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August 2010 - Posts
by Bill Hardekopf
The CARD Act is now in place and providing important protections for credit cardholders. Consumers are saving millions of dollars through some of these provisions, such as the elimination of over the limit fees and the restrictions on interest rate hikes during the first year of an account.
Credit card companies have had to find ways to make up for this lost revenue. Many issuers have increased balance transfer fees, cash advance rates and foreign transaction fees. There are now more cards with annual fees and most every fixed rate card has been changed to a variable rate card. But the change that affects the most consumers is the steady rise in interest rates.
Based on the 1000+ cards found in the LowCards.com Complete Credit Card Index, the average APR the week before the CARD Act was signed into law (May 2009) was 11.64%. As of last week, that average interest rate had increased over two percentage points to 13.70%.
A new study from Synovate confirms that issuers have increased rates on existing cards. According to their statistics, the average APR in the second quarter of 2010 increased to 14.7% from 13.1% a year ago. Synovate reports the average interest rate is at the highest level since 2001 despite the prime rate being at an historic low. There is now an 11.45 percentage point gap between the two rates, the largest in at least 22 years.
Higher interest payments are hard on consumers, but it will get even worse if the Federal Reserve starts to make changes that increase the prime rate. Nearly every credit card now has a variable rate and many of those cards have the prime rate as their base. Once the prime rate rises from its historic low, consumers will see a corresponding increase in the APR of those variable rate credit cards.
There seems to be some confusion among consumers on how the CARD Act can affect your credit card interest rates. Here is some information:
- The CARD Act does not cap interest rates. Issuers can still increase your interest rates. However, competition provides its own regulatory-type influence to help anchor down rates and keep them from soaring.
- Issuers have to give a 45-day notice for rate increases unless it is a variable rate card and the card's index (usually the prime rate or LIBOR rate) increases.
- If your credit card company does raise your interest rate, the new rate will apply only to new charges you make. If you have a balance, your old interest rate will apply to that balance.
- If your credit card's rate has been increased since January 1, 2009, the new rules require issuers to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate. Since the beginning of last year, millions of cardholders have seen their interest rates increase. Some issuers raised rates to as high as 29.99% for cardholders with good credit. Issuers must also perform a review every six months on accounts that receive a rate increase. The review should determine if changes in key factors (such as cardholder credit risk, payment history, and market conditions) give reasons to reduce the rate.
- If your payment is 60 days past due, the issuer can raise your APR to the penalty rate (30% for some cards). If you immediately make at least your minimum payment on-time for six straight months, then your issuer needs to reevaluate your account. However, if you make another late payment during that six month period, the higher rate could apply indefinitely to new transactions.
- Issuers can still apply your minimum payment to the balance with the lowest interest rate. Due to the CARD Act provisions that went into effect this past February, the remainder of the payment has to be applied to the balance with the highest interest rate.
- Issuers can't raise your rate during the first year of an account unless your payment is more than 60 days late, or unless it is a variable rate card and the card's index (usually the prime rate or LIBOR rate) increases.
Here are some tips for consumers regarding their card's interest rates:
- Shop around for a card with a low rate. Direct mail offers are increasing again. Don't necessarily apply for the first offer you receive. Compare your offer with others found on the Internet.
- Consider transferring your balance to a card with an 0% intro rate for twelve months and a lower ongoing rate. This could be beneficial if the amount of interest you save significantly outweighs the upfront balance transfer fee you will be charged. You need to do the mathematical calculations to determine if this is a financially prudent move for you.
- Pay down as much you can on the balance with the highest rate. Any amount above the minimum payment will be applied to the highest rate.
Paying off your credit card debt is the only way to be unaffected by rate increases. Higher interest rates drain away money that could be used to pay off your debt, extending the time it takes to eliminate the balance. If you have a few extra dollars, make smaller payments more often. Micropayments save on the interest you pay and will help you eliminate your debt more quickly.
Bill Hardekopf is CEO of LowCards.com, a site that 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.
I noticed several stories dealing with back-to-school shopping, but not how to ensure that the money you spent is not wasted over the first couple of weeks of school.
This is especially important for grade-school age boys. After washing the new jeans and pants, add iron-on patches to the inside of the knees. You may need to compare to an old pair to see where the holes and wear spots form. Usually one patch can be cut in half to patch two knees. Colour doesn’t matter.
Get Out the Sharpie
Write your child’s name on anything that he can remove at school; include your phone number if you don’t have security concerns (I use my cell number). Do this now before you forget. The transitional seasons are terrible for losing jackets; it’s chilly in the morning, but warm at lunch and the jacket gets left on the soccer field.
Beat Up Summer Shoes – Fine for Indoors?
The runners your children have been wearing all summer may be too beat up for the first day of school, but okay for strictly indoor wear when they start wearing snow boots. A run through the washer, some hot glue and new laces may give them a new lease on life. Of course, if they are too small or too ratty, into the bin they go.
Be Frugal with School Supplies
Even if you bought the giant pack of coloured pencils or markers, do they really need 64 colours? Dole out about 12; keep the rest for later in the school year (maybe 4 new ones per month). Otherwise, the caps get left off or they get broken or "borrowed." There you are on October 1 buying new markers.
Similarly, with regular pencils or pens, put 2 or 3 into a pencil case for the first day of school. 10 pencils last as long as 3 when all given at the same time. 100 sheets of loose-leaf paper on the first day of school is just a temptation to have a paper-airplane contest at recess.
Outgrown Sweats – Fine for PJs or Long Johns
Sweats that are too short in the arms or legs may work just fine if kept under cover. Why spend again for winter layers that no one sees? And sweats are warmer than most of the PJs you can buy.
Everyone is smart about something! That's why we have The Dollar Stretcher Guest Blog. If you have a story that could help save time or money, please send it to MyStory@Stretcher.com
by Bill Hardekopf
Talking with your son or daughter about budgets, credit cards, and the dangers of debt should be part of the preparation in sending them off into a life on their own.
Credit cards represent freedom and independence for college students, especially that first year when living away from home is new and exciting. The more they understand about the correct use of credit and its consequences, the more responsibly they can handle it. Money management is not a skill they should learn from their friends or by making mistakes.
What Has Changed
As of February 22, the CARD Act began limiting credit options for students under the age of 21. While the regulations protect students from aggressive credit card marketing on campus, the law also restricts credit availability for students. If you are under 21 and want to open a credit card account, you will need to show you are financially able to make payments, or you will need a co-signer.
There are many benefits but also some potentially harmful side effects to these regulations. Parents can have more control and more influence over their students' finances. These strict application requirements will reduce the number of college students with credit cards and credit card debt. But the law also eliminates the opportunity for responsible students to begin building a good credit score at a young age.
Before the CARD Act, it was very easy for college students to get a credit card. Issuers wanted to build brand loyalty early, and if students got into debt, the parents typically bailed them out. This also gave responsible students a chance to build a good credit score while they were in college. Today, if college students can't get a credit card while in school, it limits their ability to start building their credit score. While the credit score may not matter in college, it will matter immediately after graduation. Lenders, employers, and even apartment managers use credit scores to help make judgments about the applicant. A low or non-existent credit score could mean higher rates for loans or even a missed job opportunity.
Payment Options for Students Under 21
Credit cards. Students under the age of 21 can get a credit card if he or she has a co-signer or has proof of the ability to make payments.
Co-signing should only be an option if your student can use a credit card responsibly. If the student makes a late payment, it also shows up on the co-signer's credit report. If the student can't pay off the debt, the co-signer is responsible for all the debt.
As a co-signer, you will also receive a monthly statement. Credit limits can't be increased without your approval. It is advisable to "opt-out" for over-the-limit coverage; then any charge that puts your account over the limit will not be accepted. This avoids costly over-the-limit fees.
Sign up for online account alerts. You can receive a text or email when a payment is due, and if there is irregular activity in the account.
Students can also get a credit card if they have a job and can afford the payments. Credit card issuers give very little guidance in their terms and conditions about minimum income requirements or how they verify income. The definition of income also varies by issuer. Some include stipends, grants, and scholarships as income.
Debit Cards. These cards are tied to checking accounts. Opt-out of overdraft coverage to avoid overdraft fees. Online account alerts can notify you when the account falls below a specified balance. Debit cards do not help build credit scores and there may not be a sufficient balance during an emergency.
Prepaid Cards. These can be purchased anywhere, even grocery stores. However, they also have fees, so read the fine print before you purchase.
Secured Cards. These cards have more fees and the interest rate is high, so pay it off each month. But secured cards are relatively easy for anyone to get because it is secured by a prepaid deposit. Make sure that the card reports to a credit agency. Secured cards from Orchard Bank and Public Savings Bank both report to credit agencies.
Credit Card Stats for College Students
According to a Sallie Mae study, 84% of college students had at least one credit card in 2009, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173, which represents a 46% increase over the 2004 figure of $2,169. The average number of cards per student is 4.6. Only 17% pay off their entire balance each month and 22% make just the minimum payment.
Even though these numbers should drop because of the CARD Act, they still show the importance of talking with your students before they get into debt. The CARD Act does not remove this responsibility from parents.
Talk With Your Student About Credit Card Debt
Parents should teach their student how to budget, spend wisely, and use credit. Start with your own credit card bill and use it to explain interest rates, grace periods, and minimum payment. Explain the high rates of cash advances and how to avoid these loans. Show them examples of how much they will pay in interest by only making the minimum payments. Tell them about the fees and penalty rates. Use online payment with reminders to help avoid late payment. Teach them to monitor their credit limit and if you must carry a balance, keep it under 30% of your credit limit.
Make it clear that credit cards are loans that have to be repaid in full each month. If you can't afford to pay for the item with cash, then you can't afford the item. Tell them what is a good time to use a credit card for payment (textbooks and emergencies) and what isn't (clothing, food, entertainment).
Teach them that credit scores will be nearly as important as test scores. Show them a copy of your own credit report and use that as an example of building a good (or bad) payment history with credit cards. They can even review their credit report for free each year to check their progress at annualcreditreport.com.
Give advise on how to avoid credit card theft and what to do if your card or identity is stolen. Don't let anyone else use your card.
Bill Hardekopf is CEO of LowCards.com. 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 over 1000 credit cards offered in this country.
courtesy of The National Foundation for Credit Counseling
Silver Spring, MD - Recent legislation passed by Congress has changed how financial institutions will authorize and pay overdrafts associated with checking accounts. Although most overdrafts from paper checks and automatic payments will continue to be covered (for a fee), consumers must now opt in to authorize this service for ATM and debit card transactions made at a point of sale.
The National Foundation for Credit Counseling (NFCC) July online poll revealed that 26 percent of the 2,089 respondents intend to opt in to overdraft protection in spite of there being a fee charged for the service.
It is disturbing that this many people live so close to the financial edge. Anticipating that they will overdraw their account, they are willing to exacerbate the problem by paying a fee to have their purchases approved. "The real answer lies in examining the root problem and resolving it, as continued overdrafts can result in some significant financial damage," said Gail Cunningham, spokesperson for the NFCC.
As of August 15, 2010, both existing and new customers of financial institutions must sign up for overdraft protection before the bank is allowed to charge the customer a fee for clearing the transaction. If consumers do not notify their bank or credit union, they will not be covered, thus no action is necessary by consumers who do not wish to opt in.
Industry studies show that the average overdraft fee charged by a financial institution is $27, with approximately half of the more than $37 billion generated in fees in 2009 coming from debit card and ATM overdrafts. Banks are anxious to retain these fees, with many having launched significant campaigns encouraging consumers to opt in.
The NFCC suggests that consumers consider the following instead of opting in to the potentially costly overdraft protection:
- Keep your check register current, recording all withdrawalss and balancing often. Be sure to notate all ATM and debit card transactions along with any paper checks written on your account.
- Link your checking account to your savings account. In case of an overdraft, the money will be automatically taken from your savings with little or no fee attached.
- Pad your checking account by carrying a balance that you wiill not likely exceed. Most people spend a similar amount each month. If possible, keep an extra $100 in your checking account to cover unplanned expenses.
- Utilize technology. If your financial institution offers it, sign up for email or text alerts that notify you when your balance is low.
- Reach out to your creditors. If payment due dates do not coincide with paydays, contact your creditor and request a due date change. You may have to pay a little extra interest to cover the gap for the first month, but over time this step should help to organize your finances.
- Get help managing your finances. Reach out to an NFCC Member Agency by going online to DebtAdvice.org, or to be automatically connected to the Agency closest to you, call (800) 388-2227. For assistance in Spanish, dial (800) 682-9832.
"Even though there may be a small embarrassment if a transaction is denied, the consumer should evaluate this inconvenience against the potential savings and value of solving the underlying financial issue that resulted in the overdraft. Know that if you have already opted in, you can always cancel the program," continued Cunningham.
The actual July survey question and results are as follows:
Q: Consumers must now opt in to have their debit card purchases approved if the charge exceeds the balance in their account. Will you
A. Opt in to ensure that purchases will be approved even though a fee will be added on = 26%
B. Opt out and risk being embarrassed at checkout, but save the fee = 74%
Note: The NFCC's July Financial Literacy Opinion Index was conducted via the homepage of the NFCC Web site (DebtAdvice.org) from July 1-31, 2010 and answered by 2,089 individuals.
The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation's largest and longest serving national nonprofit credit counseling organization. The NFCC's mission is to promote the national agenda for financially responsible behavior and build capacity for its Members to deliver the highest quality financial education and counseling services. NFCC Members annually help four million consumers through close to 830 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC Member, call (800) 388-2227, (en Espanol (800) 682-9832) or visit www.nfcc.org. Visit us on Facebook at http://www.facebook.com/NFCCDebtAdvice and on Twitter at http://twitter.com/NFCCDebtAdvice.
courtesy of A New Horizon Credit Counseling Services
Fort Lauderdale, Fla. Consumers are increasingly using debit cards to make purchases, and criminals have taken notice. Credit card scammers have entered the realm of the debit card, and incidences of fraud are becoming more common place. A New Horizon Credit Counseling, a nonprofit credit counseling firm, has been advising its clients on ways to avoid becoming ensnared.
Steven Stark, Chief Operating Officer of A New Horizon, comments that “The most notable variation of this fraud that we’ve seen has been what’s known as skimming.” Skimming, a form of ATM fraud, allows a criminal to steal a consumer’s card number and PIN code, everything needed to effectively empty the victim’s bank account. The criminal accomplishes this virtual heist by attaching a small front piece to the ATM’s card reader, which electronically records the card number of any unsuspecting customer. The PIN code is stolen via a small, hidden camera placed by the scammer.
With nearly 2 million ATM machines in operation worldwide, criminals have a wide array of potential targets. The losses due to debit card fraud are expected to continue rising as the crimes, and their perpetrators, become more sophisticated. According to the Nilson Report, losses due to fraud involving credit and debit cards rose 7 percent between 2008 and 2009. That number is expected to total $10 billion by 2015.
According to Stark, there are steps consumers can take to prevent debit card fraud. “All consumers should integrate fraud deterrence practices into their banking habits,” says Stark. He recommends using only ATMs physically located inside banks, where it is much more difficult for a criminal to install the skimming hardware. Additionally, consumers should cover the keypad with their other hand when entering their PIN, to prevent any prying eyes from recording the code. Experts also stress that consumers should check their statements and balances often and thoroughly.
Here are some other tips to follow:
- Check your bank statements immediately. Make sure all payments are yours.
- Periodically check your account balance and transactions, by utilizing online banking, by telephone, or by printing interim statements at the ATM.
- Contact your bank immediately if your card is lost, stolen or subject to fraudulent use.
- Keep a record of card numbers, PINs, expiration dates and 1-800 numbers for banks so you can contact the issuing bank easily in cases of theft.
- Memorize your PIN number. Do not use your birth date, address, phone number or social security number. Never store your PIN with your card, and do not make it available to others.
- Keep your receipts. You'll need them to check your statement. If they have your account number on them, tear up or shred receipts before throwing them away.
- Mark through any blank spaces on debit slips, including the tip line at restaurants, so the total amount cannot be changed.
- Know your limits. Many issuers limit daily purchases and withdrawals for your protection.
- Do not use an ATM if it looks suspicious, it could be a skimming device.
- Be wary of those trying to help you, especially when an ATM "eats" your card, they may be trying to steal your card number and PIN.
- Do not give your PIN number to anyone over the phone. Often thieves steal the cards and then call the victim for their PIN, sometimes claiming to be law enforcement or the issuing bank.
A New Horizon Credit Counseling has free educational material available for consumers wishing to learn more about debit card fraud and how to combat it. Those interested in obtaining this material should contact A New Horizon.
ANew Horizon Credit Counseling Services is a nonprofit debt consolidation organization that has been helping consumers since 1978. For more information about their programs, contact 1-800-556-1548. They can also be found on the web at ANewHorizon.org or reached via email here.
by Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM
Here is a little primer for all the politicians and economists who are having a tough time figuring out how to get Americans working again.
The one word that best sums up the difference between being an employee and an owner of a small business is "risk." If you own the business, you are always last in line to receive your paycheck. If the business fails, of course, employees will lose their jobs, but that is the extent of their risk. Owners, however, stand to lose not only their jobs but everything they own, including their homes and retirement savings.
Why do owners put themselves at such risk? In general, it’s to create better lives for themselves and their families and become financially independent. One universal law is that the more risk a person takes, the more opportunity there is for gain or loss. This especially applies to opening one's own business. Out of every four businesses started, only one survives for more than five years.
Small business owners must be "jacks of all trades." They need to possess the technical knowledge of their profession or industry, have the skills to manage budgets and personnel, and be entrepreneurs. Very few are skilled at all three of these necessary components of success.
One of the financial skills an owner must possess is the ability to keep expenses below revenue. Generating a profit is necessary to pay down debt, keep equipment up to date, and expand the business. Only if a business has profits can it expand and hire new employees.
So the bedrock of creating jobs is sustainable business profits. Read that again, out loud if you’re sitting next to a politician. If businesses are not making profits that they can reasonably expect to sustain, they will not have the money or the confidence to expand and hire new employees.
Right now, many business owners are seeing profits decline or disappear. They aren’t feeling confident enough to risk hiring new employees. Why? Increased regulations and higher taxes. It’s really that simple.
Higher regulations reduce profits. For example, one of my small business clients generates about $50,000 a year in profits. She currently spends $1,500 a month complying with various regulations. Next year, new regulations could double that amount, adding another $1,500.
A new bill to raise S corporation taxes, already passed by the House, will increase her federal income taxes by $1,000 a month. In 2011, the sunset of the 2001 Bush tax cuts will cost her another $2,000 a month. That’s $3000 a month in new taxes and $1,500 in new regulatory costs, for a total of $4,500 a month, or $52,000 a year. This exceeds her entire profit.
She tells me she is currently understaffed and really could use a new employee that she would pay $50,000. However, she has no confidence her business will be profitable enough in the next few years to afford a new hire.
How can we get American working again? So far the government's answer is to make loans available and encourage businesses to borrow and spend. That is no help to a successful business. Most small businesses don’t need loans. They need sustainable profits.
We’ve got to cut, or at the very least not raise, taxes. In turn, we must cut, and I mean really cut, government spending. This means cutting Social Security, Medicare, education, and other political sacred cows. We simply can’t afford them at their current benefit levels. Finally, we must get rid of regulations that do nothing to protect the public and instead add unnecessary barriers and costs to creating jobs. It’s really that simple.
Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!