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.
- There are resource links on CreditCoach4U.com for checking/monitoring your credit report, the ftc, etc.
- You can google ‘Credit Card Act 2009′ or ‘HR 627′ to get more details on the new law.
- 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.
