Solid Strategies to Avoid Credit Card Smackdown

We’re officially four months away from the Credit Card Holder’s Bill of Rights going into effect. And, if certain Democrats have their way, we’re only thirty days away. But, for the sake of argument let’s assume that the CARD Act provisions will wait until February 2010 to become enforceable law.

During these last few days of the credit card world’s version of the Wild Wild West we should continue to see credit card issuers behaving badly, very badly, (see past blog on Banks Acting Badly), in fact the mega-credit card issuers have a shrinking window of opportunity to finish remolding their cardholder base to look more like what they will finally deem as being to their liking. This means consumers will continue to suffer the at the hands of their credit card companies, that is of course unless they employ one or more of the following strategies.

1. Don’t Not Use Your Card – Ok, the poor grammar was intentional and corny but I think I’ve made my point. Credit card issuers are in busy to make money and make a profit. They can’t do either unless you are using your credit card. And, the best news is that you do not have to carry a balance from one month to the next in order to drop a few dimes in your credit card issuers pockets. Each time you use your credit card the merchant (aka the place you used the card) has to pay the bank a fee. This fee is called interchange. It technically comes out of your pocket because many retailers will build the assumed fee into the price of the merchandise but it sure doesn’t feel that way when we buy stuff with our credit cards. So, knock the dust off your cards and use them for modest purchases. Don’t revolve a balance and don’t get into a position where your balances spiral out of control and you’ll be fine.

2. Shut Up! – In the past a viable strategy to get fees waived and interest rates lowered was to call your credit card issuer and complain or otherwise plead your case. That’s still a decent strategy but beware. Your credit card
issuer might turn the tables and start asking YOU questions in order to determine whether or not they still want to do business with you. If you call them and THEY start asking questions about your job status and salary then end the convo and hang up or you might just end up with a closed credit card.

3. Open Another Card, NOW – One of the worst strategies I see people employing today is the 1-card strategy. This is a consumer who has swallowed the Dave Ramsey gospel hook, line and sinker. The problem is that it’s unrealistic and appealing only to the lowest common credit denominator. You should have MORE cards, not fewer cards. Clearly this is a credit score play as well since having more available and unused credit limits are always good for your credit scores. So, if you have one or two credit cards right now, think about opening at least one more. This gives you options in case one of your credit card issuers starts behaving badly towards you. Nothing
is more empowering than saying “I’ll take my business elsewhere” and then actually doing it.

4. Don’t Hide Behind Great FICO Scores – FICO published a study earlier this year and the findings showed that the median FICO score for a consumer who has seem his or her credit limit reduced was 770. A 770 FICO score is fantastic in any lender’s book and especially in this credit environment where lenders are gravitating to stronger borrowers. What this means is that just because you have great FICOs it doesn’t fully shield you from adverse treatment from lenders.

5. Go Small and Go Local – John Ulzheimer, founder of http://www.credit.com/ and a nationally recognized credit expert and he made an interesting point. He said that we, as consumers and watchdogs, tend to focus on the largest 5-10 banks and tend to forget about the thousands of lenders who are NOT treating their customers poorly. Credit unions are a great example of these lenders. If you are sick of how you’re being treated by your Manhattan bank then perhaps you need a local credit union or local bank on your side.

6. Don’t Exit The System – The blogs are on fire with angry consumers who are claiming to have sworn off credit for the foreseeable future because of how they are being treated by their lenders. “From now on if I can’t pay cash for it I won’t buy it.” Eh, that plays well on the big screen but it’s not realistic. Carrying around cash to pay for things is a bad idea. And good luck using debit cards for things like business travel and European vacations. Stay in the system, please.

7. If All Else Fails, Litigate – If you’re finding yourself saddled with a garbage credit report because of errors and you can’t the credit bureaus or lenders to correct your files then think about filing a lawsuit. You certainly wouldn’t be alone. There will be over 8,500 credit related lawsuits filed this year. Collections agencies are the targets in most of them but certainly the credit bureaus and lenders are in the cross hairs a fair amount too. Just be
sure to hire a lawyer who knows what he’s doing.

So there you have it, seven solid strategies to hopefully minimize your chances of being treated poorly by your creditors. And while there are certainly no guarantees that you’ll exit this credit environment without a few scars, you can certainly make yourself as immune as possible by doing a few easy and inexpensive things. Good luck!!

Visit us at http://www.peakcreditsolutions.com/

FICO 08 - The Ins and Outs

On January 29, 2009 TransUnion rolled out and made available the credit-scoring model called FICO 08. This is the newest version of the FICO® credit score, which is simply a redevelopment of their widely used industry standard classic score. The long awaited release of this model is good news for lenders, low risk borrowers, and those with low credit card balances. It’s bad news for piggybackers, companies that sell piggybacking services, consumes with a lot of credit card debt, and the flop of the century, so far, in the credit scoring world known as VantageScore.

FICO 08 will eventually be the industry standard credit score despite not being available yet from Equifax or Experian. We should see FICO 08 at Equifax before the fall and at Experian as soon as they start losing customers to TransUnion or Equifax. Experian has alluded to the fact that their ongoing litigation with Fair Isaac over VantageScore is causing some stress in their relationship and delaying the roll out of FICO 08. The problem is eventually lenders are going to get sick and tired of getting caught in the middle of the “Experian versus FICO” arm wrestling match and move their business elsewhere when they find out that Experian isn’t offering the new gold standard credit scoring model. When that happens you will be able to time the FICO 08 implementation at Experian with the second hand on your favorite watch.

So what is so different about FICO 08 and the other versions of the FICO score? There are three primary differences of note. They are:

1. Negligible Collection and Public Record Exclusion – The newest FICO score will ignore any collections or public records with an original amount less than $100. It’s important to note that for a collection to be bypassed by the score, thanks to the new logic, it has to be reported as a 3rd party collection agency account and not the collection department of a credit card company. If the collection shows up as “trade” then it will still count against your score even if it is less than $100. And, if the original amount was over $100 but it has been paid down to a current balance of less than $100 it will still count in your score. This is exceptional news for consumers who are haunted by low dollar collections caused by misdirected final utility bills and some insurance snafus.

2. Credit Card Utilization – Credit card utilization, the ratio of your current balances to your current credit limits on revolving credit card accounts, remains a highly important factor in your FICO credit score. However, in FICO 08 it takes on a whole new level of importance. Consumers who have balances that approach the reported credit limit will find their scores lower with FICO 08 than with previous versions of the scoring software. FICO’s research has apparently discovered that consumers who are highly utilized with their credit cards are more risky than they were in the past, hence the more punitive treatment.

3. No Piggybacking Allowed – This new version of FICO apparently has the ability to determine if an authorized user credit card account is an attempt to game the credit scoring system through piggybacking, which is the process whereby a consumer with poor credit would pay to be added to the credit card of someone with good credit as an authorized user. Fair Isaac will not disclose how they’re able to tell the difference between a legitimate authorized user account belonging to, say, a husband and wife versus one that has been made it to a credit report through other means, such as piggybacking. You will recall that FICO 08 was originally going to completely ignore all authorized user accounts. This new logic seems to split the difference between ignoring all authorized user relationships and doing nothing to discourage the use of piggybacking services.

So why does FICO 08 pose a problem for VantageScore? It’s actually quite simple. As long as FICO keeps improving what they refer to as their “classic” risk scores the less compelling it is for a lender to test, let alone switch, to a new score brand. Implementing a new version of FICO is much easier than implementing a whole new scoring model, like Vantage. In fact, a company called SubscriberWise has already implemented FICO 08 not more than two weeks after it became available.

The best advice for consumers who will begin to be scored with this new FICO score is for them to continue to do what they’re doing now. Continue to make all of your payments on time. Continue to work down your credit card balances as much as possible. Continue to apply for credit only when needed. If you can do all of these things then your FICO 08 score will be solid as a rock and, who knows, maybe your VantageScore will be solid too, although nobody will care.

Obama Signs Credit Card Act into Law

Today, President Obama signed the consumer Credit Card Bill of Rights into law. What does it mean to us consumers? Here are a few of the things it covers:

• Creditors cannot increase the annual percentage rate (APR) during the first 12 months of opening up an account.
• Creditors are required to provide consumers with a 45-day advance notice of changes in rates and significant contract changes. Rates that change due to a change in the index that the rate is based on are excluded from this 45-day notice requirement.
• Creditors cannot change the rate on existing balances.
• Promotional rates need to be in effect for at least six months from the beginning date of that promotion.
• Creditors need to provide a 30-day advance notice of an account closure.
• With certain exceptions, credit card issuers are prohibited from charging a finance charge based on the double billing cycle method.
• Creditors are prohibited from charging a fee on an outstanding credit card balance at the end of the billing period if the fee is attributed to the interest accrued on an outstanding balance that was fully repaid during that preceding billing period.

And there's more. Pretty impressive to get this passed in such a short period of time!

But what about the dreaded Unintended Consequences?

Hampering the banks' ability to do "risk-based" pricing (ie charge a higher interest rate for riskier consumers), tampers with the bottom line. Chances are, publicly traded banks which have investors to answer to, will make up that profit difference by raising everyone's rates and fees, cutting lines of credit and generally making credit less available to us all.

Oh, and the law doesn't take effect for another 9 months, so plenty of time for the banks to "behave badly" until then.

The Credit Card Comapnies vs. President Obama

President Elect Obama is trying to get a bill passed by Memorial Day that will crimp the credit card issuers' ability to raise rates on existing balances and other deceptive practices. With that warning shot across the bow, should we expect to see a spate of those dreaded letters from the credit card companies over the next week? Check back next week to see what happens.

Banks Behaving Badly and Your Credit Scores

"We are writing to advise you about a change being made to your account." This prologue is a part of letters being sent to millions of U.S consumers and sets an ominous tone for the remainder of the communication. The "change" being referred to is either your credit card account has been closed or the credit limit has been severely slashed. In this particular example, the credit limit was lowered on a Barclay's Bank credit card by $15,000.

In normal economic times a credit card issuer would only take such adverse action against one of their cardholders if they've done something wrong, such as miss a payment. However millions upon millions of cardholders are seeing their terms changed because of seemingly innocuous actions such as "a change in spending patterns" or "inactivity." I guess we can attribute this to the fact that we're not in normal economic times, but it's not fair to consumers to leave it at that. Closing accounts and lowering credit limits can harm your FICO® credit scores. And since these actions are being taken against consumers who, in many cases, have fantastic credit scores the damage can be dramatic. Here's what you can do...

Knock the dust off that old credit card – An inactive credit card, one that is open but never used, actually costs the credit card issuer money each month. Your account information is taking up space in their databases and they're still likely buying credit scores on you each month trying to decide how to entice you to actually use the card. If you never use the card you are not generating merchant fees, or interchange fees, for the credit card issuer. And, obviously, if you're not using the card you won't have a balance rolling month over month so you're not generating interest income for them either.

In many cases, now, the issuer is simply choosing to lose you as a customer by closing your account. You want to avoid this so you'll have to appease them by generating a little bit of revenue. The good news is that it won't come out of your pocket. Simply move the card to the front of your wallet and the next time you fill up your car or buy a pair of shoes, use that dusty credit card. This will reset the clock of activity and generated a little bit of income for the issuer. Pay off the bill when it shows up so you don't pay any interest and repeat this strategy at least once per quarter.

Watch your spending patterns – This is a friendly way of your issuer telling you that you don't have enough debt. For example, if you have a card with a $25,000 credit limit but have never charged more than a few hundred dollars in any month, and you pay it in full, then the issuer is questioning the need for such a high credit limit. They still have the risk of the "open-to-buy" (unused credit limit) so many have made the decision to adjust credit limits so they are more in line with your spending patterns.

Of course to avoid this you'd have to get into much more debt with that issuer, which could hurt your credit scores and cause other credit card issuers to take adverse actions too. If you've received a letter lowering your credit limits because of spending patterns there's simply not much you can do other than be happy that they didn't close the account, which would have been worse. Continue to use the card sparingly and think about opening a new card to help replace the lost credit limit. Eventually we'll get back to the time when we can pay our credit cards on time and not have to worry about credit card issuers being scared of their customers, but for now you need to think outside of the box to prevent the bank from putting you outside of the vault!