous disclosure of fees, restrictions on certain kinds of fees, etc., is already being done by many members of the industry. We look forward to working with the Board in the coming weeks to provide comments for improving on certain aspects of the proposed rules and resolving any unanswered questions they may have.

Credit Card Rewards Must Suit You

It would be nice to think there’s not someone out there who’s never been on an airplane–and never plans to–who has a card that earns them air miles. However, you just know that somewhere precisely such a person exists.

But before you laugh too loudly, you might just want to check your own wallet. Because a combination of changing lifestyles, and amended credit card terms and conditions may mean that many, many Americans are currently signed up for credit card rewards programs that don’t really suit them.

Credit Card Debt and Credit Card Rewards Don’t Mix

To start with, most people who don’t pay off their balance in full every month should probably select a credit card based on the lowest interest rates possible and not on the credit card rewards program.

But you might not be getting the best deal, even if you do pay off your balance every month. More and more credit card companies are imposing annual fees on their cards that carry valuable rewards programs (and on some that don’t), and a little cold arithmetic is necessary to see if a card that was once a winner is now somewhere toward the back of the pack.

Credit Cards & Lifestyle

Another factor that could have made one of your cards less attractive without your really noticing is a change to your lifestyle. If you’re one of millions of Americans who fly less frequently, stay in hotels less often, and have cut down on car rentals, then perhaps you should be looking for cash rewards rather than freebies.

Of course, if your lifestyle still involves a great deal of travel, then a rewards program with travel perks could still be highly valuable. The American Express’s Starwood Preferred Guest card is a good example of a card that can return real value to the right person.

Research Before You Do Anything

If you find that you ought to change one or more of the cards in your wallet, then you should obviously search out the deals that most closely suit your way of life. That could involve finding a different rewards program, or it could simply mean exploring the range of low interest credit cards–as far as such things still exist.

But think before you sign that new credit card application. You need to have an excellent credit score to get a new card, so it could be a mistake to burn your bridges.

And simply cancelling an existing card can damage that credit rating, as can making multiple applications. So it’s often better simply to cut an existing card in half, and let the account die slowly and naturally through disuse.