Bankruptcy Questions Answered

One Bandwagon to Hop on: Credit Card Spending Down

Consumer credit use has dropped since the beginning of the Great Recession, which seems like good news for a country plagued by excessive consumer debt (often in the unhealthy, revolving credit-card type), as a recent report from Credit.com notes.

Here’s a look at some potential causes of that dip and how you can resist the urge to spend, even if you’re surrounded by good-time plastic-swipers.

What Do Lowered Credit Card Debt Numbers Really Mean?

The easy assumption is that Americans are purchasing less on credit and/or paying down the debt they currently have. But, according to some insiders, that may account for only part of the decrease in credit card debt we’ve seen lately. Here are some other potential causes:

• Credit card issuer charge-offs: Credit card companies make a lot of money from fees and interest, but they also end up "charging off" a lot of debt each year. Of course, they can afford to do this because of all the other income they collect, but still. When a customer files for bankruptcy and has her credit card debt forgiven by the court, the company generally writes that off as lost revenue. Similarly, if a consumer simply cannot pay, the issuer may sell the debt to a collection agency and charge off that debt. These numbers may not show up in the report of how much credit card debt Americans are currently holding, so we may have racked up more than we actually have to pay off.
• Tightened lending standards: Another result of the credit crisis we’ve found ourselves in is that lending standards for ordinary Americans have gotten tighter than ever before. This means that, even if an ordinary consumer may want to take on more debt, he may not be able to because nobody will lend to him. While this reads on a numbers-only report like lowered consumer debt, it can be a bad thing if consumers need access to lines of credit to buy cars or homes.
• New credit card rules: Finally, some analysts have suggested that the new rules introduced by the Credit CARD Act have given consumers a better idea of what they’re getting themselves into when they sign up for credit cards, and thus acted as a preventative measure against excessive consumer debt.

Climb Aboard the Less-Debt Ship

So how can you take advantage of this trend to help improve your personal financial situation? Check out these tips on avoiding over-spending when you’re out with non-frugal buddies. Suggestions include:

• Stick with cash so you don’t get caught with other people’s meals or drinks on your card;
• Pretend you’re coming down with something to avoid being pressured into pricey drinks with dinner;
• Think up something big you can say you’re saving for to avoid endless purchases… and then really save; and more.

No matter what your reasons for improving your financial profile, these tips should help you get a head start.

Posted in Bankruptcy and the Economy, Consumer Credit, Credit Cards, Credit and Bankruptcy, Economy, consumer debt | Comments Off

Checking in on the Credit CARD Act

A recent report from the Center for Responsible Lending suggests that the reforms introduced by the Credit CARD Act of 2009 are working to improve transparency in the marketing of credit cards to consumers.

In case you need a refresher course, the Credit Card Accountability Responsibility and Disclosure Act was designed to improve transparency from banks and other credit card issuers so that consumers could navigate the world of credit with greater ease and less financial distress. Here’s a look at just how much this consumer protection legislation has changed.

• Advertised credit card interest rates: Before the passage of the Credit CARD Act, the CRL reports, the discrepancy between the rates advertised by credit card offers and those that consumers actually paid had reached unprecedented highs. In fact, according to the report, between 2004 and 2008, the difference between promoted rates and real rates was at its greatest ever.
• Higher advertised rates means more honesty: Since the passage of the CARD Act, it seems, credit card offers have come branded with higher (and closer to actual) advertised interest rates.
• More transparency in pricing: According to the CRL, new rules governing the way credit cards can advertise their interest rates has led to the exposure of as much as $12.1 billion in annual fees. In other words, credit card companies are now presenting more honest pictures of how much their products cost consumers.
• Interest rates on credit cards constant: Despite the increases in advertised interest rates, the report shows, consumers have not actually paid more in interest since the passage of the CARD Act. This suggests that, rather than increasing the cost of credit card products, the new laws simply made those costs more readily apparent to consumers.
• Credit card offers constant: The CRL notes in its report that direct-mail offers of credit products have been extended at a volume “consistent with economic conditions,” suggesting that, while the overall total may have fallen since boom times, the drop-off can be attributed to the tight economy and not to restrictions imposed by the new law.

What Does Better Transparency Mean for You?

As a consumer, how can you expect to benefit from the changes that have been spurred by the passage of the Credit CARD Act? The CRL lists a few ways:

• Better transparency means more competition: According to the CRL, improved transparency among credit card issuers will spur positive competition – as banks abandon the trends of hidden fees and deceptive pricing, more banks and lenders should follow suit, which should eventually translate to lower consumer costs.
• Tighter rules do not mean less available credit: Though some critics of the CARD Act suggested that the restrictions on lending and increased disclosure requirements would mean a decrease in overall credit availability, numbers from actual research have not borne out those predictions.

Posted in Bankruptcy and the Economy, Credit Cards, Financial Literacy, consumer rights, legislation | Comments Off

A Stealthy New Threat to Your Credit Card Information?

A recent report from a Memphis news station warns of the latest risk to the safety of your credit card information: a super-stealthy computerized scanner that a tech-savvy thief could use to get your credit card digits while passing you on the street.

RFID Technology in Your Wallet

Here’s how the technology works, according to the story, and why it might pose a problem for ordinary consumers.

• RFID technology: Something called radio-frequency identification is commonly used in passports, credit cards and debit cards to facilitate transactions. Merchants can process information from RFID-enabled cards with a simple scan.
• Portable computing devices: Unfortunately, the technology that allows for quick transactions in the mall and at the airport also, it seems, opens the door to stealthy identity crimes. The news story mentioned above cautions that a person equipped with easy-to-purchase equipment could discretely scan people’s wallets for card information on the street.
• Potential identity theft: Clearly, having your identity stolen is not a pleasant experience – but being victimized by identity theft while you’re walking the streets and have your guard down can be both frightening and financially devastating.

Should You Be Worried about Mobile ID Theft?

The jury seems to be out on whether or not the potential for RFID-fueled identity crimes will actually translate into a rash of such crimes. An estimated 140 million Americans have some sort of card with RFID capabilities, though, generally speaking, you can guard against identity theft by taking certain precautions:

• Check your bank account regularly: Log on to your online account often and review your monthly statements carefully to make sure that no unusual activity is taking place. The more regularly you check your account balance, the more likely you’ll be to catch a withdrawal from an unauthorized source.
• Shred any sensitive documents: Though we’re well into the digital age, plenty of identity thieves still get their information by rummaging through the trash or recycling bins. Whenever you get documents with sensitive information on them (including your Social Security Number, your bank account numbers and your credit card number), shred them before disposing of them.
• Take only what you need: When you leave the house (especially for longer trips) limit yourself to only the credit cards you’ll absolutely need while you’re away. Limiting your chances of losing one or having one stolen is a smart way to play your odds.
• Change your passwords: If your passwords are easy to guess, change them. Even if they’re not easy to guess, still change them regularly.

The news story mentioned above highlighted the potential for this type of crime to lead to identity theft, but it also mentioned that no actual cases of such crimes have yet been reported – though that could be because the RFID scan theft is such a difficult technique to trace.

Posted in Consumer Protection, Credit Cards, Financial Literacy, Identity Theft | Comments Off

Can No-Limit Credit Cards Hurt Your Credit Score?

A recent article in the New York Times warns of the potential credit-score harm that a no-spending-limit credit card can have. And, while a credit card with no spending limit may seem like a product that would only be available to folks with strong credit, actually using one might backfire.

How Your Credit Score Works

In order to understand how no-spending-limit cards could hurt your credit score, it’s important to know how a credit score is calculated. Here’s a summary:

• Payment history: Your record of on-time payments is one factor that determines your overall credit rating. Unsurprisingly, timely payments help improve your credit score and late or missed payments can hurt a score.
• Available credit ratio: This refers to how much credit you’re currently using compared to how much you have at your disposal. As a general rule, using only a small percentage of your available credit is best for your credit score; maxing out credit cards or otherwise approaching the limits of what you can borrow is worse.
• Age of accounts: Older accounts are considered “better” than newer ones because they demonstrate your long-term ability to handle credit.
• Diversity of accounts: This factor refers to what kind of variety you have in your credit sources. It’s best to have credit from various sources (e.g. from a mortgage, a car loan, a student loan, and a credit card rather than just four credit cards). Theoretically, this demonstrates your ability to handle different kinds of credit.
• Credit inquiries: Having lots of credit inquiries on your credit report can damage your score. This is because inquiries happen when consumers apply for a new loan or line of credit. A person trying to take out lots of new credit in a short time is seen as a high credit risk.

How No-Limit Cards Can Affect Your Score

No-limit credit cards play into the “available credit ratio” factor of the credit score. Depending on how your card issuer reports your account to the bureaus, one of two things can happen:

• The card is reported as an “open account”: In this scenario, the card issuer reports the account as, essentially, one without a set limit. Because of this, the no-limit card shouldn’t have much of a negative impact on your credit score.
• The card is reported as a “revolving account”: In this scenario, the card issuer must report an account limit, which usually defaults to your current balance or your highest balance within a certain time period. Naturally, this method of reporting would essentially show your card as "maxed out" at all times - even though you can always take on more debt - and put a significant dent in your credit score .

So how to decide whether a no-spending-limit card is for you? First of all, figure out how your issuer plans to report your account to the credit bureaus. And if it identifies the revolving account technique, you might want to drop that application form.

Posted in Consumer Credit, Consumer Protection, Credit, Credit Cards, Credit and Bankruptcy, Financial Literacy | Comments Off

Watch out for these Ridiculous (but Legal) Credit Card Fees

Since the passage of the Credit CARD Act and its full implementation this summer, consumers have been protected in some important ways from the credit card industry. But, as Credit.com reminds us in this post about absurd credit card fees, there are still plenty of credit card industry practices to be wary of.

Here’s a look at some of the fees you should watch out for (and avoid, if possible) if you’re in the market for a credit card.

• Hefty upfront or activation fees: Though the CARD Act limited how high initial fees can be on credit cards, many issuers are still charging upfront and/or activation fees. One industry insider has apparently defended these fees as legal because many issuers assess them before an account has officially been activated, meaning that they can’t contribute to the card’s limit.
• Credit insurance or protection: This credit card charge is reportedly designed to allow consumers to stop making payments if they lose their job unexpectedly (but, one would assume, it would not stop any interest from accruing on the balance due). Naturally, it’s not free, and, according to Credit.com, your credit card issuer may not even tell you that you’re paying for such “protection” – you have to check your bill to determine whether you’re forking over cash for this. And, if you are, consider calling your card issuer to cancel it.
• Inactivity fees in disguise: Because the CARD Act forbids credit card issuers to charge inactivity fees (that is, charges for not using a card), some companies, it seems, have done little more than renamed their inactivity fees to keep them alive. Some cards apparently charge “annual fees,” which consumers don’t have to pay if they charge a certain amount each year. If you use your card very little and don’t think you’ll reach the annual fee limit, you may want to close the account.
• “Pick-a-rate” interest rates: This practice, according to Credit.com, is particularly nefarious because it can go undetected by individual credit card holders – it doesn’t cost individuals very much money, but, when applied to millions of accounts, earns a hefty chunk of change for credit card companies. What essentially happens is that credit card issuers charge a slightly higher interest rate than usual – your best bet is to avoid cards that have this language in the agreement: your interest rate “will be the maximum prime rate reported in the 90 days preceding the last day of the billing cycle.” An ordinary interest rate will be signified in your contract in this language: your interest rate “will be the maximum prime rate reported on the last day of the billing cycle.”

The bottom line? Watch out. Even though federal law protects your consumer rights to a certain extent, it’s still essential to read all the fine print and make sure you understand the terms of your credit card before you sign anything.

Posted in Consumer Credit, Credit Card Debt, Credit Cards, Credit and Bankruptcy, Financial Literacy | Comments Off

Study: We’re Using Our Credit Cards Less

A study conducted last year by the Javelin group reportedly found that, as a nation, we’re cutting back on our credit card usage. The study apparently found that, while 87 percent of consumers polled in 2007 said they’d used a credit card in the last month, only 56 percent answered yes in 2009.

And, according to sources, the researchers think that number will fall again in this year’s survey.

Potential Benefits of Lowered Credit Card Use

While the finding itself suggests that Americans are responding to the weak economy by shifting their primary payment techniques, the larger potential effects of our changing behavior are interesting as well.

• More attractive cards: One potential side effect of decreased use of credit cards would be that credit card issuers could start trying to lure customers back with more enticing card offers, which could include rewards programs, low interest rates, versatility or a number of other options. This is by no means a guarantee, but it’s something to watch out for it you’re in the market for a new credit card.
• Less personal debt: A move toward debit cards and prepaid cards could lead us to lower levels of personal debt. While this would have to be a broad and fairly long-term shift in order to significantly reduce debt, such a shift could even affect the number of personal bankruptcy filings.

Credit Cards and Bankruptcy: The Connections

It’s important to understand the connection between bankruptcy and credit cards in any examination of our nation’s credit habits, especially during a recession, when more Americans might be pushed to seek bankruptcy protection. Here’s a look at some key links:

• Credit card debt in bankruptcy: Many bankruptcy filers have significant credit card debt when they file their bankruptcy petition. And, because credit card debt is not very high-ranking among debt types in the eyes of the court, a significant portion of those who enter bankruptcy with such a burden find some or all of their debt discharged.
• Credit cards after bankruptcy: Because high credit card bills lead many bankruptcy filers to financial distress, some are skittish about applying for credit cards after they exit bankruptcy. But credit cards, when used well, can actually help strengthen your credit rating and thus help you “prove” to potential lenders that you’ve adopted healthy financial habits.

Is Your Credit Card Use Healthy or Risky?

If you’re worried about your credit card bills or if you’ve found yourself depending more and more on your credit card to make ends meet, you may be heading toward financial upset. And, in many cases, taking action sooner rather than later can make the process of financial reform much smoother.

To get an objective opinion about your overall debt levels, consider consulting with a bankruptcy attorney, who may be able to help you get on the path to healthy finances once and for all.

Posted in Credit Cards, Credit and Bankruptcy, consumer debt, trends | Comments Off

Study: Credit Card Application Disclosures Improving

Here’s some good news from the world of credit: according to a study conducted by the web site CardHub.com, the language on applications for credit cards has improved in clarity in recent years. Specifically, the transparency and completeness of disclosure of a credit card’s terms in the large print has gotten better.

The study looked at several elements of a credit card agreement, including these:

• Clarity on rewards: This category rated how easy it was to interpret and apply rewards points.
• Clarity on annual fee: Here, the study looked at whether issuers displayed the annual fee prominently or hid it among other pricing details.
• Clarity on cost of carrying a balance for new purchases: This section looked at the clarity of introductory interest rates and APRs for new purchases made with the card (i.e. not balance transfers).
• Clarity on cost of making a balance transfer: Here, the study examined the ease of finding how much it would cost to transfer balances from one credit card to another.

The study based its clarity ratings on whether or not the researchers had to click to various pages before finding the information they wanted, whether they had to sift through fine print and whether information was clearly visible on the page.

The Findings

If you’re interested in applying for a new credit card, the study may be worth checking out, as it includes detailed scores for cards put out by the top ten issuers in the U.S. Overall, the study found these trends:

• Transparency is improving on annual fee disclosure: Whether because of new regulations introduced by the Credit CARD Act or other motivations, it seems that most card issuers have improved the clarity with which they explain the annual fees associated with their cards. Annual fees have apparently become more popular since the passage of the CARD Act, which limits overdraft fees.
• Transparency is still poor for balance transfers: One area in which many cards reportedly need improvement is information about transferring balances from one credit card to another. While balance transfers can be used to lower interest rates and thus help pay down debt, they often come with fees and unclear terms, which can make them more trouble than they’re worth.
• Cash-based rewards are easiest to understand: Another area where card issuers fell short of the transparency mark was on disclosing how rewards points and miles work and what exactly they’re worth. Because of this lack of clarity, the researchers recommend cash-back rewards as the most effective kind to use.

What might all of this mean? Hopefully, it will mean people are better informed about using their credit cards and able to manage their finances more effectively—and possibly reverse the trend of unmanageable credit card debt and filing bankruptcy that the country has seen for decades.

Additional Resources

The Credit CARD Act of 2009

Posted in Credit Cards, Credit and Bankruptcy, Financial Literacy, credit card statement | Comments Off

What Do You Know about Your Credit Card Agreement?

A recent study from CreditCards.com illuminates a worrying issue about credit cards that may not be addressed by the Credit CARD Act (taking full effect later this month).

The study, which examined what it calls the “readability” of various credit card agreements, found some troubling trends, including:

• The average credit card agreement (that long document of fine print you have to sign when you open a new credit card) is written at a 12th grade reading level.
• The average American, it seems, reads at a ninth grade reading level, though as many as 48 percent read at a sixth grade level or below.
• As many as 80 percent of American adults have reading skills that aren’t up to the task of deciphering the language included in credit card agreements.

Taking into consideration from this study, it’s not at all surprising that Americans are getting in over their heads with credit card debt—to the extent that bankruptcy filings are expected to approach two million this year, according to sources.

Encouraging Changes

While the findings of the readability study may be cause for concern, there is some good news out there. For one thing, the study was reportedly made possible because of one requirement of the Credit CARD Act, which requires credit card issuers to submit copies of their card agreements to the Federal Reserve and for the Fed to post those agreements online.

And, as sources indicate, the average American needn’t always be at a loss when trying to understand the fine print in a card agreement:

• The newly mandated Consumer Financial Protection Bureau will have the ability to require credit card issuers to write their agreements in plain English, so that more credit card users can understand what they’re signing up for.
• Some banks apparently already write their agreements at a ninth grade level or below, which is what consumer advocates recommend. For a list of banks that offer more understandable contracts, see the CreditCards.com article.
• New requirements from the Fed mean that credit card agreements must include a one-page summary document of terms (which is a good thing, considering at least one agreement studied included more than 20,000 words!). This should outline the major terms a card requires.

So what does it all mean? The lack of readability in credit card agreements is scary partly because most consumer advocates push consumers to read in full any document before signing it – but reading doesn’t always mean understanding. If you aren’t sure about your card’s terms, consider asking a trusted friend or advisor to guide you or switching to one of the easier-to-fathom cards mentioned in the article.

Posted in Credit Cards, Financial Literacy, credit CARD act, credit card agreements, credit card statements | Comments Off

Look Out for More (Legal) Credit Card Fees

With the Credit CARD Act set to take full effect on August 22, many credit card issuers are reportedly already altering their policies to come into compliance with the law. And, because that law seriously limits some of the fees issuers can charge (including overdraft fees), many banks are also, according to this article, introducing new fees.

What You Might Notice

Make sure you’re reading your credit card statements closely in the coming months, as any new fees will be mentioned there. Here are some you might encounter:

• Annual Fee: This isn’t a new one, but many issuers have abandoned annual fees in favor of inactivity fees, charging customers who don’t use their cards often enough. Because the CARD Act outlaws inactivity fees, sources note that you should expect the annual fee to work much the same way: if you make enough purchases, your issuer might waive the expense, but if you don’t spend a minimum amount of money (i.e. if your account is too inactive), expect to pay.
• Foreign Transaction Fee: This is for when you make purchases in another country (regardless of currency) and is often charged in addition to a currency conversion fee. You can apparently expect this one to come to one to three percent of each purchase you make—to minimize the amount you pay, taking large amounts of cash out of ATMs and making cash-only transactions is often the best plan.
• Cash Advance Fee: Again, this one is already company standard, but sources report that you can expect your cash advance fee to rise in the coming months. Remember: cash advance may be convenient, but it’s expensive, as card issuers charge both a flat transaction fee and a steep interest rate (usually higher than your overall interest rate).
• Paper Statement Fee: Like receiving your monthly statement in the mail? It seems many banks have begun charging fees (ranging from $1 to $9 per month) to those who want paper statements. If you’ve got an email address and a printer (or digital storage space), you might want to opt out of this.
• Setup Fee: This is reportedly already common practice on most secured credit cards, which essentially work like debit cards: the transactions you make are secured by money you pay to the credit card company ahead of time. While secured credit cards can be useful as credit rebuilding tools to those with weak credit (including those recovering from bankruptcy filings), they’re expensive and often come laden with fees, so that you might have to pay a couple hundred dollars just to activate your account.
• Reward fees: Whether you want to redeem your rewards points or get them back after an issuer takes them as a penalty (maybe for a late payment), you’ll have to pay, usually between $20 and $50, according to the article mentioned earlier.

Posted in Credit Cards, Credit and Bankruptcy, credit CARD act, credit card fees | Comments Off

Credit Cards After Bankruptcy

After a bankruptcy filing, many people are reluctant to wade back into the world of credit, often because too much credit allowed them to build up the kind of debt that pushed them into filing for bankruptcy in the first place.

But, as many financial analysts note, rebuilding credit is an important part of recovering from personal bankruptcy. Here’s an outline of why and how to know if you’re ready to apply for a new credit card. For a more detailed look, check out this article from BankRate.com.

Credit after Bankruptcy?

Put simply, you need credit because in contemporary American life, your credit history plays a major role. Specifically:

• Housing: Many landlords check a person’s credit report before determining whether to rent to her. Theoretically, because a credit report includes a history of payment of various debts, it can give a landlord an idea of what kind of renter you’ll be (i.e. whether or not you’ll pay rent on time).
• Employment: It’s also common for employers to check the credit report of a potential employee. Some lawmakers are trying to see this practice changed, but for now you can expect a job application to include someone peeking at your credit report.
• Loans: This is perhaps the most important reason to reestablish credit. Whenever you apply for a loan (whether it’s a credit card, a mortgage or something between), the lender will check your credit. The terms of your loan will generally be based in large part on your credit score and the information in your credit report. Those with a strong history of paying loans on time are decent risks for lenders and so can be offered lower interest rates. And the reverse is also true.

But having no credit history at all means that potential landlords, employers or lenders would have no way to gauge what kind of risk you’d be to them, and so might deny you whatever it is you want.

When to Apply for a Credit Card

This depends largely on you and your financial habits. The BankRate.com article suggests considering these factors:

• How you’ll use it: The best way to use a credit card is to use it like cash. In other words, only buy with a card what you could afford with cash. That way, you can pay your bill in full at the end of each month. Cards grant you certain conveniences (like online shopping), not a license to spend.
• Why you filed for bankruptcy: If something unexpected like a divorce, death, illness or job loss led you to file, consider saving up about two months’ expenses before applying for a card. That way, if another emergency crops up, you won’t be tempted to run up a balance on your card.
• What card you’ll get: There are a lot of credit cards out there. Do plenty of research and find one that suits your needs. And if you can’t qualify for anything but cards with outlandish fees, wait a bit longer and try again.

Posted in Credit After Bankruptcy, Credit Cards, Credit and Bankruptcy, after bankruptcy | Comments Off