Most provisions of the Credit Card Act of 2009 went into effect this week. Did you feel the earth move? Well, actually, it has a little. There are definitely some good things in the bill that protect you from some of the egregious credit card practices. All of the scrambling to raise rates before the bill’s effects has been done. As long as you keep up on your payments, your existing rates (if they’re fixed), will be stable. Any extra payments you make will be applied to your highest interest balance. No more double-cycle billing.  So, paying down your balance just got a little easier.

On the flip side, if you’re using credit cards, you’ll want to watch for any new charges that may appear. You’ve heard the saying, “when one door closes, another opens?” Well, in this case, when one fee source is lost, another is invented. Credit card companies want to keep their cash cows fat, so they will find new and fun ways to do so. Word on the street are things like increased ATM fees, foreign exchange fees, annual fees; decreased rewards. It’s the market working. The Credit Card Act puts restrictions or bans on existing fees, but doesn’t mention fees that are yet to come.

As always, buyer beware. The government can’t protect you from everything, least of all yourself. Credit cards have always been a good financial tool – when used wisely. Once you start carrying a balance you can’t immediately pay off, you’re more-or-less at the mercy of the little tiny words on that credit card agreement (read contract) that you signed.

So, watch for new fees that may affect you, and act accordingly. Credit cards are best used for convenience and safety (safer than carrying cash or checks). They are worst used for actual loans.

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Have you charged a donation to help the Haitians? Do you know that not all of that money is going to them? Most credit card companies are charging their normal fees for these donations; usually around 3%. Check out what Laura Bassett of the Huffington Post has to say about credit card charges being deducted from your donations.

MoveOn.org has started a petition to the credit card companies to waive fees on charitable donations.

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Here is the basic transcript of me being interviewed on a recent teleconference call.

Current Trends in the Credit Industry and How they Affect You

Easy credit has left consumers and banks overextended. Everyone is running scared…..

Question: What are credit card companies doing now?

The first thing to remember is that there are a number of different credit card companies; they all have their own internal policies, and these policies change. So, any observations are general ones. Having said that, banks are lending less and charging more.

So, what are the trends?

Every four months or so, they’re checking your credit reports. If they feel you’re a risk, they’ll raise your interest rates or lower your credit limit – or both. They might also lower your limit or close your account altogether if you haven’t been using it lately. And it doesn’t matter that you’ve been making on-time payments for years – decades, even. So, what do they consider risky? Someone who is making late payments or carrying a large amount of debt.

Another thing is that they’re increasing the minimum monthly payments, usually from 2 or 3% to 5% of the balance. If you have a $10,000 balance, your minimum payment could go from $300 to $500 a month. Some people are seeing their payments double.

Some banks are increasing fees and moving from so-called fixed interest rates to variable rates. As it stands now, the fixed rates can be changed – even retroactively – as long as you’re given advance notice. That means your outstanding balance of $10,000 that’s been at, say, 7% can be increased to 21%. This would increase your annual interest payments from $700 to $2100.

Grace periods are shrinking or disappearing altogether. If your payment is a day late – your charges could be declined until your payment is received and posted. The good news is that this would save you from a 30 day late if you forgot to make your payment that month.

What they’re not doing: They’re not negotiating down rates or payments, unless they believe you’re experiencing hardship and cannot otherwise pay them. In this case, they do seem to be more willing to work out arrangements with you. Be aware, though, that if you call to negotiate on the basis of hardship, your account might be closed on the spot.

Question: A credit card act was recently passed. Will that help?

Ironically, a lot of what’s been happening recently is a result of the new legislation. Congress passed the Credit Card Accountability, Responsibility and Disclosure Act of 2009 in May, but the Act mostly goes into effect in February of 2010. That’s eight months for credit card companies to raise rates and fees. So, in the short run, it’s actually been worse for consumers. In the long run, there are benefits. The banks will have less room to confuse consumers and otherwise behave badly, but there will continue to be a lot of fine print.

As for the specifics, there’s a lot to the new law, and you can find the details on the net. Some top-level highlights of the Act:

Interest rates:

• Universal default is banned. This means, for instance, that Chase will no longer be allowed to instantly hike up your rate because you made a 30 day late payment to Discover.
• Retroactive interest rate increases are, for the most part, banned. This is not to be confused with variable rates, which fluctuate up and down with the market. Also, rates for future purchases can increase – with advance notice.
• As of Aug 09, you must be given 45 days’ notice of rate increases, and you have the right to opt out – that is, keep your old rate and close the account.
• Excess payments must be applied to the portion of your balance with the highest interest rate first.

Fees:

• You can be charged with over-limit fees only once per month, and they’re optional. In other words, you can’t go over your credit limit if you opt-out.
• There are additional requirements for secured credit cards, such as how much can be charged in up-front fees.

Operations:

• Your payment must be due at the same time each month.  If it falls on a weekend or holiday, it will fall forward to next business day.
• The banks must disclose:
  • How long it will take to pay off the balance by making the minimum payments.
  • What the monthly payment would be to pay off the balance in 36 months.

Marketing:

• Marketing and granting of credit to minors (under 21) is limited.
  • No marketing on school grounds.
  • No more tee shirts and pizzas for credit card applications.

Question: How this affecting people’s credit and their scores?

Decreased credit lines generally reduce your credit score. In addition, Fair Isaacs Company, or FICO, is counting debt levels more heavily, which is further putting the squeeze on credit scores. Bottom line: scores are decreasing for those who carry balances on their credit cards and other accounts.

With the prime rate at 3.25% and thirty-year fixed mortgages around 5%, borrowing is cheap for those with excellent credit scores – and by excellent I mean 740 or better. But for those with lower scores, or those who carry balances on their credit cares, the cost of borrowing money has gotten more expensive.

For those with a healthy set of accounts, who use them and make on-time payments; who don’t carry credit card balances; their scores will remain high.

But debtors who are on the edge are falling off. Many people who were able to make minimum payments can’t once their payments increase. Many of these are defaulting, even declaring bankruptcy. That’s devastating to their credit scores.

It’s tougher to get any kind of loan or credit line – for everyone. Guidelines are stricter and timelines are longer. Credit scores are more important than ever – if you’re looking to borrow more money. Not so much if you aren’t in the market for a new loan.

Going forward, you may see the return of annual credit card fees, the reduction of ‘perks’ or ‘rewards,’ more complicated credit card statements, and the disappearance of secured credit cards. The overall cost of credit cards is increasing.

Question: With all of these actions squeezing consumers, how can they protect their scores?

The credit scoring rules haven’t changed much – except for a heavier negative emphasis on debt. Keep each credit card active by using it at least once every 3 to 6 months. Make your payments on time each month. Ideally, pay the balance off in full before the due date. The best way to use a credit card is to not borrow money.

If you are carrying a balance, put together a plan to pay it down – and stick to it. Knowing how much in interest you’re paying each month to carry your debt is a good motivator.

If you can’t make your payments, contact the credit card companies before you run out of money. If they realize you’re experiencing hardship, they might work with you to reduce your burden, but they will probably want you to pay something each month. Remember that many companies will close your account when they see you’re in trouble.

Finally, correct any errors on your credit report and address any delinquencies, such as collections and outstanding judgments.

Question: Where can people go for more information?

There are three places I would look.

1. There are resource links on CreditCoach4U.com for checking/monitoring your credit report, the ftc, etc.
2. You can google ‘Credit Card Act 2009′ or ‘HR 627′ to get more details on the new law.
3. You can go to CreditCoach4U.com and download free financial inventory worksheets. You can use these to take stock of your situation. The next step would be to have me review your worksheets and outline a strategy to address your issues. The details for this are outlined in the worksheets.

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The House and Senate are both working on bills to put limits on credit card companies. The Federal Reserve has created credit card regulations which are scheduled to go into effect July 2010. I’m listing some of the highlights below, and giving you enough info to google for details. I don’t know if any meaningful legislation will get passed or not. I hope so, because there are some good things in the bills, but I am concerned about what’s not in the bills.

There are no limits to interest rates. I’ve had a client – with a clean payment history – whose rate was raised from 12% to 38% one fine day. I don’t know how this can be justified with the prime rate  in the low single digits. My client, who was able to handle the 12% rate was unable to handle 38%, in addition to the other credit card rate hikes. Guess what? He’s now looking into debt settlement and bankruptcy. Guess what else? He’s not the only one. I’m not into government dictating prices or rates, but rates in excess of prime +25% is ridiculous. I think there should be an interest rate ceiling tied to prime or some other index. Usury laws are not new, and I don’t understand why this is missing. Anyway, here are some highlights of what is included:

• Limits on over-limit fees
• Limits on how interest rates are allowed to rise, and how much notice is given when rates are increased
• Restrictions on deceptive marketing practices
• No cards to known minors who are not emancipated
• Payments applied to highest interest portion of balance
• Allow consumers to lower their credit limit

House Bill H.R. 627 is called the ‘Credit Cardholders’ Bill of Rights Act of 2009.’ It’s sponsored by  Representatives Barney Frank and Carolyn Maloney.

Senate Bill S. 414 is called the ‘Credit Card Accountability, Responsibility and Disclosure Act. ‘It’s sponsored by Senator Christopher Dodd.

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Elizabeth Warren was the guest on The Daily Show with Jon Stewart on Friday.  In case you missed it, you can view it in this Huffington Post post by Sam Stein. I highly recommend that you do. I have nothing to add to the post, but to say that I am consistently amazed by Elizabeth Warren.

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I often get asked to comment on particular debt companies. Of course, I usually haven’t even heard of the the company. I believe in the 80/20 rule – 20% of companies are decent or better, while 80% are inept and/or thieves. Looks like this one might turn out to be bad. Here’s an article in the Boston Herald about John Cummuta, a debt company I have heard of…..

There is not ‘get out of debt free’ card, but please check out a company before you hand over any cash. If they talk too fast and avoid answering questions, they may be trying to hide something – like the truth.

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Does your credit report reflect your character? Increasingly, Employers are answering, “yes.” According to Business Sense, 42% of US employers said they performed a credit check on employees in 2006 – a jump from 35% in 2004. Invasion of privacy? Perhaps. You don’t have to sign the consent form, and you don’t have to apply for the job.

I remember the first time I was faced with the choice of peeing into a cup or declining the job interview. For me, this was an encroachment on my civil liberties. I compromised my principles, went on the interview, and got the job. As it turned out, I never peed into the cup.

Maybe your credit report doesn’t reflect your character. Maybe it’s invasive for employers to check your credit. Maybe it’s better to get your credit life in order.

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On Wednesday, 13 Feb, 2008, President Bush signed the Economic Stimulus Act of 2008. Read it here: Economic Stimulus Act of 2008.

You may have heard that taxpayers will be receiving an ‘income tax rebate.’ The law also contains some temporary relief for home loan borrowers. It applies for Freddie, Fannie, and FHA loans written between 1 July 07 (not a typo…) and 31 December 08. So, get ‘em while you can – if you can.

Supersize that?

A loan for a single family home that is greater than $417,000 does not conform to FHLMC/FNMA (Freddie Mac and Fannie Mae, respectively) limits, and is called a ‘Jumbo’ loan. Larger loans are considered riskier, and interest rates for them are higher.

The stimulus package temporarily (curiously, 07/01/07 until 12/31/08) sets the limit higher in certain parts of the country. Illinois is not one of them. In Illinois, then, as in most of the country, a Jumbo is still a Jumbo. Check here for Jumbo sizes in other parts of the country. If your location isn’t on this list, then the loan limit for Freddie and Fannie loans is still $417,000 for a single family home.

Retro is in. Long live FHA.

In the good old days, if you didn’t have 20% to plop down on a house, you might get an FHA loan, for which you only needed to plop down about 3%. They also had a different set of requirements, some of them more favorable to borrowers. Then came the heydays of loose money and wacky loans. FHA loans were still available, but with tighter restrictions, more rules, and lower loan size limits, fell out of favor in recent times.

The days of easy loans are gone, and FHA is back in the spotlight. FHA limits have increased to $410,000 (from $271,050) in the Chicagoland area. This limit is good for loans funded by 31 December, 2008. Note that lenders are still figuring out their lending rules for FHA loans greater than $362,790. Click here for FHA limits in other areas.
Coming down the pike: FHA Modernization Act…. Stay tuned.

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Check out my essay, “What Price Art?” It appears in FaithHopeandFiction.com, a community of readers and writers who share stories that inspire and entertain.

Enjoy!

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Are we in a recession? Why do we care? I’m not saying that I don’t care that many people are hurting financially. I’m just wondering why everyone is worried about a label (recession) that they don’t even understand. Ben Stein is talking about his world in this video:

http://money.cnn.com/video/#/video/moneymag/2008/01/21/mom.stein.recession.moneymag 

(Please excuse the commercial. I don’t know how to cleanly link to this. Advice is welcome.) 

You’re probably not concerned about the same things as Ben… but we all have things in our lives that matter more than whether our GDP will be declining this quarter and next…. To misquote an old Bob Dylan song – Do you need a weatherman to know which way the wind blows?

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