March 1st, 2009 | Posted in Finance Management
Consumers who carried a big balance and made the bare minimum payment each month used to be a credit-card issuer’s dream. Now, they are their worst nightmare.
With defaults on the rise, credit-card issuers are employing all sorts of tactics to persuade consumers to reduce their balances and, ideally, close their accounts. Some issuers are using carrots: American Express is offering some cardholders a $300 gift certificate if they zero out their balance by April 30, and Citibank is offering to match a portion of the payments some cardholders make beyond the minimum amount due. Others are using sticks: Chase is tacking on a $10 monthly fee to the accounts of consumers who have carried a large balance for more than two years.
Reducing the liability of outstanding balances is an effective way to head off problems at a time when defaults are rising and it’s become increasingly difficult to collect, says Tom LaMagna, director of Auriemma Consulting Group, a Westbury, N.Y.-based consulting firm that specializes in payments and lending. Credit card charge-offs (when issuers write off unpaid debts and send them to collections) rose to 6.3% during the fourth quarter of 2008, up from 4.15% the year before, according to the Federal Reserve.
At first, credit-card issuers targeted cardholders who hadn’t used their accounts in a year or two. Now, they’re going after another group: consumers who carry high balances and make few new purchases, many of whom have low rates from longstanding promotional balance transfer offers.
“When the economy was really booming, we were seeing a lot of 0%, low-rates-for-life offers because the industry was profitable overall,” explains LaMagna. “Now they can’t afford to keep them on the books, as good as that customer may be.”
If you’re an American Express or Citibank customer, don’t sit around waiting for the card issuers to come knocking on your door with an offer of a gift certificate or cash aid to help you pay off your balance. Both card companies say their deals are by invitation only.
American Express sent out its offer to “a relatively small number of cardmembers who have sizable balances and little spending and payment activity,” says spokeswoman Molly Faust. (She declined to specify how many.) Eligible consumers received a special offer code that, when redeemed online by Feb. 28, immediately cancels their account and sets the offer clock in motion. Fail to pay off the balance in full by April 30 and you’ll be out on both the account and the gift card. (The remaining balance must be paid off under your regular card rate and minimum monthly payment.)
Citibank spokesman Sam Wang declined to comment on the issuer’s program, saying eligibility and details depend on the customer’s unique circumstances. But cardholder Lynn Murphy, of North Little Rock, Ark., was happy to tell us about the deal she received last week: 10% back on payments made above the minimum for four months, with a maximum rebate of $550. “I was surprised that they just offered it,” says Murphy, who is considering the offer although she worries that it will limit her ability to manage debt during the offer period. While participating in the program, she can’t make any purchases on her card. After she completes the program, her account’s $17,750 limit will be cut to just above the balance.
A credit score of more than 800 wasn’t enough to save Lee Frizzell of Farmington Hills, Mich., from Chase’s new policy, which took effect in January. Chase is tacking on a $10 monthly service charge to many low-rate accounts with big debts held for more than two years. The fee is added to the balance, where it earns interest just like any other charge. Chase also raised the minimum monthly payment from 2% of the balance to 5% for affected cardholders. Frizzell has $12,000 in debt on his $35,000-limit card from three years ago, when he consolidated his bills to take advantage of an offer promising a rate of 3.99% for the life of the balance. “It was the cheapest rate around,” he says. “Now they’re trying to renege on the deal.” (Changes affect fewer than 0.5% of accounts, says Chase spokeswoman Stephanie Jacobson.)
by Kelli B. Grant
Copyrighted, SmartMoney.com. All Rights Reserved.
February 9th, 2009 | Posted in Finance Management
We’ve all heard some of them, and we’ve probably believed more than a few, but living by a credit card myth can cost you a lot of money in fees and hurt your credit rating.
Here are seven of the most pervasive credit card myths to watch out for:
Myth No. 1: Writing ‘See ID’ on the signature line on the back of your cards will stop a credit card thief cold and absolve you of any liability if a thief uses it.
The Logic: The “Ask for ID” or “See ID” prompt reminds salespeople to confirm that the name on the credit card matches that of the person holding it. And why write your signature in that little white space when it could be copied and used on checks, legal forms or other documents? There are even reports of law enforcement personnel recommending this precaution.
The Reality: An unsigned credit card is invalid, technically, according to the agreements that card issuers have with retailers. Moreover, many clerks don’t even check for signatures at all, meaning that they’re unlikely to see “See ID” on the back of your card, even if it is there.
If you do give a clerk an unsigned card or one with “See ID” written instead, they’re supposed to have you sign the back of the card and check the signature against your driver’s license or passport. This may trip up the fraudster a bit — after all, a thief is unlikely to be able to mimic your signature on command — but that’s only if the cashier bothers to take the time to compare that signature to the one on the driver’s license.
So what about the liability issue? Does writing “See ID” absolve you if the card is taken and used? No, because “no matter what’s on the back, you’re only liable for up to $50 charged when a card is stolen, and some companies waive that for their cardholders,” says Lauren Zeichner, an attorney with Consumer’s Union. “Writing ‘Ask for ID’ might encourage a retailer to ask for your ID, but it has no legal bearing.”
Myth No. 2: There’s no credit limit on your American Express card, so you can buy anything you want.
The Logic: Years of powerful advertising from American Express have probably locked at least one of their messages in your mind: “No preset spending limit.” So when the AmEx arrives in the mail, you can activate it and buy tickets to Maui — or your own Gulfstream jet to take you there, right? After all, there’s no limit on your account.
The Reality: AmEx has changed; it no longer issues only charge cards — the type that allow you to rack up a lot of debt, as long as you pay off the entire debt every month. They issue credit cards, too, which allow you to carry a balance.
In addition, when you inspect the marketing info from American Express, the phrase “no preset spending limit” usually comes with an asterisk. In the fine print, you’ll find wording to the effect that this “… does not mean unlimited spending. Your purchases are approved based on a variety of factors, including current spending patterns, your payment history, credit record and financial resources known to us.”
“There is no preset spending limit. It’s dynamic. It can change based on your financial situation and how you use the card,” says Mona Hamouly, a spokeswoman for American Express. “We have customers who make extremely large purchases with their cards, but that may be part of their profile.”
In other words, if you don’t already make high-dollar purchases with your credit cards, expect AmEx to question why you’re suddenly buying $6,500 designer shoes when you stated on your application that you earned just $30,000 a year. “The best thing to do when you’re going to make a purchase that’s out of the ordinary for you is call and let us know, so we can discuss the details,” says Hamouly.
Myth No. 3: You need one of each of the big cards — Visa, MasterCard, American Express and Discover — in your wallet because you may be stuck someplace that accepts one and not the others.
The Logic: People do wonder if the place they’re going will take the card(s) they have. The rivalry between American Express and Visa has perpetuated this for years, as evidenced by TV spots for Visa that showed flashy restaurants and exclusive hotspots ” … that don’t take American Express.”
Some places are picky: Go to a Sam’s Club, and you can only use Discover and its own branded card, while only American Express is good at rival retailer Costco.
The Reality: “If you have two of the big four, you’re not likely to have any problems,” says Linda Sherry, national priorities director for Consumer Action in Washington, D.C., “and millions of people just get by with one. It’s much simpler.”
“Although their advertising can make you want all these great cards, it’s probably not great financial sense to have them all,” says Sherry. “Remember: All those cards with your name on it don’t make you rich and powerful, and in the end, you could become poor because of them.”
Myth No. 4: You can give your credit score a boost by paying more than you owe.
The Logic: Paying more than you owe does temporarily bump up the amount of available credit on your card. It’s also true that using a smaller percentage of the credit available in your accounts — known in the industry as keeping a “low utilization ratio” — helps your credit score. Lastly, it’s thought that early credit scoring models may have given people a boost when they paid a personal or car loan a month early, so some may think that the same thing would apply to their plastic.
The Reality: “Even though you may be below zero on an account, it’s assumed that’s a temporary situation,” says Roslyn Whitehurst, a spokesperson with the credit bureau Experian. “Whether you’ve got a credit of $100 or $1,000, it still shows as a zero balance for scoring purposes.”
Myth No. 5: Using your debit card wisely can help your credit score.
The Logic: Debit and credit cards look alike, both bearing Visa, MasterCard or other logos. They’re treated virtually the same by retailers. Thus, both should have an impact on credit scoring.
The Reality: “Having a bank account with a debit card and maintaining it properly shows that you’re a responsible consumer,” says Sherry. “But it is not taken into account” in credit scores, she says.
Myth No. 6: Retailers can set a minimum amount you can charge on a credit card when you buy something from them.
The Logic: In a small store or restaurant, it’s not uncommon to find a sign that says, “$5 minimum for credit card purchases.” If this wasn’t allowed by the credit card companies, surely they’d crack down on it.
The Reality: Retailers who set minimum charges are breaking their agreements with the card companies. Because retailers pay interchange fees — which vary, but average about 2 percent of the sale — plus possible transaction fees on each credit card purchase, it’s easy to see why a store owner would want to discourage lots of small credit card sales. But when they do so, they risk losing their ability to accept cards. “You’re allowed to charge any amount on your card, even a penny,” says Zeichner. “The problem is that the retailer wants you to charge enough to make it worth his while.”
If you need to use a card for a small transaction that’s against store policy, you can object, although you may be invited to take your business elsewhere. The other thing to do is contact the credit card company. “We want to know about retailers who do this,” says Matt Towson, a spokesman for Discover Financial Services. “It violates our contract with them.”
Myth No. 7: If you go over your credit limit and pay it back before the due date, you’ll be fine.
The Logic: Lots of people go over their credit limits. After all, credit card companies don’t want to embarrass you and lose you as a customer, so they rarely decline your purchase. As long as you’re a good customer and you keep the overage reasonable, they won’t hit you with an over-the-limit fee.
The Reality: It’s true that credit card companies don’t want to decline your purchase when you go over your limit. And if you’re buying something that puts you a few dollars or more over the top, there’s a good chance they’ll give you the green light. But remember, every time you pass that credit limit, even for a short period, you could give the issuer a reason to boost your interest rate to penalty rate levels — sometimes more than 30 percent.
You’ve also triggered one of those nasty fees that can eat up your account. Taken over time, those fees can add up and hinder your ability to draw down your debt. “It just makes sense for the company,” says Sherry. “They know you don’t want to have the card declined, so they quietly penalize you the $30 or $40 over-limit fee.”
To avoid it, try calling before your purchase to see if they can give you at least a little bump in your credit line.
By John Morell
Provided by Creditcards.com
