The Unintended Consequences of the Credit CARD Act
February 24, 2010 by Holly
Filed Under Business & Finance, Finance
This is a guest post by Bill Hardekopf, CEO of LowCards.com.
On Monday, February 22nd, the major provisions of the Credit CARD Act took effect, nine months after they were signed into law.
Many of these provisions will have a very positive effect on consumers, but the law has resulted in some unexpected fallout.
“The CARD Act has some very significant benefits for credit cardholders. The restrictions on interest rate hikes and the ban on over-the-limit fees are tremendous. Consumers have cried out for these protections for years and they are finally about to take effect,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “However, there are a number of unintended consequences that have resulted from the CARD Act. These changes might affect more credit card consumers than the law helped.”
Here is a look at some of the unintended consequences of the CARD Act:
- Since issuers will be unable to raise interest rates on new accounts for twelve months, they simply raised the advertised APR before February 22nd so it affected everyone shopping for a new credit card account. According to the LowCards.com Complete Credit Card Index, the advertised Annual Percentage Rates for credit cards averaged 13.46% last week. Six months ago, the average was 12.11%. One year ago, the average was 11.51%.
- People under 21 will find it harder to build their credit score. If they do not have a job with enough income, they must get an adult to co-sign. Many young adults will not take this extra step, losing out on the opportunity to build up a good credit history throughout college. Without a positive credit history, they may not receive as good an interest rate on their first house or car loan.
- Fees, fees and more fees. Issuers are introducing more cards with annual fees, increasing existing fees, and putting new fees on accounts. Last October, Bank of America notified a small percentage of their customers that it is adding an annual fee of $29 to $99 on their accounts beginning in February. Balance transfer fees, which have been at 3% for most issuers, have now been increased to 5% by Chase and Discover. Firth Third Bancorp recently added a $19 inactivity fee if your card is unused for a twelve month period.
- The scarcity of fixed rate credit cards. Most issuers switched their fixed rate cards to variable rates, since the CARD Act allows APR increases in variable rate cards if the index used to calculate that variable rate increases. As an example, if the infex for a variable rate card is tied to the prime rate and the prime rate increases by 1%, the APR on that card can increase 1%. Many issuers switched their fixed rate cards to variable rate cards so they could maintain their margins once the CARD Act was instituted.
- Since any amount above the minimum payment goes toward the balance with the highest APR, some issuers raised the minimum payment up to 5% on a number of accounts.
- A decrease in the amount of credit card rewards or cash rebates. Reduced rewards could come in several different forms.
- A cutback in the payouts of cash back cards.
- More miles or points needed for that free airline trip or hotel stay.
- Higher tiers required for consumers to receive the same level of rewards.
- A decrease in the number of credit cards awarded by retail stores. Providing proof of income when applying for a credit card will make it significantly harder for consumers to instantly qualify for a credit card. This will certainly impact the marketing efforts of the 10-15% discount on a purchase if you sign up for a store’s credit card. Retailers rely on this marketing strategy to increase purchases and to build their mailing list of customers used for offering future coupons or early-bird discounts.
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LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1260 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.
Using Credit Card Rewards Points to Donate to Haiti Relief Efforts
February 1, 2010 by Holly
Filed Under Changing the World, World
It was announced in mid-January that the nation’s largest credit card networks–Visa, Mastercard, American Express and Discover, would waive fees for some contributions that were being made to aid Haiti relief efforts, after taking a heap of criticism for charging up to 3% of charitable donations for transaction fees. This is only the second time that credit card companies have waived fees made from charitable contributions, which companies rake in as much as $250 million dollars annually from; the first time they waived these fees was after the tsunami in 2004.
Now that the major credit card companies have waived their (in my humble opinion, devastating and ill-willed) fees aimed at charitable contributions, many companies have also set up processes in which cardholders can redeem their rewards points to make donations to aid Haiti relief efforts.
American Express has set up a website, GivingExpress Online, which lists a number of great charities and allows cardholders already enrolled in their Membership Rewards program to donate to any of the charities listed on the website by using their Membership Rewards points. American Express has also announced a donation of $250,000 to assist several different charities dedicated to the relief efforts in Haiti, including the American Red Cross, Doctors Without Borders, International Rescue Committee and the United Nations’ Friends of the World Food Program. They are also matching employee donations for relief efforts.
Capital One launched their No Hassle Giving Site in 2008. This website allows cardholders to donate rewards to more than 1.2 million United States charities. Since the devastating earthquake hit Haiti in early January, the No Hassle Giving Site has listed about a handful of worthwhile charities dedicated to Haitian relief efforts. Cardholders have the option to set up charitable donations online as either a one-time only donation or a reoccuring donation; cardholders will also earn rewards on their donation transaction. A Capital One spokeswoman has also declared that donations made to the relief efforts in Haiti are tax deductible and donors could obtain a detailed donation history and summary of taxable donations for their records.
Chase cardholders who hold either Chase Freedom, Sapphire and/or Ink can redeem and donate their Ultimate Rewards points to the American Red Cross Haiti Relief and Development Fund. Donations can be made starting at $25 for 2,500 points and then in $25 increments beyond that. There is no limit to the amount of points you can redeem to donate to Haiti, as long as it is up to your points balance.
Citibank has enabled cardholders to redeem their ThankYou Network loyalty points to make donations to the American Red Cross and the ARC Disaster Relief Fund before the earthquake hit Haiti. Since the earthquake, donations have been reported to increase to 20 times the normal number they will pulling in. On January 20th Citibank added a Haiti-specific donation option which benefits the American Red Cross International Response Fund and since then, there has been a nearly 100 times increase in the daily redemption rate of loyalty points. You may redeem your ThankYou Network loyalty points in denominations of $50 and $100 to benefit the American Red Cross International Response Fund. You can also call the ThankYou Network service center to redeem your points for a donation by calling 800-842-6596.
Woman Tribune has been reporting on the relief efforts, current conditions, ways to donate and how people around the world are uniting to help Haiti in a time of serious and desperate need. We will continue reporting as information becomes available, so please consider following our reporting on Haiti to stay up to date on what is happening there.
Consumer Tips for Applying for a Credit Card
January 16, 2010 by Holly
Filed Under Business & Finance, Finance
This is a guest post by Bill Hardekopf, CEO of LowCards.com.
January is historically the busiest month for credit card applications. Consumers are inspired by New Year’s resolutions to save money or find themselves trying to repair the damage done by holiday shopping.
Before applying for a credit card, consumers should do an internal audit on their financial situation and then thoroughly compare credit card offers instead of applying for the first offer that comes in the mail.
“Shopping for a credit card can be overwhelming since there are over 1,000 credit cards on the market,” says Bill Hardekopf, CEO of LowCards.com, home of the internet’s only Complete Credit Card Index. “If you don’t have a plan, it is easy to just pick a card because it has a familiar name or the advertised features sound attractive. You want to pick the right card. If it doesn’t fit, credit cards don’t have a free return policy. Every time you apply for a card, it is reported on your credit score and too many applications can pull down your score.”
Start by checking your credit score to understand how lenders will judge you. Also, this will enable you to check the accuracy of the report to make sure you are not being penalized unfairly. Checking your score may help you estimate the interest rate you may receive.
Then, classify yourself. Credit cardholders fall into four categories: those who pay the full balance each month, those who carry a balance all the time, those who want to transfer their balance to a lower rate, and those with either no credit or marginal credit.
The type of customer you are dictates how you shop for a credit card.
- If you pay the full balance each month…
If you pay off your balance each month, the interest rate is not that important. You can make the credit card work for you and earn free rewards or cash. There are reward programs for practically every hobby or interest, so apply for a card that has the best reward program that fits your needs.
Finding the best reward card can be difficult since the offers are often hard to compare. To simplify, assume that the average reward program pays you 1% of what you spend. If the card offers you more than 1% of what you spend, it is an above average offer. Very few cards offer cashback rewards over 1%. The ones that do have a minimum spending limit you must reach to receive the higher rate, or it is part of a rotating reward program and the categories change every quarter.
When choosing a reward card, first look at your annual credit card usage. If you charge less than $5,000 a year, your best option is a general reward card, such as Blue from American Express. You can select rewards on lower levels like gift cards, restaurants and retail stores. If you have an airline reward card and charge $5,000 or less each year, you may need give years to earn a free ticket (most cards offer a free, domestic airline ticket for 25,000 points.) If your usage is more than $50,000 per year, look for a card with unlimited rewards since some cards cap rewards at $50,000.
Hotel reward cards sometimes offer the most generous point distribution for everyday purchases, general purchases, and bonus points. Starwood American Express offers 10,000 points (three free nights at some hotels) with first purchase plus an additional 15,000 Starpoints if you spend $15,000 in six months. Some hotel cards also redeem points for airline tickets or retailer gift cards.
Now is the time to take advantage of cards that do not charge an annual fee and to use reward points as you earn them. Rewards aren’t covered under the CARD Act and issuers can make changes or place restrictions on them at any time. Rewards are an easy area for struggling issuers to cut costs and add fees.
- If you carry a balance…
The average credit card rate is 13.25%. If your credit score is above 720 and your APR is over 15%, apply for a card with a lower rate. If you have good to average credit, you won’t get approved at the lowest advertised rate. Look at the rate tiers in the terms and conditions to judge what rate you may actually receive and to determine whether it will be worth the effort to apply.
This group of cardholders has been the hardest hit by issuers reacting to the tight credit market and the provisions of the CARD Act. In 2009, issuers increased rates for many cardholders that carried a balance to as high as 29.99%. Issuers also switched rates from fixed to variable.
“Issuers once competed aggressively to attract consumers that carried a credit card balance. Now they are raising rates, slicing credit limits, and even closing accounts for this same group. Issuers have been burned by high default and delinquency rates, and any significant outstanding balance now waves a huge red flag of risk” says Hardekopf.
- If you want to transfer a balance to get a lower rate…
Ideally, balance transfers help you shift your balance from a high interest rate card to one with a lower rate. This used to be so easy that cardholders transferred their balance from card to card to take advantage of the intro period and avoid interest payments. Issuers allowed this and did not even charge a fee for balance transfers.
Today, balance transfer options are still available but they aren’t as easy and welcoming as they used to be. Many introductory periods have been cut from twelve to six months, the ongoing interest rates are higher, and some issuers have increased the balance transfer fee from 3% to 4% or, in some cases, even 5%. Citi Platinum Select offers a 0% for up to twelve months for balance transfers with a 3% balance transfer fee.
It is important for consumers to mathematically calculate whether a balance transfer makes financial sense. Compare the up front balance transfer fee (which is then rolled into your balance) and what you will save in interest payments for the introductory period to the interest payments you will make on your existing card. Carefully read the terms and conditions of the card you are considering to see if purchases made during the introductory period are covered at the introductory rate or if that rate only applies to the transferred balance.
“If you have average credit, there is no quick fix to get a lower rate. Issuers have tightened lending and approval rates to this group. The best way to lower your rate is to raise your credit score. That will take time, but it will be worth the effort,” says Hardekopf. “Ironically, one of the fastest ways to pull up your credit score is to pay down your debt and reduce your credit utilization ratio.”
- If you have no credit or bad credit…
Secured cards are for those who have no credit or bad credit history and can’t get a traditional credit card. This card may also be an option for those who have a completed bankruptcy. Think of a secured card as a short-term band-aid to repair your credit. If used correctly, a good payment history with the secured card should improve your credit score enough to qualify for a standard card in twelve months to two years.
The secured card looks like a traditional credit card–a merchant will not know it is a secured card. The difference between the secured and unsecured card is the higher rate and fees for the secured card. You must make the monthly payments on the card or the bank will turn the account over to collections, further damaging your credit score.
The deposit for a secured card determines the credit limit. If your deposit is $300, you will receive a Visa or MasterCard with a credit limit up to $300. The security deposit is not used to pay for charges but to cover the balance if the account is closed. The deposit is held until the account is closed.
A secured card has certain requirements. You m ust have a telephone in your home, reside in the United States, and have a valid social security number. While many applications are accepted, you are not guaranteed to receive a card. Unpaid tax liens or undischarged bankruptcies may prevent you from getting the card. Some issuers will not offer you a card if you have declared bankruptcy in the past.
Make sure that the issuer of the secured card you are applying for reports to the credit bureaus. This is necessary to help rebuild your credit history. If the issuer doesn’t report your history, a good payment record will not positively affect your credit score. Some cards require an additional fee for this. Save yourself some money and choose a card that doesn’t require this fee but still reports to credit bureaus.
Paying your bill on time can result in your account being upgraded to an unsecured card within two years. Some cards may also increase the credit limit to more than the amount of your deposit. After twelve months of good payment history, contact the issuer about converting your secured card to an unsecured card with a lower rate and a deposit refund.
“Once you have determined the type of credit card customer you are, compare all the cards in that category. Don’t just look at the advertised slogans or features. Dive into the terms and conditions of each card. Make a grid of the rates, fees and rewards of each card so you can compare apples to apples and make an informed decision on the right card for you,” says Hardekopf.
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LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1260 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.
Credit Card Predictions for 2010
January 7, 2010 by Holly
Filed Under Business & Finance, FinanceThis is a guest post by Bill Hardekopf, CEO of LowCards.com.
The LowCards.com credit card prediction for 2010 is no surprise: cardholders will pay more for credit card loans. The cost of credit cards will continue to increase for consumers even though the major provisions of the CARD Act go into effect on February 22. Cardholders could see increases in both their interest rates and existing fees, as well as the introduction of new credit card fees.
“Credit card issuers have lost billions of dollars in credit card loans during this economic downturn. Now they are staring at these new provisions of the CARD Act that will limit their ability to make revenue. They are coming up with ways to generate additional revenue and it obviously comes at the expense of the cardholder,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “This eans that cardholders will continue to pay more for credit card loans. Cardholders who pay their balance in full every month may eventually see the end of ‘free’ credit card loans as we know them.”
Here are some 2010 predictions for the credit card industry:
- More Cards with Annual Fees
According to the LowCards Complete Credit Card Index which tracks the rates and fees of 1000+ credit cards, only about 20% of the credit cards in the United States currently have an annual fee. But that number should increase in 2010. Some credit card issuers have already made the first moves to test annual fees on a small percentage of cardholders or offer cards with annual fees that build customer loyalty.
Bank of America has been test marketing the effects of adding an annual fee to some of their existing customers. In October, the issuer notified a small percentage of customers that it is adding an annual fee of $29 to $99 on their accounts beginning in February 2010. Only a few customers (0.5%) received the notice but the outcry against this annual fee was loud, even from consumers who were not affected.
Chase is using premium rewards to encourage customers to select or upgrade to cards with annual fees. They introduced the Sapphire Preferred card with an $85 annual fee and enhanced benefits and earning potential.
“Bank of America and Chase are the first major issuers to test the traditionally unpopular annual fees. If other issuers think this is working, they will also add annual fees. Issuers use each other for market research,” says Hardekopf.
American Express recently introduced the new Zync card with a twist for annual fees. It is a charge card aimed at people in their twenties. The annual fee is $25 per year and includes participation in Membership Rewards. It also offers packs of benefits that can be purchased for an additional $20 per pack per year. For example, enroll in the Go Pack and receive twice the Membership Rewards on airfare.
“Issuers are trying to find ways to change the dynamic of the credit card market. They want to ‘mainstream’ annual fee cards and provide enough value to attract the consumers with good credit,” says Hardekopf. “Right now the majority of consumers do not want to pay an annual fee for their credit card. Consumers shouldn’t have a card with an annual fee for their credit card. Consumers shouldn’t have a card with an annual fee since 80% of the cards currently do not have one. Some issuers may force the annual fee, but others will find creative ways to encourage customers to accept a card with an annual fee.”
- Fixed Rate Cards Changed to Variable Rates
In 2009, issuers switched many fixed rate cards to variable rates, making rate increases for everyone almost inevitable. Variable rates rise and fall with the prime rate. The rate is currently at 3.25%, the lowest level since the 1950’s. As the economy recovers, the rate is expected to rise. As it does, cardholders will see increases in APR.
“Issuers will continue to move the remaining fixed rate cards to variable rates. Fixed rate cards are almost extinct, and if your card still has a fixed rate, expect it to be switched to a variable rate in the next month,” says Hardekopf. “Issuers are switching cards to a variable rate that have the prime rate as their base so that interest rate increases can be passed on to the cardholders even after interest rate provisions of the CARD Act take effect.”
- Increases in Interest Rates
Even though the CARD Act limits the issuers’ ability to raise rates “at any time, for any reason,” expect issuers to find loopholes and create opportunities to raise rates. In addition, since the CARD Act limits interest rate hikes during the first year for cardholders, issuers are like to increase the advertised APR so the cardholder is locked in at a higher interest rate.
- Increase in Existing Fees
The CARD Act does not limit fees, so expect issuers to increase the existing fees. An example is the balance transfer fee. A year ago, the industry standard for balance transfer fees was 3%, meaning if you transferred $10,000, you would incur a $300 balance transfer fee. But Bank of America increased their balance transfer fee to 4% in the summer of 2009 and a Chase increase to 5% takes effect this month. Expect other issuers to follow these increases. The same increases might occur with cash advance fees.
- Introduction of New Fees
Issuers can also be expected to add new fees to credit cards. This is already being tested by several issuers.
Firth Third Bancorp recently added a $19 inactivity fee if your card is unused for a twelve month period. In August of 2009, Citi informed some of its cardholders that they will be charged an annual fee of $30 to $90 unless they spend at least $2,400 per year. Some retail cards are adding a $1 monthly processing fee should you request a printed credit card statement each month.
“Since fees represent such a cash cow for issuers, expect aggressive increases in existing fees as well as some brand new fees on your credit cards in 2010,” says Hardekopf.
- Decreased Rewards on Some Cards, Increased Rewards on Others
Rewards sound generous in advertising for credit cards, but the points formula can be complicated and subject to change. Expect issuers to play musical chairs with rewards in 2010.
Issuers will cut costs by reducing rewards for some cardholders, especially those who do not pay an annual fee and pay off their balance each month. Reduced rewards could come in several different forms: (a) a cutback in the payouts of cash back cards; (b) higher tiers required for consumers to receive the same level of rewards; or (c) more miles or points needed for that free airline trip or hotel stay.
However, rewards will likely be used as an incentive for cardholders to accept a credit card with an annual fee. Bonus offers will be more generous for cardholders that pay the annual fee.
- Government Regulation
The CARD Act goes into effect in February, but that may not be the end of government regulations. Credit card reform is a hot issue and some Senators and Representatives think that the CARD Act didn’t go far enough. For example, Congress may try to force issuers to lower the interchange rate they charge to merchants. If this passes, it will reduce an important source of revenue for issuers and consumers will likely have to pay more to make up the loss.
“Government reform sounds good and scores political points for the lawmakers who push it, but it often results in higher payments for the people it is trying to help. If you place limits on issuers, they will find ways around them because they have to make money on these loans to stay in business. Credit card companies are not philanthropic organizations,” says Hardekopf.
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LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1260 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.
- More Cards with Annual Fees
