Debtmerica Debt News

Debit card use is closely tied to consumers' credit scores

Wednesday, August 04, 2010 10:00 AM

A new study has found that the number of times a consumer uses their debit card to make a purchase every month, and how much they spend on them, is closely related to their credit score.

According to a study from MasterCard, which also cited third-party findings from Lightspeed Research, the lower a consumer's credit score, the more likely they are to use their debit card more frequently every month in lieu of taking on credit card debt.

The study said that consumers whose credit score is considered "subprime" - or below 650 - are far more likely to use their debit card to make purchases. These borrowers use their debit card to make an average of 28 purchases per month, and spend $860. This use makes up 73 percent of all their spending on cards.

Consumers whose credit card companies consider them simply "prime" - those with scores between 650 and 720 - use their debit cards less often, the study found. They make just 20 purchases per month on average, and spend $618.

The study also found that consumers with the best credit scores - those above 720, which are considered "superprime" - use their debit cards with even less frequency. These borrowers make an average of 11 purchases a month on debit, and spend just $324 on them. Standing in stark contrast to their subprime counterparts, these borrowers use credit to make 72 percent of all their card purchases.

Despite the wide-ranging disparity in debit card usage per month, however, the study found that the total number of debit transactions has increased considerably, and across the board, over time. Between the fourth quarter of 2008 and the same period a year later, the amount of debit purchases subprime borrowers made per month has increased 10 percent. That number rose 17 percent for prime consumers, and 12 percent for superprime. However, MasterCard found that these increases did not affect credit card usage for the most part, but rather that the rise in debit card spending cut into cash and check payments instead.

In recent years, as the economy worsened and credit card delinquencies rose, lenders made it more difficult for consumers with lower scores to obtain a line of credit, in some cases shutting them out completely. This trend may be one reason for their low usage among subprime borrowers. Add a comment

Which is better: charge cards or credit cards?

Tuesday, August 03, 2010 10:00 AM

While they look the same, and many cards bear the logos of major lenders, there is a huge difference between credit cards and charge cards.

Despite their cosmetic similarities, a charge card works in an entirely different way from their credit counterparts. According to a report on the consumer advice website Mint Life, they don't have a monthly limit, and consumers can spend as much as they want on them until the card's issuer cuts them off. Instead, these cards carry what is referred to as a "shadow limit," meaning that the company assesses on a case-by-case basis what a consumer's upper boundary for spending is.

The other major difference between the two is that balances on charge cards must be paid off in full every month, allowing consumers to remain debt free, the report said. While this might be a pain for consumers, it is actually beneficial to them in the long-term because it both keeps spending down and never accumulates interest. As a result of this, however, these cards typically come with annual fees.

Credit cards, on the other hand, do have credit limits, the report said, and common ones for low-end cards typically range from a few hundred to a few thousand dollars. These cards don't have to be paid off in full every month, but do carry annual interest rates on any debt that is still unpaid on the account's balance. This type of card, unlike charge cards, typically don't carry annual fees as a consequence, since consumers are giving the lender plenty of revenues in the form of interest payments.

Because of these characteristics, both cards have their own benefits and drawbacks, the report said. Because charge cards basically guarantee that a consumer can't find themselves deeply in debt as a consequence of using them - since it has to be paid off every month - they're a good way for a consumer to establish a solid credit history. However, with no credit limit, the part of their score that's governed by how much they can borrow is basically non-existent. Credit cards obviously offer that aspect, but also come with the looming threat of the consumer incurring lots of debt.

Consumers may find that they benefit from having both types of card, which will allow them greater flexibility in finding a payment method that works for them. Add a comment

MasterCard's profits make huge leap as consumers increase per-purchase spending

Tuesday, August 03, 2010 09:00 AM

An increase in consumer spending - not by volume but rather in the value of the things they bought - helped MasterCard post large profits in the second quarter.

The company, which processes a large percentage of all credit card transactions in the U.S., said that profits rose 31 percent between April and June of this year thanks to decreased operating expenses and an increase in consumer spending on a per-purchase basis. In addition, American consumers spent more overseas in the three-month period.

"We are pleased with our performance in the second quarter," said MasterCard president and chief executive officer, Ajay Banga. "Solid GDV growth, particularly in markets outside the U.S., continued momentum in worldwide cross-border volumes, and thoughtful expense management all contributed to good financial results this quarter."

The company's numbers showed what could be a renewed consumer confidence, because while the company's profits climbed considerably, the number of total transactions it processed was essentially flat, increasing just 0.1 percent. This is an indicator that while consumers aren't making more purchases, they are buying more expensive items. Add a comment

FHA announces it will introduce minimum credit score for mortgages it insures

Monday, August 02, 2010 10:00 AM

Because it has been hemorrhaging money for months, the Federal Housing Authority announced it will begin to institute a minimum credit score for the homes it insures.

According to a report in the Wasington Post, the FHA will no longer insure mortgages for consumers who have faced credit problems and have a rating of less than 500 because it has seen the cash reserves it keeps to pay for "unexpected losses" evaporate to dangerously low levels in recent months.

The report said that in the past year and a half, the number of FHA-insured loans made up about 30 percent of all new single-family home purchase mortgages, an increase from just 3 percent in 2006. Similarly, about 20 percent of new refinances are also insured by the Authority. However, as the number of loans it insures rose, so too did its default rate, which cost it a significant amount of its reserve money.

The Post said that if the agency runs out of money, taxpayers will have to foot the bill for all the home loans that go bad. By instituting the minimum credit score of 500 for all borrowers, it is trying to insulate itself against the risk of running out of money while still maintaining its key role: keeping the housing market afloat.

According to the Post, not only will the FHA introduce a minimum, but it will also require all borrowers with a credit rating under 580 to have a higher down payment on their home than those that don't. Currently, borrowers only have to put down 3.5 percent of the home's total cost, but those with a score below 580 will have to pay 10 percent. This protection should help the Authority considerably, as the percentage of borrowers that are "seriously delinquent" was three times higher for those below that mark than those above it in January, the last month data was available.

However, many mortgage lenders have already been tightening restrictions, the report said. This is one reason that just 1 percent of current FHA-insured borrowers have scores below 580.

These new restrictions could be one reason that home sales have been so slow in recent months despite record lows in mortgage rates more or less across the board. Add a comment

Credit card companies still finding loopholes in laws

Monday, August 02, 2010 10:00 AM

Credit card issuers have lost out on millions in profits as a result of the laws put in place by the Credit Card Accountability, Responsibility and Disclosure Act, which prohibited practices deemed excessive and harmful to consumers.

According to a report in the Dallas Morning News, however, those companies have made up some of those lost profits by exploiting loopholes in the Credit CARD Act. They are complying with requirements like the necessity of 45 days' notice before changes to a credit card agreement, any payment made above the minimum be put toward the credit card debt with the highest interest rate, or those eliminating fees for going over a card's credit limit. But at the same time, they've found new ways to drive revenues.

The report said that the Pew Safe Credit Cards Project has found that companies are still engaging in what it calls questionable practices, including sharp, unannounced rises in penalty interest rates.

"For the first time, we have seen credit card disclosures warning consumers that interest rates could go up as a penalty for certain actions, but not stating how high those rates could go," Nick Bourke, director of the project, told the paper.

Pew found that surcharge fees for cash advances also rose sharply between July 2009 and March of this year, the report said. The average increase for these charges rose by one-third, from 3 percent per transaction to 4 percent.

Consumers should be aware that any new card they sign up for now may come with an attractive introductory interest rate, which then increases significantly when that initial period ends. This practice may seem harmful as well, but because it was spelled out in the credit card's initial agreement, it is perfectly legal under the new laws. Add a comment

Identity theft scam could create credit card debt for power company's customers

Tuesday, July 20, 2010 10:00 AM

Customers of a major power company in Utah are being targeted in an identity theft scam that could cause them to rack up thousands in fraudulent credit card debt.

According to a report in the Salt Lake City newspaper the Deseret News, identity thieves are trying to rip off customers of Rocky Mountain Power by calling their homes posing as employees of the power company. The criminal typically asks for the customer's credit card number to prevent an interruption of service at their home. Often, they say the reason for the problem is the customer's last check did not include a signature.

"These calls are in no way associated with our company, and we want to make sure our customers are aware that anything that seems unusual is just that — unusual," Karen Gilmore, vice president of customer services for the company, told the paper.

Consumers should be aware that legitimate representatives of any company would never call to ask for credit card information. Businesses that do take sensitive financial information over the phone would typically have several safeguards in place to reassure consumers that they're really with the company. Add a comment

Two senators push for greater protection from the Fed on credit card debt

Tuesday, July 20, 2010 10:00 AM

In recent months, many consumers may have found themselves hit with penalty rates and fees for a late payment, which has only added to their ever-mounting credit card debt. And while new Federal Reserve rules will soon be enacted to help alleviate the problem, two U.S. senators say they don't go far enough.

According to a report from the Associated Press, Senators Charles Schumer of New York and Tom Harkin of Iowa wrote a letter to Federal Reserve Chairman Ben Bernanke, urging him to add extra rules that would prevent credit card companies from hitting consumers who are behind on payments with exorbitant penalty rates.

"Credit card companies can still double or triple the interest rate when a consumer falls two months behind on payments," they wrote.

The senators say that if the new rules, which go into effect on August 22, are not altered to comply with their request, they will seek legislation to compel the Fed to change them, the AP reported.

While these rules do not govern penalty rates, they do prevent credit card companies from charging excessive penalty fees. Add a comment

More Americans' retirement savings to fall short

Monday, July 19, 2010 10:00 AM

According to the latest projections, it seems as though many Americans are at risk of running out of savings within a decade of retirement.

According to the latest report from the Employment Benefit Research Institute, a nonpartisan group that monitors how financially ready Americans are for retirement, at least 43 percent of people in all three age groups measured could hit financial problems early in retirement. A significant number of Early Baby Boomers (47.2 percent), Late Boomers (43.7 percent) and Generation Xers (44.5 percent) are considered "at risk" for running out of the basic amount of savings required to provide for themselves and cover medical expenses for the uninsured within 10 years, assuming a retirement age of 65.

The report said 70.4 percent of households in the bottom third of pre-retirement income are "at risk" for this eventuality, and 41.6 percent of the middle third are in the same situation. Only 23.3 percent of the highest-income group are "at risk."

Many Americans may have run into money troubles thanks to a number of factors, like high unemployment rates or mounting credit card debt, that caused them to dip into their retirement savings to make ends meet. Add a comment

Falling credit card debt causing lenders to introduce incentive programs

Monday, July 19, 2010 09:00 AM

As more people across the country are paying off their credit card debt, it is forcing lenders to more aggressively pursue new accounts.

According to a report in the Chicago Tribune, credit card companies haverecently begun to roll out new incentive programs in an attempt to entice new accounts and poach consumers that keep their balances with competitors. Lenders have also started marketing those new programs rather aggressively.

The report said that Discover Financial Services is increasing its marketing budget for the third quarter to levels not used since the same period of 2008, and Chase launched its new "Ultimate Rewards" program with a nationwide ad campaign earlier this month.

Fortunately for consumers, the new rates they get for opening or switching their account to a new lender will have to last for quite awhile. The new Credit Card Accountability, Responsibility and Disclosure Act requires all lenders to maintain introductory rates and incentives for at least a year. Banks will also have to give significant notice before they can change those offers. Add a comment

New requirements for credit report checks worry mortgage lenders

Friday, July 16, 2010 01:00 PM

When Fannie Mae announced it would require a second check of a consumer's credit score before it would allow them to close on a mortgage, it may have given Americans some cause for concern.

According to a new report from the Washington Post, it wasn't just consumers who were worried. Mortgage lenders, too, say that this new requirement is causing logistical nightmares that are slowing home sales at a time when the housing market is as bad as it's been in over a decade. They say even small, short-term debts can affect a consumer's credit report enough to cause them to be rejected.

The report said Fannie Mae is now already reviewing its policy thanks to the flood of feedback from lenders, and will offer new guidance by the end of July. The company also noted that it didn't intend to actually require the second credit reports, but to merely emphasize existing policies related to due diligence.

According to a report in the Chicago Tribune, Fannie Mae also recently tightened restrictions for appraisals of single-family homes because of a number of questionable loans recently given out by lenders. Add a comment

Consumers with credit card debt get help from new financial reform bill

Friday, July 16, 2010 10:00 AM

While many Americans have piled up thousands of dollars' worth of credit card debt in the months since the recession began, there is help on the way thanks to the new financial reform bill.

The bill, which passed the Senate 60-39, will add new help for Americans in the form of the Consumer Financial Protection Bureau, which will operate as part of the Federal Reserve System. The new body will help to govern the way banks can lend to consumers, and will have the unprecedented ability to rule on rates and fees that it deems harmful.

"From now on, every American will be empowered with the clear and concise information you need to make financial decisions that are best for you," said President Barack Obama, who is expected to sign the bill before July 24. "It will reinforce the new credit card law we passed banning unfair rate hikes, and ensure that folks aren’t unwittingly caught by overdraft fees when they sign up for a checking account."

In addition to credit card lending, the new bureau will have oversight of several other types of loans, including mortgages. Add a comment

What your credit score means

Thursday, July 15, 2010 11:00 AM

Most consumers know that they have a credit score, and many are aware of what it actually is. However, a lot of people probably don't know exactly what that number means.

As more consumers' credit scores sink below 650, the basic cut-off rate between prime and subprime borrowers, it's important that they know the consequences of their lower score. According to a new report from consumer financial advice website Mint.com, consumers with a score under 650 are likely to be denied for credit or, worse, given loans with seriously unfavorable rates and terms.

Because many Americans may have ugly looking credit reports, it should also be noted that those negatives will stay on the report between seven and 10 years. However, bad marks do eventually have to be removed from it, and as negatives age, they matter less to lenders, meaning that credit scores can improve over time all by themselves.

However, there are steps consumers can take to improve their credit scores, including making their payments on time - which accounts for 35 percent of a score by itself - and paying more than the minimum on their credit card bills. Add a comment

Alliance says it wrote off less credit card debt in second quarter

Thursday, July 15, 2010 09:00 AM

Many credit card companies across the country have seen an increase in the rate at which they've written off delinquent credit card debt as irretrievable in recent months. But one company that issues cards for major retail chains actually reported a decrease in its charge off rate.

Alliance Data Systems, which controls credit card and loyalty rewards programs for chains like Ann Taylor, Victoria's Secret and Pottery Barn, said that the rate at which it wrote off credit card debt as uncollectable declined in the second quarter of the year to 9 percent. That rate was at 9.8 percent for the same period of last year, and 9.4 percent for the first quarter of 2010.

Like most major lenders, Alliance also reported a drop in delinquencies. Payments that were 30 days behind or more dropped from 5.9 percent through June of 2009 to 5.4 percent for the same period this year.

However, those lenders have reported lower delinquency because they have written off those debts, whereas Alliance has managed to lower both delinquency and charge off rates. Add a comment

June retail sales fall as consumer spending dips

Wednesday, July 14, 2010 01:00 PM

Sales at retail and food service businesses declined slightly in June, thanks to a drop in consumer spending.

According to the latest figures from the U.S. Census Bureau, retail and food services had sales of $360.2 billion, a decrease of 0.5 percent - though that number is within the margin of error - from May. The figure, however, is a 4.8 percent increase from the same month last year.

The Census Bureau said that retail and food services increased significantly for the quarter, despite the June losses. Sales were 6.8 percent higher than they were in the same quarter of last year.

According to a report from the Wall Street Journal, most economists were not surprised by the losses in sales. Consumer spending declined, they said, because of a combination of volatility in the stock market and the continued elevated levels of unemployment.

One economist said that the underlying numbers showed this decline was a long time coming because "household balance sheets [are] still over-leveraged," and that's the largest determining factor in consumer spending growth. Add a comment

Peer-to-peer lending offers help with debt consolidation

Tuesday, July 13, 2010 09:00 AM

Many consumers that have been considering debt consolidation might have found it difficult to get a loan from traditional banks thanks to the tighter lending restrictions forced by the economic downturn.

Butthere is a new trend that has helped many Americans get the money they're looking for called peer-to-peer lending. According to CBS News, the movement is taking hold because consumers now recognize it as a cheaper alternative to borrowing from banks for a number of reasons. While peer-to-peer lending sites do take into account credit score, credit history, income and employment situation, they have less stringent restrictions for who they will lend to, and lower rates as well.

While there are fees involved with using these sites, those seeking a loan for debt consolidation should be aware that they are typically lower than those credit card companies charge for balance transfers, the report said. There's also no fee for paying back the loan early.

According to the consumer advice website Bankrate.com, debt consolidation loans are typically difficult to pay off when they are issued through banks. Peer-to-peer lending might alleviate some of those troubles for borrowers. Add a comment

Many New Jersey residents face bankruptcy

Monday, July 12, 2010 01:00 PM

Millions across the country have faced the possibility of having to declare bankruptcy. For increasing numbers New Jersey residents, that possibility is becoming reality.

According to a report in the Times of Trenton, the number of bankruptcy filings in the state increased considerably - by 27 percent - in the 12-month period ending in May from the previous year. Those numbers hit their peak in March, when 4,166 state residents filed for bankruptcy. That was the highest monthly total since the federal bankruptcy laws were changed four years ago.

Exacerbating the problem is that many of these filings have been by individuals, and that number is climbing all the time. Salaries have stayed flat, and many homeowners have lost their jobs, which has wiped out their savings as their income dried up. That leads to more credit card debt, making their financial situation worse every month.

Nationwide, consumer bankruptcies increased steadily in the first six months of the year, climbing 14 percent over filings in the same period last year. But according to the American Bankruptcy Institute, there have been three months of slight decline in the number of bankruptcy cases. Add a comment

American credit scores sinking all the time

Monday, July 12, 2010 01:00 PM

More consumers are seeing their credit scores drop off this year.

According to a report from the AP, which cited new statistics provided by FICO, 25.5 percent of Americans - about 43.4 million - have a credit score below 600, meaning lenders view them as a risk, leaving them unable to qualify for credit cards, auto loans and mortgages. Over the last two years, the number of people in the lowest credit score category increased by about 2.4 million.

The report also said that this trend is likely to get worse before it gets better due to millions of unemployed Americans going longer without full-time work. Millions more face foreclosure, which can lower a credit score by 150 points. An ugly credit report takes considerably longer to repair than it does to ruin.

A new report from Fox Business said that new changes in lending laws are designed to help consumers out a bit, but that they will also force lenders to tighten their restrictions even more, locking out larger numbers of Americans. Add a comment

Consumer spending declines despite holidays

Friday, July 09, 2010 11:00 AM

Thanks to worries over the state of the economy, even holiday discounts weren't enough to push consumer spending forward significantly.

According to a report from Marketwatch, a number of retailers saw June sales push ahead slightly as consumers shopped both for the holiday discounts and as a result of rising temperatures nationwide, while others flagged unexpectedly. Department stores led the way, with retailers like J.C. Penney, Macy's and Nordstrom posting better-than-anticipated sales numbers, though Kohl's fell short.

Discount retailers, on the other hand, saw sales fall short of expert forecasts, Marketwatch said. Target's sales rose, as did those for Costco and BJ's Wholesale, but those increases were less than they expected.

Marketwatch said that these results mean retailers will have to increase their promotions for the back-to-school season, which is the second-largest sales period after the holiday season.

A report in the financial times said that June was an important month because it comes in the middle of the quarter and numbers from it will determine whether retailers will have to significantly discount inventory to offload it before the end of July. Add a comment

Credit card debt getting worse, despite numbers

Friday, July 09, 2010 09:00 AM

All the latest numbers make it look like a success story. Credit card debt and delinquencies have declined in recent months, and experts hail these numbers as a sign that Americans are pulling themselves out of financial trouble.

But a new report in the Wall Street Journal says a deeper look tells the opposite story. The real reason for these sharp declines over the past few months, despite rates of joblessness remaining rather high, is that credit card companies are simply writing off long-delinquent debt as money they will never collect.

The evidence, the Journal says, is found in the quarterly numbers from the Federal Reserve Board and the Federal Deposit Insurance Corporation, which show that despite $19.5 billion in debt reduced in the first three months of the year, $18.7 billion of that - almost 96 percent - was actually written off as being irretrievable.

A Forbes report on the drop in debt and delinquency said that unemployment and delinquency figures are usually closely connected, but that trend didn't hold last month as delinquencies dropped while joblessness held steady. Add a comment

Consumers can lower their credit card interest rates

Thursday, July 08, 2010 09:00 AM

With credit card debt mounting and bills piling up, many Americas may wonder what they can do to help their financial situations.

According to an article in U.S. News and World Report, one thing that consumers may now consider is trying to lower the interest rates they pay. There are several ways to attempt to do so, but the report says the easiest is to simply call the credit card company and ask for a lower rate. If a consumer mentions that they saw a low rate on a card from another company, their current lender may be inclined to offer a lower rate in an attempt to keep the business.

However, this does not always work, and consumers should be prepared to transfer their balance to a card with a low introductory rate. Often these new rates last for a year, and allow consumers to pay off nothing but the principal for up to a year. There is, however, often a fee associated with balance transfers.

Consumers should be aware that lenders have tightened requirements for borrowers thanks to the new credit card laws, which can complicate matters for consumers because new rates may simply be impossible to find. Add a comment