November 2010 - Posts - Dollar Stretcher Guest Bloggers
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November 2010 - Posts

  • Credit Card Debt and Number of Accounts Continue to Fall

    by Bill Hardekopf

    A new report from the Federal Reserve of New York shows that the number of open credit card accounts continued to decline during the third quarter of this year. The number of open credit card accounts has dropped 24% from its peak in the second quarter of 2008.

    The Quarterly Report on Debt and Credit shows that approximately 217 million accounts were closed during the four quarters that ended September 30. Meanwhile, only 158 million new accounts were opened during this same time.

    In addition, the Federal Reserve's new monthly report on consumer borrowing shows that revolving credit (the majority of which is credit card debt) dropped for a record 25th consecutive month, falling by an annual rate of $8.3 billion, or 12.1%.

    While these numbers appear ominous for the credit card industry, there are some positive signs for issuers.

    • The decline in open credit card accounts was much smaller during the third quarter of the year. The total number of open credit card accounts dropped from 381 million to 378 million.

    • The number of new credit account inquiries increased for the second quarter in a row, indicating that consumer demand is increasing for credit cards and more people are submitting credit card applications. According to the New York Times, there were 160.8 million inquiries in the six months through the end of September, up from 149.7 million in the six months through June 30. Even with the improvement, this is the lowest number of credit inquiries for any 12-month period since the Fed began counting the numbers in 2000.

    • Total household delinquency rates may also show signs of recovery. Total household delinquency rates declined for the second consecutive quarter. As of September 30, 11.1% of outstanding debt was in some stage of delinquency. This is down from 11.4% on June 30, and 11.6% a year ago. Approximately $1.3 trillion of consumer debt is currently delinquent, down 8.2% from a year ago. About $928 billion is seriously delinquent (at least 90 days late or "severely derogatory"), down 4.6% from a year ago.
    Over the past two years, credit card issuers and cardholders have both aggressively reduced credit card debt. Issuers have lowered limits and closed accounts, while cardholders have reduced their usage, paid down their balances or defaulted on the account. These changes have restored a bit of stability to credit card lending. It remains to be seen if this stability leads to wise growth in credit card borrowing and lending.

    Link to the Federal Reserve's Quarterly Report on Debt and Credit here

    Link to the Federal Reserve's Monthly Consumer Credit Report here 

    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. It also gives an unbiased ranking and review for each card.
  • Don’t Break the Bank this Holiday Season

    courtesy of A New Horizon Credit Counseling

    With fall well underway and the winter holidays just around the corner, many people begin to think about that traditional yearly task.  No, we’re not talking about adjusting your clock for the end of daylight savings time.  Holiday shopping time has arrived  but that doesn’t mean you need to take out a second mortgage just to spread the holiday cheer.

    This holiday season make it a point to plan your purchases well in advance.  Most consumers who rack up the holiday debt do so because they failed to plan ahead.  Hurried, last minute shopping will come back to bite you when you get your credit card bill.  Try incorporating these tips to give your wallet a holiday gift:

    1. Set a budget and stick to it. Sometime early in November compile a list of whom you plan on giving presents.  Set an overall budget, and then divide that budget between the people on your list.  For instance, you might want to spend 20% of your budget on your spouse, but only use 5% on distant Uncle Joe.

    2. Look for online deals. If you start early, you can shop around and find the best price. Look for websites that price shop for you. Several prominent websites will compare prices for you. Some of the more prominent sites include:
      • Google.com/products
      • Pricegrabber.com
      • Nextag.com

    3. Research internet coupons. Several websites provide coupons that can be used during checkout at popular online retail sites.  RetailMeNot.com is a good place to look.

    4. Be aware of “sale adjustments.” Keep your receipts.  If you purchase an item at full price and it goes on sale the following week, bring your receipt to the store and ask for an adjustment to the sale price.  Retail stores will often issue you a partial refund to effectively give you the sale price.

    5. Look for price-matching policies. Many retail stores will match the prices offered by their competitors.

    6. Consider layaway. Layaway plans offered by retailers can be a good alternative to purchasing with credit. Layaway allows you to purchase an item in installments. Typically, however, the store will hold the item, or “lay it away”, until your last payment. Make sure to begin the process early, though, so you have the item in time for the holidays!

    7. Check out online auctions. eBay and similar auction sites can provide great deals to watchful and patient consumers.  If you buy through an auction site, though, make sure to purchase the item at least a couple weeks before the holidays.  Some sellers may take longer to ship items than others.

    The Friday following Thanksgiving, also known as Black Friday, is traditionally the most popular shopping day of the year.  Black Friday can be a great opportunity to buy at a savings, but be aware of some pitfalls.

    1. Stick to your budget. This bears repeating, especially when Black Friday rolls around. A $500 item offered for $300 may be a great deal, and very tempting but don’t get charmed by the savings; if your budget for that person is $50, stick to it.

    2. Be aware of an item’s price history. It’s not unheard of for some retailers to slowly raise the prices of items in the weeks leading up to Thanksgiving, only to lower them to “sale” prices for Black Friday.  Make sure that “deal” is really a deal.

    3. The early bird gets the worm. Some stores open as early as 4:00 AM. Lines form the night before.  Any given store may only have a handful of the best sale items actually in stock.  Be early, or risk losing out on the sale.  Take your spouse or a friend and split up the shopping, each tackling a separate store.

    As a final note, remember to ship early if you’re planning on sending gifts through the mail. If you wait too long you may need to ship express or 2-day at a substantial cost.  Happy shopping!

    courtesy of A New Horizon Credit Counseling, a national, non-profit credit counseling organization dedicated to providing counseling services and financial education programs to individuals and families from all walks of life helping them with debt consolidation of their unsecured debts.

     

  • Holiday Shoppers - Beware of Store Credit Cards

    by Bill Hardekopf

    Store credit cards are rarely a good idea for consumers. They encourage impulse shopping and also charge some of the highest interest rates of any credit cards on the market.

    In a time where credit cards have become a favorite political target, New York Representative Anthony Weiner conducted a study on these store credit cards, and has now introduced legislation to increase point of purchase disclosure of interest rates, grace periods, and annual fees for store credit cards. Weiner hopes this legislation will give consumers the information they need to make informed decisions when signing up for new credit cards.

    Representative Weiner's recent study documents the exceedingly high interest rates on retail store credit cards, some with interest rates as high as 28.99%. By matter of comparison, the average credit card interest rate this week is 13.81% according the LowCards.com Weekly Credit Card Rate Report.

    The study surveyed credit cards at 35 major New York City stores and found the average rate was 23.83%, up from 21.71% in 2008. Radio Shack had the highest APR in the survey at 28.99%. Staples and Best Buy had cards with interest rates of 27.99%.

    These cards may not be a good deal for shoppers but stores offer them because they generate revenue. Many times, retailers lure consumers into signing up for these cards by offering a one-time discount on that day's purchases, immediately resulting in incremental revenue for the store.

    Once consumers have that card, they are likely to use the card again and again, leading to future revenue. In addition, retailers build a valuable list of consumers who have a track record of shopping at their store. This list provides a very efficient way to promote future offers and encourage online purchases.

    Mark Begor, president and chief executive of GE Capital Retail Finance and Restructuring Operations, said last week that the company plans to hold on to its $28 billion private-label credit card business. GE is one of the few issuers of retailer credit, providing consumer credit cards for retailers such as Gap, J.C. Penney, Lowe's, and Wal-Mart. Begor said providing credit cards for retailers is safer than the market for bank-issued cards. He said interest rates on the GE-operated cards are higher, but average balances are lower.

    According to the Wall Street Journal, this means that GE makes higher margins but has less risk when consumers default. Begor also estimates that 40% of purchases at the Gap and other such retailers are made using GE-operated credit cards.

    Store credit cards are a good deal only if you can take advantage of the discount offers and pay the balance off as soon as you get the bill. A 10% discount on purchases does not justify a 28% interest rate. We should note that there are some good store credit cards. Target's store card offers 5% off all purchase when you use the card. That's a good deal, but only if you completely pay off the balance each month.

    Some store cards also offer reward points with bonus points for purchases made at the store. This may sound like a good deal, but look closely at the fine print because what you earn on general purchases may be less. The average credit card offers 1 point per $1 spent. If the store card offers less than that, use a general purpose rewards card like Citi Platinum Select, Discover More, Chase Freedom, or Blue from American Express.

    Do not sign up for a credit card with each of your favorite stores. Too many open lines of credit can hurt your credit score. Limit your total number of credit cards to two or three. But most importantly, pay off the balance in full every month on each of your credit cards.

    You'll find a link to Rep. Weiner's report at http://weiner.house.gov/reports/11.14.2010StoreCCRates.pdf.

    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. It also gives an unbiased ranking and review for each card.

  • Credit Card Companies Paid $83 Million to Colleges & Alumni Groups in 2009

    by Bill Hardekopf

    The CARD Act requires credit card companies to disclose the details on how much they pay to colleges for the rights to market their cards to students and alumni. The Federal Reserve's first Report on College Credit Card Agreements was released Monday, showing that credit card issuers paid over $83 million to colleges and their related alumni organizations in 2009.

    Issuers paid out $83,462,712 to a total of 1,044 colleges and associations, an average of nearly $80,000 per institution. A total of 53,164 new college credit card accounts were opened under these agreements in 2009. The report details the payments to each school and can be found here.

    The University of Illinois Alumni Association received the highest payment of $3,272,657 in 2009. The Penn State Alumni Association received $2,835,000. Both of these payments came from Bank of America. The University of Notre Dame got $1,860,000 from Chase in 2009.

    While 17 issuers struck marketing deals with colleges, three credit card companies--Bank of America, Chase, and U.S. Bank--accounted for approximately 96 percent of all college credit card agreements submitted to the Board. Bank of America alone had marketing deals with 86 percent of the institutions.

    Bank of America submitted 906 college credit card agreements, more than fifteen times as many as any other card issuer. In 2009, it made payments totaling $61,968,307, an average of $68,398 per agreement. It opened 38,610 new accounts under its college affinity program.

    U.S. Bank submitted 60 agreements and spent a total of $2,502,744 ($41,712 average). It opened up 7,911 new accounts in 2009.

    Chase Bank submitted 36 agreements and paid out $13,892,863, a staggering average of $385,912 per agreement last year. It opened 529 new accounts under these agreements.

    Issuers are willing to pay these figures in return for valuable information from colleges and alumni associations, which could include phone numbers, e-mail addresses and physical addresses of members. The agreement usually comes with a right to market cards to them a specified number of times.

    Under the CARD Act, credit card issuers can no longer offer incentives or giveaways to encourage card applications on college campuses. It also prevents anyone younger than 21 from getting a credit card without proof of ability to pay or an adult co-signer.

    This first report underscores how important the college market and alumni associations are to credit card issuers. This is also very significant money for colleges at a time when these institutions are scrambling to raise money any way they can.

    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. It also gives an unbiased ranking and review for each card.

  • Deflation

    by Rick Kahler

    The Federal Reserve is back in the inflation business. The Fed, with the blessing of the U.S. Treasury and the Obama administration, recently announced they will again start inflating the money supply in hopes of staving off a sustained deflation. Why are they so fearful of deflation?

    Put simply, most government officials know how to deal with inflation. Actually, inflation is the political savior of an overspending country that finds itself deep in debt, as the U.S. is today. A country has four tools to retire its debt: raise taxes, cut spending, declare bankruptcy, or debase the currency through inflation.

    Of these options, bankruptcy is the most unpalatable. It would most likely mean the country goes through a gut-wrenching depression and is unable to borrow for the foreseeable future.

    Almost as unpalatable to politicians are spending cuts of any kind. Taking away something the electorate views as a "right" or an "entitlement" is akin to ending your political career.

    Raising taxes is somewhat more appealing, especially in countries where the majority of the voters don’t pay taxes or the increases apply primarily to those the electorate perceives as "the rich." The risk here is that if taxes increase too much it reduces the incentive to work and the whole economy crashes. This means gross tax revenues fall, which in the end actually increases the country's debt problem as the government must increase borrowing to keep from making any spending cuts.

    That leaves inflation. A slow, chronic inflation is the most politically palatable way of reducing the debt in a manner that is somewhat unnoticeable to the electorate.

    With inflation, the losers are the people and institutions that own the debt, because the currency shrinks in value. For example, say you loan the government money by buying a $1000 U.S. government bond that matures in ten years. At the time you buy it, you could buy a fully loaded laptop or a round trip ticket to London for $1000.

    Now, let’s say the U.S. inflates its currency at a 7% rate for the next ten years, which would be about twice the "normal" inflation rate of 3.3% for the past 80 years. At the end of that time, the bond matures and you get your $1000 back. You go to buy a laptop; they now sell for $2000. That trip to London costs $2000, too. Many people in this situation will think that the prices of laptops and airline tickets have gone up.

    Actually, in real dollars (which are dollars adjusted for inflation), the cost of these items hasn’t gone up a dime. It’s the value of the dollar that’s gone down, in this case, by 50% over ten years. The big winner here is the U.S. government, because its multi trillion-dollar debt has been chopped in half (again in real dollar terms) in ten short years. They accomplished this without raising taxes or cutting spending, which is intoxicatingly appealing to politicians.

    If the country slides into chronic deflation, similar to Japan which has seen consumer prices fall up to 2% a year for 15 years, government revenues will fall while the real value of its massive debt will grow, further stagnating future growth. It becomes a vicious cycle which politicians have few, if any tools, to combat.

    That is why gradual inflation is the preferred medicine. When it's done well, citizens become like the proverbial frog that is cooked slowly in a pan of water where the temperature is gradually increased, rather than being frozen to death by deflation. In the end, of course, neither outcome is good for the frog.

    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!

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