Credit and Prepaid Card News
The latest news on the credit card and prepaid card industry from the Center for Responsible Lending.
- Credit-Report Firms to Face More Scrutiny
MarketWatch 21 Jul 2011
The companies that amalgamate consumer credit reports and scores -- the firms that bear the brunt of borrowers' ire because they play such a large role in financial decisions -- fall under different oversight as of July 21. The newly formed Consumer Financial Protection Bureau is assuming from bank regulators a swath of consumer-product regulatory functions, including some control over mortgage and other credit products. Included under the bureau's purview are the big three consumer credit-reporting companies: Equifax Inc., Experian PLC, and TransUnion. These firms compile data that banks and lenders use to determine borrowers' creditworthiness for major purchases, such as a home or car. Still, the full extent of the consumer bureau’s oversight of these companies is murky, as is whether the new watchdog agency will help to cut what consumer advocates say are significantly high credit-report error rates and the failure of credit-reporting firms to settle consumer disputes in a timely fashion.
- Stores Can Now Offer Deals With Certain Credit Cards
Reuters 20 Jul 2011
U.S. District Court Judge Nicholas Garaufis on July 20 approved a settlement between the Justice Department and MasterCard and Visa that requires the card processing networks to allow retailers to offer discounts or rebates to customers for using a particular kind of card. American Express has refused to settle with the government, vowing to wage a multiyear fight on the grounds that the deal would promote steering customers from one payment network to another without enhancing competition. A MasterCard spokesman said in a statement that the terms of the settlement "are consistent with company practice to allow merchants to offer a discount for cash and other forms of payment, including competing card brands."
- Report Highlights Consumer Confusion About Credit Scores
CreditCards.com 19 Jul 2011
In a report released on July 19, the Consumer Financial Protection Bureau (CFPB) noted the difficulty consumers often experience in trying to decipher the wide variety of credit scores offered to them by lenders, credit bureaus, and other providers. The confusing landscape often means consumers and lenders see different numbers. When the CFPB launches on July 21, free credit scores will begin to be provided to consumers who are denied loans or given less-than-ideal terms. "Consumers will then begin to see and receive many more credit scores than they had been exposed to previously," according to the CFPB. The agency plans to "obtain a substantial database" of consumer reporting information in order to determine whether consumers and creditors are actually seeing different credit scores and to what extent consumers are being hurt. The CFPB accounts for some key factors in the confusion surrounding credit scores: lenders may use a different scoring model than the one used and purchased by the consumer; the consumer and lender may obtain different scores from different credit bureaus; and the data in a consumer's underlying credit report may change significantly between when the credit score is purchased and when the lender obtains the score. Some consumers lack even a basic understanding of credit scores; but even for those who understand what the score does, there can be confusion resulting in costly mistakes. Despite this confusion, consumers are increasingly willing to pay for their credit score, according to the CFPB. Consumer advocates say borrowers need to be more careful, making wise decisions about when and how to purchase their score.
- Little-Known Firms Tracking Data Used in Credit Scores
Washington Post 16 Jul 2011
"Fourth bureau" companies that deal in personal data once deemed unreliable, such as consumers' purchases, now carry particular weight for people who live on the margins of the banking system. These firms sell collected information to lenders, landlords, and even healthcare providers; and most people do not realize files on them exist until something goes wrong. Federal regulations do not always require the companies to disclose when they have shared a consumer's financial history or with whom they have shared it, and there is no way to opt out. No standards exist for what type of data should be included or how it should be used, and there is no standard in place for checking accuracy. For most consumers, credit scores are based on records of loans they have taken in the past and how well they have paid them off; and government regulators, financial firms, and consumer advocates have launched extensive education campaigns in recent years to make sure consumers know what goes into their credit scores provided by the major national credit bureaus. Still, consumers outside the mainstream financial system have received little attention from this effort. These consumers are often students, immigrants, or low-income customers who do not qualify for traditional loans and instead rely on a shoddy system of payday lenders, check-cashers, and prepaid cards -- none of which are recognized by the three major credit bureaus. Enter the fourth bureau companies, which track down financial and other personal information ignored by the credit bureaus. Consumers cannot dispute the results of the credit score provided by these companies. In contrast, the three large credit bureaus avail themselves to consumers for questions and concerns via the Internet and a toll-free phone number. Complicating matters even more, there is no registry of fourth bureau companies, and the businesses that submit data to the companies have to provide only vague disclosures, if any at all.
- Credit Cards: Should You Ever Pay an Annual Fee?
San Francisco Chronicle 14 Jul 2011
Most of the time, it does not make sense for a consumer to pay an annual fee on a credit card. However, there are some cards that offer benefits that offset the fee; and these can be worthwhile. A card that offers a signup bonus that outweighs the annual fee is one such example. Another card that may be worth the annual fee is one on which a consumer can earn enough cash back on regular purchases to far outweigh the fee. Cards that offer travel perks worth more than the annual fee, like rewards at hotels, are also worth it. Finally, if the only card a consumer can get approved for carries an annual fee, it is worth making the investment in a card for the purpose of improving that individual's credit score. Still, consumers should be on their guard when signing up for these cards; and they should not expect to see the benefits of a card unless they also plan to be extremely responsible with it.
- For the Creditworthy, Worthwhile Credit Card Bonus Deals Abound
Daily Finance 13 Jul 2011
Credit card companies are going out of the way to attract big spenders who pay on time, particularly those who kept their credit profiles squeaky clean during the Great Recession and its aftermath. According to CardHub.com, there are more credit cards offering higher initial rewards bonuses -- for people with credit scores above 700. The Web site examined more than 800 credit card offers and found 338 cards with initial rewards bonuses. Card Hub CEO Odysseas Papadimitriou adds that consumers need not worry about long-term consequences from seeking these deals, unless they plan to apply for a loan, take out a mortgage, or otherwise actually need the best credit score possible within six months of their application for the card. "The hit you take as a result of opening a new card will not be permanent and will truthfully be irrelevant unless you need your credit score," he says. "On the other hand, the benefit of a lucrative rewards credit card offer is plain to see."
- Consumer Debt Rises For Eighth Straight Month
ConsumerAffairs.com 10 Jul 2011
The Federal Reserve reports that consumer credit grew in May for the eighth month in a row, primarily as a result of credit card use. According to the data, credit rose by $5.08 billion after a revised $5.67 billion gain in April. Economists say that many consumers are using their credit cards to purchase necessities such as gas, groceries, and other day-to-day needs. Revolving debt, which includes credit cards, rose by $3.37 in May after shrinking $877 million in April, marking the first gain this year and the biggest jump since June 2008. Non-revolving debt also was higher, climbing $1.71 billion in May after jumping $6.54 billion the previous month. To keep credit card debt under control, the Center for Responsible Lending recommends that consumers always pay more than the minimum amount due on the monthly bill. CRL says that doing so can save a consumer as much as $2 for every extra $1 they pay.
- The Secret's Out on Behavior Scoring
ABC - KFSN Fresno 24 May 2011
A consumer's behavior score is one that most credit agencies choose not to discuss very often, but it can affect everything from the interest rate a consumer pays to loan approval. According to John Ulzheimer of smartcredit.com, "It is an empirical fact that where you use your credit card does in fact tell a story on what type of risk you pose to the credit card issuer." He adds, "Using your credit card in places like pawn shops, title lending, using them in places like marriage counselors, massage parlors, tire retreading shops, discount stores, that could indicate that you are in fact a higher credit risk." Josh Frank of the Center for Responsible Lending says that even when consumers cut back on spending and behave in a more responsible way, such activity can be counted against them, because it can be perceived as an indication of financial distress. The Federal Reserve in 2010 found that 35 million card holders in a single month were reviewed using behavior scoring, but only a very small percentage of them saw their credit score suffer. At the same time, some say that behavior scores and bankruptcy scores, which forecast the chance that someone will file for bankruptcy, adversely impact minority and low-income consumers. "It can focus on groups indirectly in a way that's arguably illegal," Frank says.
- Financial World's Dirty Little Secret: Behavior Scores
ABC7 News 03 May 2011
By keeping a so-called behavior score, credit card companies are able to judge consumers based on where they shop, what they buy, and how they use their credit cards. Depending on the observed patterns, a consumer's behavior score can be negatively affected. According to John Ulzheimer of SmartCredit.com, almost every large credit card issuer in the country uses behavior scores -- which are separate from credit scores and typically not available for the consumer to see. Behavior scores are used by credit card issuers to determine a consumer's interest rate, credit limit, and even whether they get to keep their credit card. "Using your credit card in places like pawn shops, title lending, using them in places like marriage counselors, massage parlors, tire retreading shops, discount stores, that could indicate that you are in fact a higher credit risk," Ulzheimer explained. The Federal Reserve in 2010 found that 35 million card holders in a single month were reviewed using behavior scoring, though only a very small percentage of those card holders were actually adversely affected by their score. Credit card issuers also use bankruptcy scores to measure a consumer's creditworthiness.
- US Credit Card Groups Target the Wealthy
Financial Times 27 Mar 2011
Credit card issuers are offering a number of perks to draw well-to-do customers as they seek to mitigate exposure to increasingly debt-saddled subprime borrowers. "In the 20 years we've been tracking this, we've never come across such good offers," according to Anuj Shahani, an analyst for the market research firm Synovate, who stresses that the offers are extended almost exclusively to wealthy consumers. The trend marks a change of tide from pre-bubble initiatives to attract lower-income borrowers, a group once perceived as attractive because credit card companies could hike their rates on a whim and charge other fees that made lending to such a high-risk group profitable. Today's offers come as the wealthy are deleveraging and the poor are accruing more debt. The average prime borrower carries about $3,124 in credit card debt a month, down from nearly $3,500 less than two years ago. The average subprime borrower, on the other hand, carries $2,464 a month in credit card debt, up $100 over the same period, according to Synovate. "The subprime households are still caught in a debt cycle, while the prime borrowers are paying down their debt," explains Shahani.
- Credit Card Rules Help to Lower Fees, Rates
Associated Press 23 Mar 2011
Federal officials at the Consumer Financial Protection Bureau say consumers are being hit with fewer over-limit penalty charges, rate hikes, and late fees one year after new regulations cracked down on questionable billing practices. The CFPB will administer the regulations once it goes live in July. The agency examined the impact of specific regulations but did not look at the full range of costs customers pay for cards, which may be on the rise in the form of higher annual fees and higher interest rates for new cardholders. Still, penalty charges overall are down, falling to $427 million in November from $901 million in January 2010. One reason for this drop in late fees is a new $25 cap on penalty charges. Consumers also benefited from new rules on interest rates, which prevent card issuers from raising rates on existing balances or within the first year after an account is opened. Before the regulations, some 15 percent of accounts were slapped with rate increases over the course of a year; but that number dropped to 2 percent in the year after the rules took effect.
- 6 Reasons You Don't Need A Prepaid Debit Card
San Francisco Chronicle 17 Mar 2011
Though a prepaid card can be the only solution to some problems, there are six situations in which the cards are not necessary -- even if they seem like a good idea. The first circumstance is when giving a gift. It may seem outdated to give cash or a check, but giving prepaid cards to people who are unfamiliar with them means also giving them the hassle of a card that essentially comes with a complex user's manual of terms, conditions and fees. Second, prepaid cards are not a wise choice for paying children allowances, because teaching kids to spend with cash will likely make them more responsible spenders in the long run. The cards also do not need to be used for a tax refund, which can be deposited directly into a person's bank account. For people without a checking account, refund checks can be cashed for a minimal fee -- just $6 at Walmart, for example. Nor should prepaid cards be used to avoid monthly banking fees, primarily because most of the fees on a checking account can be avoided with prudent management of the account. Using prepaid cards to limit spending or restrict access to money also is not the best plan, and consumers would be wise to use a debit card or cash to keep a tight leash on their spending. Finally, consumers should be wary of feeling as though they must use the cards for online shopping. Prepaid cards can be beneficial for some consumers who are savvy enough to understand the terms and conditions so as to avoid fees; but despite their conveniences, they can make finances more complicated for many.
- Looking for a Credit Card? It Pays to Be Rich
Associated Press 22 Feb 2011
A year after far-reaching credit card regulations changed the face of the industry, banks are unloading perks and rewards on big spenders with pristine credit scores. At the same time, they are hammering customers with flawed financial histories with higher interest rates, lower credit limits, and new annual fees. In some instances, the riskiest customers are being dropped altogether. "When you look at the regulations, it's a net positive for consumers," insists American Bankers Association Spokesman Peter Garuccio. "But there have been some trade-offs." The growing disparity between how customers are treated is largely the result of new limitations on card issuers. A key change under the Credit Card Accountability, Responsibility and Disclosure Act, or the CARD Act, is that issuers can no longer increase rates on existing balances or in the first 12 months that an account is open. The regulations are already transforming the cards on the market. To make up for the decline in revenue, banks are levying new annual fees and hiking interest rates, but mostly for those with the lowest credit scores. The best customers are more valued than ever.
- Debt Settlement Industry in Flux as New Rules Start
Fox Business 11 Jan 2011
Consumer advocates are outraged that borrowers are still being tricked into signing up for debt settlement services, despite federal rules that took effect more than two months ago with the intent of curbing shady practices. The industry has changed since the legislation went into place, but advocates say the changes has not necessarily been for the best and has not come quickly enough. Debt settlers generally have responded to the new regulations in one of three ways: by going out of business, changing their business models to comply with the rules and stop collecting upfront fees for debt negotiations, or changing their marketing tactics in an effort to circumvent aspects of the rule that apply to telemarketing. As of Oct. 31, 2010, the companies are no longer allowed to charge fees until after they have negotiated settlements with credit card companies and other creditors. Restrictions are also placed on the amount of fees that can be charged and the kind of claims that settlement firms can make in their advertising. The industry has grown from nearly a dozen players in the early 2000s to about 100 as of 2006, and only about a quarter of clients who remain in debt settlement programs for three years actually complete their debt repayment plans. The Association of Settlement Companies, an industry trade group, says it is as interested as consumer advocates in weeding out the companies that are doing business poorly, but abuses still continue. A coalition of consumer groups sent a letter in December 2010 urging the Federal Trade Commission to increase enforcement of its rules. Though the FTC pledged to do so, consumer groups say the agency is not adequately staffed to truly police the industry. Since telemarketing has been banned, consumers have seen an increase in spam e-mails touting their qualifications for the services. The companies have also increased their usage of radio advertising, which suggests to many that a more comprehensive federal law is needed.
- Credit Cards Still Use Soon-to-be-Banned Policies
Associated Press 28 Oct 2009
An analysis conducted by the Pew Charitable Trusts' Safe Credit Cards Project concludes that the nation's 12 biggest credit card issuers are still engaging in practices that will be considered illegal once new restrictions kick in early next year. The organization examined nearly 400 cards offered by the banks that account for 90 percent of outstanding credit in this country. What it found is that most of them continue to hike interest rates on outstanding balances, trigger penalty interest rates with just one or two late payments or over-the-limit transactions, and apply payments to the lowest-interest portion of balances first -- all policies that are outlawed under the Credit Card Accountability, Responsibility and Disclosure (CARD) Act signed by President Obama in May. Additionally, penalty interest rates have climbed, as have the lowest interest rates offered to new customers; and issuers have added fees -- or raised existing ones -- for balance transfers, cash advances, overdraft protection, and other services. "It's clear that until the law takes effect, or Congress accelerates the implementation date of the law, these practices are going to continue to be out there," declares study co-author Nick Bourke. "Once it takes full effect next year, it's going to stop a lot of unfair and deceptive practices." If consumer advocates have it their way, the crackdown will start sooner. Responding to ongoing complaints from the public, Congress is considering moving the effective date of the CARD Act to Dec. 1 instead of waiting until February to fully implement the law.