Credit cards: How to avoid getting tricked this holiday season
Dec 2 (Reuters) – ‘Tis the season to charge it.
Pay a little now, finance the rest with credit cards. If you’re like a lot of people, that might sound like a good deal for holiday shopping. “We spend more in this five-week week period than in the collective 47 weeks that lead up to it,” says credit expert John Ulzheimer.
Yet your option to pay the full amount that is due for the billing period — the smart thing to do — may not be the most prominent one displayed on your credit card statement. And when you go online to pay your bill, the minimum payment box might already be checked.
Even sophisticated consumers can fall into the minimum payment trap, according to Linda Salisbury, a Boston College professor who studied consumer behavior when paying credit card bills. She surveyed hundreds of people on the subject.
Using actual credit card payment data collected by British researchers as well as her own research, she says consumers appear to be drawn to paying less than they might have when they see a “minimum payment” amount on their bill.
Credit experts say you need to resist the draw to pay low and instead shell out for as much as you can afford in order to break the hold of card debt. That attraction to pay less, Salisbury says, has a greater impact on people who have the money to pay the bill, because they could afford to pay the full amount, but don’t, and end up spending money on interest instead.
The impact of paying the minimum is significant. An example: If you have $10,000 in debt on card with a 10 percent interest rate and a bank that requires a minimum payment of 4 percent of the balance (initially $400 a month), it would take about 10 years to pay off that card if nothing more was charged. Increase your payment to $800 a month and it would take 14 months and save you nearly $2,000 in interest.
That impact is even greater on those who accept the tempting store credit card offers being constantly dangled in front of them, with those cards typically carrying interest rates at 20 percent and higher.
New York City bankruptcy lawyer Daniel Gershburg says he sees the psychological pull to pay the minimum by clients all the time.
“They believe that because they’re making this tiny payment every month, they are above water, when, in actuality, they’re not,” he says. “It’s really a huge problem because consumers then spend so much more and pay so much more in interest because of this unrealistic sense of security that a minimum brings with it.”
You might think that the calculations on your statement showing how long it will take to pay off your credit card debt would motivate higher payments. But that hasn’t been the case, Salisbury says. “We were surprised that the additional cost and loan payoff information didn’t have a positive effect.”
The federal CARD Act, which took effect in 2010, is responsible for the disclosures we now see on credit card statements — how long it will take to pay off a balance if you pay the minimum as well as how much you’d have to pay monthly to retire your debt in three years. There are also plenty of online calculators out there, such as what you can find onthat let you change scenarios to see just how much a difference a bigger (or smaller) payment can make.
“Give it a try the numbers can be scary,” says Bills.com president Ethan Ewing: “The minimum monthly payment is a costly way to pay down your balance, and can effectively lock you into a lifetime of debt.”
The Consumer Financial Protection Bureau says 70 percent of consumers surveyed say they have noticed new credit card disclosures on their bills. But fewer than one-third say this caused them to make bigger payments or stop charging up their cards.
A bit of good news for holiday shoppers with good credit who are intent on paying off their debt: A resurgence of card offers featuring introductory balance transfer interest rates that last a year or more (Citiis offering 21 months). Some of the offers are fee-free. Others charge up to 3 percent of the balance, that could be hefty — $600 if you transfer $20,000.
The Dangers of Paying the Minimum on Your Credit Cards
Because of the CARD Act, creditors must print on credit card statement the amount of time to pay off the card’s balance (and interest paid) if you just made minimum payment required. I’ve spoken with many consumers and I can tell you that a lot of people think the information is a misprint. How can it take 22 years to pay off a $15,000 credit card debt? Needless to say, this information is very eye opening and extremely useful.
I have used a couple of real examples to show you the impact of paying the minimum on moderate balances of $680 and $1424. To make things simple, each example assumes that no more is charged to the account during the time frame and the interest rate is 14.5%. You will see how fast interest adds up!
The first example is a bill for $680, if you make the minimum payment of $15 a month, it would take 6 years to pay. The total amount paid would be $991, with $311 of it in interest charges. This is almost 50% of the original bill. If you pay more than the minimum or $23 a month for 3 years, you would pay $842 and $162 in interest. You save $149 paying it 3 years earlier. Either way it is still a very long time to pay a bill totaling $680.
Monthly payment: $15 Pay off: 6 years Amount paid: $991 Interest: $311
Monthly payment: $23 Pay off: 3 years Amount paid: $842 Interest: $162
The next example is a bill for $1424. Paying the minimum of $28 a month would take 12 years to fully pay off the balance. The payments total $2,662, with $1,238 of it being interest. This is 86% of the original bill. If you pay more than the minimum of $49 a month, you would pay the bill off in three years, which is 9 years earlier. You pay $1,764 and $341 in interest; the savings of $897 is substantial.
Monthly payment: $28 Pay off: 12 years Amount paid: $2,662 Interest: $1,238
Monthly payment: $49 Pay off: 3 years Amount paid: $1,764 Interest: $341
In addition, if you don’t pay the bill within the date it is due, a late fee of $35 is added to your bill. And, your interest rate could also go up as a result. Look at your cardholder agreement, if you haven’t thrown it away, for the “default rate.” That’s the rate they can charge if you miss a payment.
I don’t know about you, but I don’t like paying interest; it is throwing money away. I don’t get anything tangible in return for this wasted money. I can think of many things to do with $1,238 or even $341 and using it to pay interest isn’t one of them.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.
New limits placed on credit card late fees and other penalties
The Federal Reserve approved a series of new limits on credit card companies that will protect consumers from exorbitant late fees and other penalties, including fees for inactivity and exceeding the maximum credit limit.
The new limits take effect Aug. 22, 2010 and are the final step in the Fed’s action to implement the Credit Card Accountability and Disclosure Act that Congress enacted last year. That legislation has already benefited consumers and brought a number of restrictions on credit card companies’ billing practices, including curbs on arbitrary interest rate increases.
The additional limits announced Tuesday mostly target payment penalties. Now, credit card issuers can only charge a maximum fee of $25 if a consumer pays late (as long as they haven’t been late in the past seven months). The new rules also bar credit card companies from charging “inactivity” fees and places new limitations on the fees that they can charge for other violations such as returned checks or exceeding account’s maximum credit limit.
Among the new limits:
- Credit card companies can no longer impose multiple penalty fees for a single late payment or other violation.
- Any fees charged for violations of a credit agreement’s terms have to be in proportion to the amount of a violation. So, the maximum penalty for a consumer whose $20 minimum payment is late or who exceeds a credit limit by $20 cannot be more than $20.
- The Fed also required credit card companies to reexamine any accounts on which they raised interest rates since Jan. 1, 2009, “to evaluate whether the reasons for the increase have changed and, if appropriate to reduce the rate.”
Federal Reserve Governor Elizabeth A. Duke said in a statement that the new rules will lead to fees being assessed “in a way that is fairer and generally less costly for consumers.”
U.S. Rep. Carolyn Maloney, D-N.Y., the legislation’s sponsor praised the Fed’s move. “The Federal Reserve’s guidelines issued today are great news for consumers,” she said in a statement. “By capping any late fees to a maximum of $25, charged only once per violation, by banning inactivity fees, and by requiring re-evaluation of any rate hikes since January 2009, the Fed has achieved the final set of accountability and fairness steps called for in my bill.”
But not everyone is pleased with the new rules. The Center for Responsible Lending noted that the rules have some loopholes. For example, the $25 maximum can be exceeded if the credit card company can prove that it incurred more in costs to collect the payments.
Kathleen Day, a spokeswoman for the group, described the Fed’s action as “tepid.” “It is better than the status quo, but it isn’t what it could have been,” she said.
In a statement, Center President Michael D. Calhoun said the $25 limit is still too high and warned that even as the Fed requires credit card companies to reexamine interest rates that they’ve charged in the past, it also allows them to review and re-impose higher rates every six months.
The American Banking Association, which represents credit card companies, called the changes the “most sweeping overhaul of the industry since the invention of credit cards.”
“Most customers handle their credit cards responsibly, but bad behavior by a relative few, increases costs for all customers,” Kenneth J. Clayton, the group’s general counsel said in a statement. “The rules adopted by the Fed today address so-called ‘penalty fees,’ and seek to ‘make the penalty fit the crime,’ so that simple missteps result in minor penalties, while larger or repeated missteps can result in higher penalties.”
He said the rules will provide “greater protection, transparency and certainty” for credit card customers.
How the Credit CARD Act Will Affect Types of Credit Cards
How will the CARD act affect you? That depends in part on which type of credit card you’ve got in your wallet.
The combined impact of the economic downturn and the restrictions placed on credit card companies by the Credit CARD Act mean card issuers will be changing how they do business in ways that will affect every credit card
Bad Credit, Credit Cards
The CARD Act’s crackdown on extremely high fees will severely curtail the ability of issuers to offer so-called “fee harvesting” credit cards. Cards with hefty upfront fees and extremely low credit limits geared toward people with bad credit.
Balance Transfer Cards
For most consumers, being able to get a balance transfer card that offers a 0 percent, 1 percent or 2 percent interest rate on a transferred balance for much more than a year will become a thing of the past.
Teaser rates aren’t going to go away, but they’re probably not going to be as lucrative for the consumer as they were.
Business Cards
None of the provisions in the CARD Act apply to business credit cards. So far, small business cards are unaffected by the Act.
Debit Cards
Debit cards have never been all that profitable for banks, but new rules on overdraft charges mean banks will make even less. Starting in July 2010, new customers will not be allowed to overdraft using their debit cards unless they opt in ahead of time. Overdraft fee income had been a big profit center for banks.
To help make up the lost revenue, many banks may start charging annual fees for debit cards, probably in the $20 to $30 range.
Gas Cards
The CARD Act will indirectly influence the most popular type of gas card, the co-branded card, which typically is issued by a bank in partnership with an oil company, and offers perks and rewards to the customer.
Low Interest Cards
In the near future, interest rates on fixed rate low interest cards, as well as cards with low introductory rates, likely will go up several points, and issuers will be even more selective about who gets these cards.
Prepaid and Gift Cards
The Credit CARD Act imposes pre-purchase disclosure of certain fees, such as inactivity fees, associated with prepaid cards and mandates that the cards not expire before five years. The new rules for prepaid cards including gift certificates, reloadable prepaid cards and gift cards go into effect Aug. 22, 2010.
Reward Cards
Rewards card issuers already have started to move away from a mass-market mentality in which the goal is to create buzz around a rewards program and get as many people as possible to apply.
Student Cards
The days of the big credit card issuers setting up tables on college campuses and offering free pizza to entice students to sign up for easy credit are over. The CARD Act prohibits that type of marketing and requires anyone under 21 to prove a source of income or have a parent co-sign to get a card.
Source
Beware: Loopholes in the Credit CARD Act you need to know about
The credit card reform bill, otherwise known as the Credit CARD Act, goes into effect next month (on February 22, to be exact). While there’s a lot to be grateful for in this legislation, there are also some omissions, loopholes and flat-out giveaways to the credit card companies of which consumers need to be aware.
WalletPop talked to Lauren Bowne, an attorney with Consumers Union, the nonprofit consumer-advocacy group (and publishers of Consumer Reports). Bowne has been tracking this act as officials get ready for its launch, and she offered WalletPop readers a list of loopholes to watch out for when you use your credit cards after the CARD Act kicks in.
The bad news
There is no cap on the interest rate card companies are allowed to charge. While companies can’t hike your rates on existing balances unless you’re 60 days late with a payment, they can raise rates on future purchases any time and for any (or no) reason, warns Bowne. They do have to tell you this, but they’ll probably send it in an envelope that looks like junk mail in the hopes you’ll throw it out.
Lesson? Read everything your credit card company sends you! Issuers have to give you a 45-day warning, and a new rate can kick in as soon as two weeks after they send you that notice. If you don’t want to pay the new interest rate on future purchases, your only choice is to stop using the card (or pay your balance in full every month).
While the CARD Act has limits on the severity of penalty fees you can be charged, there’s no rule against card companies making up as many new fees as they can conjure and charging whatever they like for them. MSNBC’s Red Tape Chronicles tackled this topic in a recent post. Some issuers have already started adding annual fees to cards that didn’t used to require them, and are also adding things like fees for paper statements. Some are even adding “inactivity fees” if you don’t use your card for a long period.
Expect to see more of this in the future, experts say. (Yet another reason to read all the mail your credit card company sends you, so you can opt out or, at worst, cancel the card if you don’t want to pay the new fees.)
The Red Tape Chronicles also highlighted another area of fee creep: Card companies are allowed to — so it’s safe to assume they will — raise existing fees. The amount you pay for anything from balance transfers to cash advances has already been creeping up. Be prepared to see it rise further in the future. Again — and we can’t say this enough — read your mail. If a fee for, say, balance transfers pops up, be sure not to transfer a balance or even stop using that card.
We told you card companies can’t hike your rates on existing balances. That’s true as long as you have a fixed-rate card instead of a variable rate card, says Bowne, and that is a loophole big enough to drive an armored truck through. This is the reason why card issuers have been switching people to variable-rate cards as fast as they can print out and mail the notices.
Right now, most variable rates are in line with or maybe even a little lower than the fixed rates users were paying before. This is because the “variable” part of the variable rate, called the prime rate, is at a historic low because the government is keeping interest rates very low. Translation: When the Federal Reserve raises interest rates — which most experts think will happen in about a year, give or take — to prevent inflation, your interest rate’s going to rise, too. Our best advice? Pay those balances down as soon as possible to avoid paying more when interest rates go up.
While issuers have to give you 45 days’ notice before making most kinds of changes to your account (such as raising rates), there are two important exceptions, Bowne says: Your card company can lower your credit limit or close your card without giving you any warning at all. So what’s a consumer to do?
Your best move in this case would be to call the issuer, ask why they made the change and see if they’ll reverse it. If not, it’s a good idea to pay down that balance as fast as possible, since a lowered limit can impact your credit score by skewing your utilization ratio. Bowne says issuers tend to close cards that are inactive or aren’t used very often. However, if you find yourself with a closed card that has a balance on it, it’s in your best interest to pay that off as fast as possible, since the issuer will likely report that balance as the credit limit, making it look as if you’ve maxed out your spending.
New Requirements for Credit Card Disclosures
The first phase of the Credit Card Accountability Responsibility and Disclosure Act (aka Credit Card Act) goes into effect February 22, 2010. The new law will require certain disclosures to all credit card consumers. The following disclosures must be present on every monthly statement sent to credit card borrowers:
1.The total number of months it will take for the consumer to pay off their credit card if they only make the minimum payment. This disclosure is very important because many debtors are under the false belief that paying only the minimum payment on their credit card will pay off the card in a few years. That is far from the truth. Depending on the balance of the credit card it could take 10 years or more to pay off a credit card paying only the minimum payment.
2.The total cost of the credit card loan. This cost will include the principal and interest if the consumer only makes the minimum payment as noted above. This disclosure is necessary to let people know that they will often pay twice or even three or four times for an item they charge to their credit card and repay over the years.
3.The payment amount the borrower needs to make if they want to pay off their credit card loan in 36 months. This disclosure will definitely help millions of Americans come to terms with their credit card debt. When debtors begin to realize that they need to pay $1,000 per month over the course of three years to pay off their maxed out credit cards they may seriously consider bankruptcy if they don’t have the income.
Bank Of America Credit Card Changes: Things To Watch Out For
If you own a Bank of America credit card, then you are likely aware of the fact that the bank has changed (and is continuing to change) its credit card policies due to the passage of Congress’s Accountability, Responsibility, and Disclosure (CARD) Act of 2009, which takes effect in February 2010.
It would be in your best interests as a customer/cardholder (or a potential customer) to know what exactly they things are being changed, because it may have an effect upon your financial situation. The purpose of this blog post is to try and bring some of these changes to your attention, and to provide you with access to the documents being used to do so.
Highlights/Major Changes:
1) Your rate for existing balances will no longer be raised for being a few days late with your payment -but you will still be charged a late payment fee. This change affects the “Default Pricing” section of your credit card agreement.
2) Beginning on February 13, 2010, your APR’s on existing balances can only be raised if you do not make your minimum monthly payment within 60 days of the payment due date. However, the APR on future accounts and transactions can (and probably will) be raised if you fail to make the payment within 60 days. The bank also reserves the right to amend your agreement in such a situation. However, in order to do so, Bank of America has to provide you with at least 45 days of prior notice.
3) Bank of America will not give you a charged fee for going over your credit limit (although such transactions would still be declined). Doing so can negatively affect your account balance if your account is currently at a penalty rate, leading to a decrease in your credit score.
4) This one is perhaps the most important one – Any amounts that you pay over the minimum payment required will now be used to pay down balances with the highest APR. In other words, if you have a credit card account with two balances and you overpay on one, then the amount that you go over will be used to pay off the account with the higher APR. This is a tricky one that you need to keep your eye on.
5) Payment dates will always fall on the same date each month, and will be at least 25 days from the closing date printed on your account.
Helpful Documents:
Reading the following documents will give you a firsthand look at the changes being made, what exactly is being changed, and why. You can also use them to help reach your own conclusions concerning your personal financial situation.
For a copy of what the February legislation should look like, you can find an online copy if you click on the following link: Credit Card Program
For a copy of Bank of America’s letter explaining these changes, you can look at a sample provided by them. You can find it by clicking on the following link: Sample Customer
For a copy of the Accountability, Responsibility, and Disclosure (CARD) Act of 2009, click on this link: Congressional Act. And if you want to know more about what the Act will affect, you can find out by clicking on the next link: Congressional Act Explained.
The Credit CARD Act of 2009 becomes Law
The President signed into law H.R. 627 (“The Credit CARD Act of 2009”) as Public Law 111-024. The law provides, in part: “Section 201(1) IN GENERAL.-Not later than 6 months after the date of enactment of this Act, the Board shall issue guidelines, by rule, in consultation with the Secretary of the Treasury, for the establishment and maintenance by creditors of a tollfree telephone number for purposes of providing information about accessing credit counseling and debt management services, as required under section 127(b)(11)(B)(iv) of the Truth in Lending Act, as added by this section.
(2) APPROVED AGENCIES.-Guidelines issued under this subsection shall ensure that referrals provided by the toll-free number referred to in paragraph (1) include only those nonprofit budget and credit counseling agencies approved by a United States bankruptcy trustee pursuant to section 111(a) of title 11, United States Code.”
Key Elements: Credit Card Act of 2009
Bans Unfair Rate Increases: Financial institutions will no longer raise rates unfairly, and consumers will have confidence that the interest rates on their existing balances will not be hiked.
Bans Retroactive Rate Increases: Bans rate increases on existing balances due to “any time, any reason” or “universal default” and severely restricts retroactive rate increases due to late payment.
First Year Protection: Contract terms must be clearly spelled out and stable for the entirety of the first year. Firms may continue to offer promotional rates with new accounts or during the life of an account, but these rates must be clearly disclosed and last at least 6 months.
Bans Unfair Fee Traps:
Ends Late Fee Traps: Institutions will have to give card holders a reasonable time to pay the monthly bill – at least 21 calendar days from time of mailing. The act also ends late fee traps such as weekend deadlines, due dates that change each month, and deadlines that fall in the middle of the day.
Enforces Fair Interest Calculation: Credit card companies will be required to apply excess payments to the highest interest balance first, as consumers expect them to do. The act also ends the confusing and unfair practice by which issuers use the balance in a previous month to calculate interest charges on the current month, so called “double-cycle” billing.
Requires Opt-In to Over-Limit Fees: Consumers will find it easier to avoid over-limit fees because institutions will have to obtain a consumer’s permission to process transactions that would place the account over the limit.
Restrains Unfair Sub-Prime Fees: Fees on subprime, low-limit credit cards will be substantially restricted.
Limits Fees on Gift and Stored Value Cards: The act enhances disclosure on fees for gift and stored value cards and restricts inactivity fees unless the card has been inactive for at least 12 months.
Plain Sight /Plain Language Disclosures: Credit card contract terms will be disclosed in language that consumers can see and understand so they can avoid unnecessary costs and manage their finances.
Plain Language in Plain Sight: Creditors will give consumers clear disclosures of account terms before consumers open an account, and clear statements of the activity on consumers’ accounts afterwards. For example, pre-opening disclosures will highlight fees consumers may be charged and periodic statements will conspicuously display fees they have paid in the current month and the year to date as well as the reasons for those fees. These disclosures will help consumers make informed choices about using the right financial products and managing their own financial needs. Model disclosures will be updated regularly based on reviews of the market, empirical research, and testing with consumers to ensure that disclosures remain clear, useful, and relevant.
Real Information about the Financial Consequences of Decisions: Issuers will be required to show the consequences to consumers of their credit decisions.
Issuers will need to display on periodic statements how long it would take to pay off the existing balance – and the total interest cost – if the consumer paid only the minimum due.
Issuers will also have to display the payment amount and total interest cost to pay off the existing balance in 36 months.
More Key Elements
Accountability: The act will help ensure accountability from both credit card issuers and regulators who are responsible for preventing unfair practices and enforcing protections.
Public posting of credit card contracts: Today credit card contracts are usually available only in hard copy and not in plain language. Now issuers will be required to make contracts available on the Internet in a usable format. Regulators and consumer advocates will be better able to monitor changes in credit card terms and evaluate whether current disclosures and protections are adequate.
Holds regulators accountable to enforce the law: Regulators will be required to report annually to the Congress on their enforcement of credit card protections
Holds regulators accountable to keep protections current:
Regulators will be required to request public input on trends in the credit card market and potential consumer protection issues on a biennial basis to determine what new regulations or disclosures might be needed.
Regulators will be required either to update the applicable rules, or to publish findings if they deem further regulation unnecessary.
Increases penalties: Card issuers that violate these new restrictions will face significantly higher penalties than under current law, which should make violations less likely in the first place.
Cleans Up Credit Card Practices For Young People at Universities. The act contains new protections for college students and young adults, including a requirement that card issuers and universities disclose agreements with respect to the marketing or distribution of credit cards to students.
DEBTHELPER.COM 