Category: General

Credit Card Users Feel the Pain as Credit Crunch Spreads

General

In what could be considered the latest fallout from the subprime mortgage crunch, the Financial Times reports that credit card companies were forced to write off 4.58% of payments as uncollectible during the first half of 2007, an increase of 30% over the amount during the same period of 2006. Citing data from Moody’s, late payments also rose, while the quarterly payment rate fell for the first time in more than four years.

Analysts at Moody’s suggest that as interest rates have crept up and the housing market has slowed down, consumers are less likely to pull equity out of their homes to pay off their credit card debt. However, Moody’s also told the F.T. that it is unclear if the people defaulting on credit card payments are the same people defaulting on subprime mortgages, in part because underwriting standards have generally been more strict for credit cards than mortgages.

There already has been some reaction among credit card issuers. The Wall Street Journal reported last week that USAA has tightened their underwriting standards and raised their score cutoffs slightly on their auto loans, credit cards and personal loans. USAA is also being less generous with its automatic credit line increases. According to the WSJ, lenders can afford to be more selective and to charge more for their services because more consumers — increasingly locked out of home-equity loans and lines of credit — are using their credit cards more. Recently, Bank of America, Capital One, and Discover have all raised rates and fees for some credit card customers.

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How Safe is Your Credit Card?

General

A new study was just released examining how well credit card issuers are protecting their customers from fraud. The study looked at the security practices from 25 of the largest issuers, particularly in the areas of prevention, detection and resolution. Overall, the results identified the top six safest issuers as:

  • 1. Bank of America (Visa Platinum)
  • 2. American Express (Blue from American Express)
  • 3. (2-way tie) Discover (Discover Platinum Card, now called the Discover More Card)
    First National Bank of Omaha (Platinum Edition Visa Card)
  • 5. Citibank (Citi Platinum Select)
  • 6. Navy Federal Credit Union (Platinum MasterCard)

You can read more details about the results of the study here.

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Sign a Petition Against Deceptive Credit Card Practices

General

Consumers Union is organizing a petition in the hopes that it will lead to meaningful credit card reform. Their list of targeted practices includes:

Universal default: Your interest rate can skyrocket if your credit score declines because of your behavior with other creditors even if you always pay your credit card on time and never miss a payment. Some card issuers will raise your rate if you inquire about a car loan or open a new credit card.

Change of terms: Credit card terms keep changing. Read the fine print and chances are you’ll find this disclosure: “We reserve the right to change the terms (including the APRs) at any time for any reason.” A fixed rate is fixed until the bank gives you at least 15 days notice that it isn’t. If you want to keep your account open, you’ll pay the higher new rate on your existing balance.

Teaser rates: That low rate you signed up for expires suddenly and you end up paying more. A temptingly low introductory rate can climb to 30 percent or more.

Minimum payment: If you pay the minimum payment every month, you’ll end up paying a lot more than what you charged and you could be on the hook for a very long time.

On time payment: Card issuers are systematically mailing statements closer to the due date, giving customers less turnaround time. You can be hit with a late fee even if the payment is mailed on time. The average fee for a late payment has more than doubled in the past decade.

Double cycle billing: Finance charges are usually calculated using the average daily balance. If you alternate between paying off and carrying a balance, you’ll end up paying more interest.

Cash advance/convenience checks: The interest rates on these are higher than your credit card.

Penalty interest and fees: Late payments can raise your interest from 7% to 27%! Rather than rejecting charges that exceed your credit card limit, issuers today often let them go through but then charge a hefty fee — as high as $39.

Fees, fees, and more fees: As if the penalties weren’t enough, you pay more fees for paying by phone or charging abroad. You may have to pay a fee to receive what used to be free year-end summary statements.

Balance transfer switcheroo: Transferring a balance from an account with a high APR to another one with a lower interest rate could come at a high cost. Any payments you make are typically applied first to the lowest rate balance. So while the credit card company uses your payment to quickly pay off that 0 percent transfer balance, you are piling up interest on purchases, at say, 18 percent. Multiple balance transfers will hurt your credit score.

You can read their complete press release here. To support their efforts, sign their petition at http://www.creditcardreform.org/.

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An App-O-Rama Primer: How to Profit from Credit Card Offers

App-o-rama, General

An App-O-Rama (also known as an “AoR,” or stoozing if you’re in the UK), simply put, is when you apply for many credit cards at once to take advantage of their signup bonuses and introductory balance transfer offers. If you have good credit, you can easily make thousands of dollars from this technique, with very little real effort.

Today, I’ll step through the process at a high-level. Please note that this strategy is definitely not for everyone. If you fit any of the following profiles, I would heartily recommend not pursuing this strategy:

Who Should NOT Do an App-o-Rama

  • Anyone who is not fiscally responsible — applying for a lot of credit cards and balance transfers means taking on A LOT of new debt. Anyone who cannot be trusted to safely invest this borrowed money should just stop reading here.
  • Anyone who is not meticulous with recordkeeping — the penalties from late or missing credit card payments would wipe out any potential benefit from this strategy.
  • Anyone who needs a new loan soon — an App-o-Rama will trash your credit score in the short-term, so if you will be in the market for a new mortgage, car loan, etc. in the near future, you should hold off on your app-o-rama.

Step 1. Preparation

If you truly want to maximize your profits, you’ll need to do some prep work beforehand to max out your credit score and make yourself as attractive as possible to credit card companies so they will approve you for many cards with high credit limits.

There are a couple of easy ways that you can help your score out. First, try to avoid applying for any new lines of credit for at least six months to a year before starting your app-o-rama. Each time you apply for credit, your credit score takes a slight hit. Ideally, you would minimize the number of credit inquiries you’ve had within the last year, since that is roughly the time frame in which inquiries affect your credit score. Applying for new credit is also bad since opening a new line of credit will decrease the average age of your credit accounts, which is another factor that weighs in your score.

It would also be wise to pay down any existing credit lines that you have to manageable amounts, as the percentage of available credit you utilize is another important factor in your credit score. You will definitely want to stay below 50% utilization of credit, but the lower, the better.

As you’re putting your credit profile in order, start doing research into the credit card offers that you intend to apply for. An admittedly biased source (me) thinks that this blog is a great resource to use to find worthy credit card offers. In particular, check out the credit card offers database.  You should pick not only cards that you intend to use long-term as everyday cards, but you should also single out cards that offer good signup bonuses or introductory balance transfer offers. Be especially wary, however, of balance transfer fees associated with introductory rates–even if a credit card offers a 0% intro rate, it may not be worthwhile to take if it comes with an uncapped 3% balance transfer fee, since it may be difficult to find an investment that would recoup that cost.

Step 2. The Application Process

Once you’re ready to start, the application process itself should be fairly straightforward. Since there is a small lag time until an inquiry shows up on your credit report, you’ll ideally want to apply for as many cards in as short a period of time as is reasonable. Obviously, if a bank can see that you’ve already applied for ten credit cards very recently, they’re far less likely to approve you for your eleventh. For this reason, it’s probably best to apply for cards all on the same day. It’s also preferable that you apply for your most desired cards first, since the likelihood of rejection will increase as you go along.

Step 3. Profit!

Your work is not all done after you’ve been approved for a bunch of new cards.
For one thing, there’s the record-keeping. If you applied for a number of balance transfers, you’re going to have to be meticulous in tracking when to pay them, how much to pay, and when their intro period ends. If you can’t do this properly, it will end up costing you. Set up automatic payments, track it in Excel, use online reminders, or use an aggregator like yodlee–track it however you like, just make sure everything gets paid on time.

Also, unless the balance transfer offer comes with an accompanying low-interest rate offer on purchases, you’ll want to put the card away and make sure it never gets used until the balance is paid off. A standard clause in credit card terms and conditions trips up many newbies. That clause states that any payments will go towards the lowest interest rate debt first. This means that if the intro APR is 0%, and the standard APR is 20%, if you mistakenly purchase something on your card, you’re stuck paying 20% on that purchase until the whole balance is paid off.

Last but not least, you will need to invest all of your newfound balance transfer money. I personally would advise against putting this money into anything that isn’t risk-free and liquid. Right now, the FDIC-insured E-loan savings account paying 5.5% fits the bill nicely.

In Summation

This game has reached very widespread popularity in recent times, because of the ease in which signup bonuses and intro offers can be turned into profit. I suspect that is the reason that we’re seeing several card issuers tighten up the terms of their introductory offers. The times of easy money aren’t likely to last forever, so it pays to take advantage while you can.

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Gas Rebate Credit Card Roundup

American Express, Cash Back Cards, Chase, Citibank, Discover, General

Editor’s Note: While the information presented was accurate at the time of publication, it is now outdated. For the latest details on these cards, see the following links:

Posted May 17, 2006 — Is the price of gas hurting your pocketbook? If you don’t already have one, maybe it’s time to consider adding a credit card that gives you a rebate on your gas purchases. Below is a compilation of these cards:

  • Citi Dividend Platinum Select – 5% rebate at gas stations, grocery stores and drug stores
  • Chase Cash Plus Rewards – 5% rebate at gas stations, grocery stores and drug stores
  • American Express Blue Cash – 5% rebate at gas stations, grocery stores and drug stores/1.5% everywhere else once your year-to-date spending reaches $6,500; 1% at gas stations, grocery stores and drug stores/0.5% for the first $6,500 of spending in a year
  • Discover Platinum Gas Card – 5% rebate on gas
  • Hess Platinum Visa – 10% rebate at Hess during the first 90 days; 5% afterwards
  • Chase PerfectCard – 6% rebate on gas during the first 90 days; 3% afterwards
  • Marathon Platinum Mastercard – 10% rebate at Marathon during the first 60 days; 5% afterwards
  • BP Visa – 10% rebate at BP and Amoco during the first 60 days; afterwards, 5% rebate at BP and Amoco, 2% on eligible travel and dining; 0% at non-BP gas stations
  • Speedway SuperAmerica Platinum MasterCard – 8% rebate at Speedway, SuperAmerica, and Rich Oil during the first 60 days; 4% afterwards

Note: Unless otherwise noted, each card also earns a 1% rebate on other purchases. For each card’s full terms and conditions, please visit the card issuer’s web site.

If you carry a balance, then ignore what I’m about to say, as reward cards aren’t for you. Instead, you should focus upon getting the card with the lowest interest rate.

Otherwise, for those looking for a gas rebate card, most will be best off with either the Citi Dividend, Chase Cash Plus or American Express Blue Cash, as they offer the most cash back at gas stations after the promotional period without tying you to a particular brand. Among those three, I would recommend either the Citi Dividend or the Blue Cash, since the Chase Cash Plus card is no longer being actively marketed and appears to have an uncertain future.

For big spenders, the Blue Cash may make the most sense as you’ll be able to fully take advantage of the higher tier of rewards. For everyone else, the Citi Dividend will offer the most value, as you earn 5%/1% from your first dollar. Do keep in mind that there are limits to your rebates. The Citi Dividend limits you to $300 cash back in a year, while the Blue Cash limits your rebates to the first $50,000 of spending in a year.

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Paying Your Taxes By Credit Card – Is It A Good Idea?

General

It’s that time of the year again. The tax man is calling and more than ever before, Americans are turning towards plastic to pay their tax bill. According to the IRS, as of March 31 of this year, nearly 800,000 taxpayers have paid more than $450 million in taxes with a credit card, totals representing an increase of over 40% from the same period last year.

What’s behind this shift? Well, it appears that convenience is the overriding factor. The electronic conveniences offered by the IRS of E-filing, direct deposit and credit card payments have all seen increases in utilization. As of March 31, 67% of returns had been e-filed compared to 65% at the same time last year, and 67% of all refunds have been issued via direct deposit, up from 63 percent of the total for the same period last year.

And then there are the incentives that credit card issuers are offering. In addition to the usual cash back or mileage awards that many credit cards offer, card issuers have come up with a myriad of other incentives to tempt you into charging your tax bill. (See the table at the end of this article for a list of some of the incentives being offered up.)

While it seems like a really easy way to rack up a whole load of credit card points, it turns out that it is almost never a good idea to put the tax bill on plastic. Not yet, anyway. And the primary detracting reason is because of fees. The two companies that the IRS has contracted to handle credit card transactions, Official Transactions Corp. and Link2Gov Corp., charge a 2.49% convenience fee on all tax payments. That fee, in nearly all cases, will more than wipe out any benefits accrued by using your card.

Consider, for example, the Starwood American Express Card, which earns Starpoints for every dollar spent. Many people consider each Starpoint worth in the neighborhood of two to three cents. Using that assumption, earning double Starpoints for your charging your tax bill then would essentially end up being a wash. Most people, however, would probably prefer cash in hand versus the Starpoints equivalent.

Then there is the ever present danger of accumulating more debt than you can handle. If you are having trouble paying your bills to begin with, charging your tax bill only serves to put you further in the hole. With credit cards having regular interest rates that start in double digits and quickly increasing with any sign of default or deliquency, if you are unable to make timely payment of your tax bill, you will probably be better served setting up an installment plan with the IRS rather than putting your tax bill on your credit card.

Credit Card Incentives For Charging Your Tax Bill

Card Incentive Fine Print
American Express Business Gold Rewards $200 credit The offer applies only to new accounts, and payments must be made through Official Payments by June 30.
CitiBusiness AAdvantage 15,000 bonus miles, one mile per dollar charged, and no annual fee the first year. Bonus miles apply only to new accounts but not to your first purchase. The bonus expires June 30, and miles are capped at 150,000 a year.
Delta SkyMiles Two miles for every dollar of federal tax charged. You get only one mile per dollar for charging state or property taxes; rewards for SkyMiles Options accounts are lower. Rewards are capped at 30,000 to 100,000 miles, and they don’t apply to the convenience fee. Payments must be made by April 17.
H&R Block One deal waives the 2.49 percent convenience fee entirely, one waives the fee on just the first $350 you pay (a maximum of $8.72), and another cuts the fee to 1.99 percent You must complete your federal return through H&R Block Online and pay the taxes you owe through www.pay1040.com. Different deadlines and terms vary depending upon whether you use a debit or credit card or a Visa or MasterCard.
Hilton HHonors Platinum Three HHonors points for every dollar of federal, state and local taxes charged. The reward does not apply to the convenience fee. Redemption restrictions may apply.
Starwood Preferred Guest Two points for every dollar of federal tax charged. The reward applies only to personal federal tax payments, you can earn no more than 5,000 points, and the offer doesn’t apply to the convenience fee. Deadline: April 17.
Official Payments The convenience fee is cut to 1.99 percent. You must make your payment through www.officialpayments.com/mcfeeoffer.jsp and charge your federal personal tax bill on a MasterCard by April 17.
TurboTax A 15 percent discount if you use TurboTax Online. You must access TurboTax Online through www.officialpayments.com, e-file and charge your tax bill through Official Payments. The offer expires Oct. 15.
United Mileage Plus Signature Two miles for every dollar of federal, state and local taxes charged, plus 30 percent off the TurboTax Online fee to prepare your federal 1040. Delinquent customers don’t qualify. You must go through www.officialpayments.com and pay with your United card. The TurboTax discount expires Oct. 15; the mileage reward expires Dec. 31.
This table’s data is courtesy of the San Jose Mercury News.
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