A viral video taking over the internet this week brings together some comedy heavyweights, plus director Ron Howard, to educate consumers about the need for a Consumer Financial Protection Agency.
"Presidential Reunion" brings together presidential impersonators from the past 35 years of "Saturday Night Live," including Will Ferrel as George W. Bush, Dana Carvey as George Bush, Sr., Chevy Chase as Gerald Ford and Fred Armisen as President Barack Obama. The video also features Jim Carrey as Ronald Reagan.
In the video (see it below), President Obama is struggling with opposition to the Consumer Financial Protection Act by congress and lobbyists. He is then visited by the six previous presidents (including the late Reagan and Ford). Bush, Jr., and Clinton (played by Darrel Hammond) explain how they eased restrictions on banks, helping to create the financial mess in which the nation finds itself. Later, Jimmy Carter (played by Dan Aykroyd) explains in clear terms the benefits of the proposed CFPA.
"Mr. President, you have to establish the Consumer Financial Protection Agency. People are tired of being ripped off by credit card companies and banks," he says.
The video was made in conjunction with the Main Street Brigade, an organization committed to bringing awareness to, and dispelling myths about the CFPA.
The act was first suggested to Congress by Harvard professor Elizabeth Warren, author of several studies about consumer credit and bankruptcy.
This week saw the much-anticipated date (February 22) on which the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) took full effect. And, while it theoretically introduces many new consumer protections, it leaves plenty room for “creativity” from card issuers.
Center for Responsibility Lending Responds
The Center for Responsible Lending released a humorous (though cynical) animated video that highlights some of the areas not addressed by the new act—and illustrates ways in which credit card issuers have adapted their policies to maintain profit levels. These include:
Interest rate hikes: To compensate for lost revenue, some card issuers have already raised users’ interest rates. Even users in good standing may be “forcibly eligible” for this, as the video claims.
Over-limit fees: If you accidentally exceed your credit limit, your cardholder likely charges a fee. And, with new restrictions in place on other charges they can assess, you might see this fee jump.
Inactivity fees: On the other hand, if you use your card too infrequently, you might see a fee for that, as well, because that means you’re less profitable for the company.
Increased minimum payments: Another technique some card issuers are using is to up the minimum amount you can pay each month. This could be profitable for those who won’t be able to afford the increased payments and can be charged an under-payment fee.
The Regulation-Creativity Relationship
As the video illustrates with a graph, more consumer protection may seem like a good thing, but in practice, it often means that card issuers just get more “creative” with fees they charge reasons they charge them.
If you’re thinking now is a good time to get out of credit cards altogether, you’re not alone, but, before you cancel your cards, consider this:
Your credit score: Part of your credit score is based on age of accounts (older ones are better); another part is based on diversity of credit (so eliminating one type entirely would hurt you).
Your reentry: If, at some future time, you decide you want a credit card again, you’ll likely have to contend with uber-high interest rates (above 70 percent) because you won’t have any recent credit card history.
The video exaggerates a little (by mentioning, for example, a “legibility fee” for left-handed users), but by doing so draws attention to the more serious matter of how significantly your credit card could change.
Be sure to read all correspondence from your card issuer, even mailings that seem like junk: some of them might contain important details about the new rates and fees you may have to pay. These statements will also come in handy if mounting fees and interest force you into bankruptcy.
Good news for credit card holders—the final set of provisions under the Credit Card Act of 2009 take effect today, offering some important consumer protections.
For those who use credit cards responsibly, the new laws will provide more time to pay bills and less likelihood for fees, penalties and interest rate changes. For those struggling with credit cards or facing bankruptcy, the laws may prevent fees from adding up and provide a little breathing room.
Here's a look at some of the key provisions that are now in effect:
Expanded Statements: Your monthly card statement will have a few new features, including broken down fees and penalties and a chart showing how long it will take to pay off the charges making only the minimum payment (and how much it will cost). Your statement will also arrive at least 21 days before the due date, a full week earlier.
45 Day Notices: Your credit card issuer must give advance warning of any changes to your account, particularly interest rate changes. This will give you more time to consider the changes, negotiate with the credit card company, or, if necessary, pay off the balance and close the account.
No Rate Increases for 1 Year: The new law prohibits "arbitrary" rate increases for the first year you hold an account. Lawmakers hope this will curb "universal defaults", in which one card issuer raises interest rates due to late payment on a card issued by a different bank. Some actions could still trigger a rate increase, such as being more than 60 days delinquent.
Over-Limit Opt-in: You will only be charged over-limit fees if you agree to it. While this may seem like a blessing, it also means more transactions may be declined.
While these changes went into effect, many cardholders have seen changes to their account over the past year, since the law was introduced. Credit card companies have been preparing for the law to go into effect, and in many cases have not been acting in consumers' best interest.
Many credit card companies have been raising interest rates and introducing new annual fess (which are permitted in the new law) in order to prepare for the revenue losses that could come under the Credit CARD Act.
Finding out your credit card has been canceled can be frustrating, embarrassing and worrisome.
Unfortunately, tough economic times may mean card cancellations become more common and more likely in the coming months.
Why Credit Cards Matter
Hopefully, you already know that your credit score is a number calculated through a formula developed by the Fair Isaac Corporation (FICO) and determines what kind of interest rates you’re likely to receive from lenders.
But what you may not have realized is that your credit card usage plays an important role in your credit score:
Age of accounts: The longevity of various credit accounts, including loans and lines of credit, is a factor in your credit score. So maintaining a credit card for a number of years is better than opening up new ones and canceling old ones.
Variety of account types: Another factor of your credit score is the diversity of your credit portfolio. Credit cards are one of the only tools that offer revolving credit, so they demonstrate how well a borrower handles this particular credit product.
Credit utilization ratio: Finally, credit cards help by giving you more credit available. Part of your score comes from a comparison between how much credit you have available to how much you’re using (using less is better).
So having a card canceled on you may damage your score in three different ways, and there is no law that requires credit card issuers to notify consumers about cancellations.
Reasons for Credit Card Cancellation
Even if you’re a responsible credit card user - meaning you pay your bill on time every month - your credit card company may cancel your card. Common reasons include:
Ratio shift: If your available-credit-to-debt ratio changes - that is, you start using significantly more credit - a card issuer may cancel your card due to "increased risk."
Lack of profitability: Sadly, if you pay your bill in full every month, the issuer isn’t making much money from you, and may cancel your card.
Lack of use: If you haven’t used your card in several months, it could get the shaft. Charge something small every month or so and pay it off immediately to prevent this.
Bad economy: Market conditions, like unfavorable interest rates or housing prices, may cause card issuers to close accounts.
Credit report information: Negative information in your credit report, whether true or not, can make an issuer pull the plug.
In some cases, you won’t be able to prevent cancellation, but you can stay on top of your finances by checking your credit report regularly and fixing any errors you notice. This will help you stay on top of any credit card problems before they arise.
For most Americans, the allure of credit cards can lead to a financial trap. Credit cards make purchasing easier—but can make responsibility harder.
Credit card spending often brings freedom today while impacting your future. Whenever you buy with credit, you're promising your future income today. And if you're buying things that don't increase in value, that can be a poor investment.
If you're considering filing bankruptcy, using a credit card may be twice as bad—bankruptcy laws may prevent you from discharging recently racked-up credit card bills.
However, for those who have learned to use credit wisely, the purchasing power of credit cards can bring peace of mind, and even some added perks, while building credit.
Benefits of Purchasing with Credit
Protect your money: Identity theft and credit card fraud can be a huge financial set-back. Luckily, most credit card issuers consider users liable for no more than $50 of purchases that turn out to be fraudulent. This protection is generally not available with debit cards, probably because credit cards involve a loan of the company’s money, and debit cards involve only the user’s money.
Guarantee your gadgets: A lot of credit card issuers provide warranties for items purchased on credit—another reason that many store-offered warranty packages are a bad investment.
Protect your purchases: A significant number of credit cards include clauses that offer refunds for items that are lost, stolen or damaged recently after being purchased on credit.
Get reimbursements: Some cards offer users reimbursements if they find a price lower than what they paid for an item; others offer refunds even if they’re against store policy.
Milk the rewards: Cash-back bonuses, airline miles and other bonuses can be extremely rewarding, as long as you pay off your balance in a reasonable amount of time.
Travel smarter: Some cards provide insurance for car rentals, air travel, cancellations and accidents, which can cost lots of cash to buy during every trip.
The Golden Rules
Before whipping out your wallet and charging up a storm, though, keep in mind the two most important ingredients in making sure your credit card use doesn’t turn into a recipe for disaster:
Know the cost. Don’t assume your card offers any of these benefits—read the details of your contract and ask an attorney, trusted friend, or call the company to clarify any muddling points BEFORE using any credit cards.
Check your budget. Running up a high balance is never a good idea if you cannot pay it off. Remember that credit cards do not offer additional income; they merely offer an alternative way of purchasing with your existing finances.
Additional Resources
The Credit Card Model (PDF): A 1997 study of the debt cycle caused by credit cards and their long-term impact.
The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009, which will take full effect in February, limits many practices now common in the credit card industry. Some, however—like issuing a card with an interest rate near 80 percent—will still be permissible under the new law.
Subprime Credit: Still a Bad Idea
The subprime lending boom and the “unconventional” lending techniques that accompanied it were major factors in the housing market’s explosion and collapse, and thus the current recession.
But just because people have grown more wary about some types of subprime lending doesn’t mean it’s disappeared entirely. In fact, according to an MSNBC article, some of the worst credit cards on the market are still as costly as ever.
The First Premier credit card reportedly provides a source of credit for people with limited or shaky credit histories – that is, the so-called subprime borrowers. But, because of the potentially high risks associated with having a blemished credit history, this card comes with some shockingly expensive terms:
Initial limit of $300: Users of the First Premier card will have access to only $300 in credit when they open their accounts, an increase from the card’s former limit of $250. But that’s not even as much as it seems.
Maximum permissible fees: The Credit CARD Act prohibits issuers from charging fees that total more than 25 percent of a card’s limit, and the First Premier charges exactly that: $75 in fees each year. Formerly, the first year’s fees totaled $256 – on a $250 limit.
Astronomical interest rate: Presumably to make up funds lost from the limited fees, the First Premier issuers jacked up the interest rate on their card to a whopping 79.9 percent. The new law sets no limit on credit card interest rates, so while shockingly high, this limit is legal.
Avoid the Trap: Wait It Out
Naturally, getting tangled up with a card that carries a nearly 80 percent interest rate is not a good idea, no matter how badly you want to start rebuilding your credit after a bankruptcy filing or other financial stumbling block.
If you currently have a rough or limited credit history and don’t think you’ll qualify for a credit card with more favorable terms, your best bet may be to simply wait a while. With a few months or years of responsible and timely bill paying, you may qualify for much better credit products.
If you’re struggling with credit card debt, you’re certainly not alone. Research indicates that more than three-quarters (78 percent) of American households have at least one credit card, and among this group, the average debt is more than $10,000.
While credit card debt can be a significant financial burden no matter what the national economic climate, when the economy weakens, paying off such debt can seem almost impossible. But, if you make a commitment to eliminate your debt, you may have some alternatives to paying the entire amount you owe.
Ask for a Reduction
Deciding to pay off your credit card debt is an important part of actually becoming debt free. After you’ve laid out all your latest statements and calculated what you owe, it’s time to contact your creditors.
Research your history: Review old bills and notices from your credit card issuers. Take notes on what accounts you’ve kept up to date, how much you owe where and what interest rates are on each card.
Place a call (or several): If you’re like many Americans, you have more than one credit card. Choose the card you’ve been most diligent about paying on time and call the customer service number provided on the bill.
Explain yourself: Explain to the representative that you’ve decided to pay down your balance, and you were wondering if they could lower your interest rate. Remain polite and point out the positive history you have with the account if you need a bargaining chip.
Repeat with as many of your cards as you can. Even if none of your issuers agrees to lower your rates, the worst anyone say is “no.”
Write a Letter
If you think your financial circumstances will prevent you from paying down your credit card debt regardless of your interest rates, it’s time to ask for a bit more.
Contact your creditors. If your attorney believes that you are judgment proof (that is, that your creditors couldn’t collect any money even if they sued you), you can write to your creditors to ask for a complete cancellation of your debt.
Contact a lawyer. A local attorney can help you determine whether your finances are truly as dire as you think. If they are—that is, if you have little enough income and few or no valuables that could be sold to raise money—you may be a good candidate for debt cancellation.
This method has worked in the past, as this post from Creditbloggers.com reports. Remember, credit card debt doesn’t have to ruin your finances. A little determination can go a long way.
According to an article from the Associated Press, fewer Americans were late on their credit card payments in the third quarter of this year than in the second quarter, signaling that consumers may be getting more responsible at managing their debt.
While the decrease isn’t staggering (1.10% of payments compared to 1.17%), the statistic itself is: this is apparently the first time in a decade that late payments have decreased between the second and third quarters.
The Bigger Picture
Here’s a look at how this decrease fits into the larger context of credit card payments and debt in the United States:
Steady decline: The 6% drop comes after an 11% decline in late payments between the first and second quarters, suggesting that, as a nation, our debt management skills are improving.
Trend follower: The highest late payment levels occurred in states where the housing bust was biggest (California: 1.33%; Arizona: 1.35%; Florida: 1.47%; and Nevada: 1.98%).
Outstanding balance: Average amounts due have also declined from earlier quarters and last year: in Q3, the average was $5,612, down from $5,719 in Q2.
Savings down: The third quarter also saw a slightly lower rate of savings among U.S. consumers, suggesting we’re putting money toward debt rather than in the bank.
So What Does It Mean?
While no definitive explanation can be offered for the drop in late payments, the trend may be affected by a variety of factors, including:
Unemployment: Both those who have lost their jobs and those who are still working (but are perhaps more aware of the threat of layoffs) tend to cut back on discretionary spending and focus on paying down debt rather than accumulating new “stuff.”
Tightened credit: Many credit card issuers have pulled way back on their offerings of consumer credit and have gotten stricter about raising interest rates for late and missed payments. This may “scare” consumers into taking their debt more seriously, or into paying down balances to have more wiggle room.
The holidays: For many of us, a major shopping and/or traveling season is upon us. The dip in late payments could represent a sort of collective preparation for the financial stresses of the season.
Increased caution: The drop could also point to a more cautious American consumer – one who’s a bit less cavalier about taking on masses of revolving debt.
