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Credit cards

Toothless credit card consumer protection laws

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Well, if there ever was any question about who holds sway in the halls of Congress, the outcome of the effort to regulate the credit-card industry to provide a little consumer protection. Who owns Congress? Big industries with deep enough pockets to hire persistent, heavy-hitting lobbyists, that’s who.

Have you received your notice from American Express yet? Mine came a couple days ago: a flatly worded announcement that late fees and interest rates are going up.

Not that I care: I don’t carry a balance on any credit card, and though I charge almost every purchase as a matter of convenience, I make it a point to pay well in advance of the due date.

Betcha this isn’t the last we’ll hear from AMEX on the subject. The Wall Street Journal recently reported that American Express and other major card issuers are canceling hundreds of cardholders’ accounts without explanation and without notice. In many cases, the canceled accounts are deemed inactive because the cardholders haven’t used them in some months. But at least a few accounts, including one reported in that W. St. J. article, belong to people who use their cards, never miss a payment, and pay off balances monthly.

Over at Freep, commentator Brian Dickerson calls the new legislation “regulation a regulated industry can love.” He points out that Congress rejected the only provision that would have given consumers any meaningful protection—a cap on the already usurious interest rates card issuers can charge. Says Dickerson:

In the end, card issuers preserved both their right to charge whatever the market will bear and their right to abruptly cancel a cardholder’s credit without advance notice.

Uh huh. I’ve said it before and I’ll say it again:

Politics is money, money politics.

Yep, I sure did say it before!

Economy Is All about Politics
Personal Finance IS Politics
Economy Is Politics: Arizona’s Politico-Economic Disaster

Sears Credit Card: A new fast one from MasterCard

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What should come in the mail today but a notice that, o lucky me, I soon will be receiving a shiny new gold-plated MasterCard to replace my ancient Sears credit card, which I thought I’d canceled years ago.

Huh. “Your new card gives you MORE!” 

Oh boyoboyoboy! 

“Earn Rewards Points!…
…with FREE membership in Sears Choice Rewards when you call 1-800-669-8488 and enroll by 10/31/09″

“Plus Earn Up To 1,500 Bonus Points!!!!!”

Be still, my heart. I can hardly contain my excitement.

At first I thought this thing is a straight-out replacement for the Sears card, which materialized some time back when I bought some appliances on one of those 12-month no-interest deals. If you have the cash to pay upfront, these offers can be played to your benefit: you just set the money aside a high-interest online bank account or into your credit union’s highest-paying account or 9-month CD. Then in the 11th month, you pay off the debt in full. Allows you to earn a few dollars on the float. Makes you feel smug.

However, a study of the fine print reveals that you don’t lose your regular Sears charge account unless you call an 800 number and have the MasterCard activated. If you do nothing, well then…nothing happens. The Sears card does not go away, and the MasterCard does not function. But if you don’t want them to send you an unsolicited credit card, the better to expose you to identity theft, then you have to waste some time navigating their punch-a-button maze to call and tell them to knock it off.

Well, I thought I’d closed that Sears account. Dug up the old, dusty file folder and found…nay. The last time they sent me a shiny new blue Sears charge card, I just dropped it in the folder and forgot it. The sticker with the phone number to activate it is still stuck to the front of the card.

I carry two cards in my wallet because some establishments refuse to pay American Express’s exorbitant merchant’s fees. That notwithstanding, I use AMEX because a) Costco won’t take any other card at its gas pumps and b) it gives me a $250 to $500 kickback once a year. Since I don’t carry cash, I need a back-up card if I’m to do business with retailers and service providers who won’t accept AMEX. That feels like one card too many for me: given my choice, I’d use only one card. So I absolutely positively do not need a MasterCard with a Sears logo on it.

This fine offer came in a first-class envelope labeled “credit-card replacement information—open immediately.” What it really is is issuance of an unsolicited credit card. I did not ask for this card, whose interest rate can go as high as 29.99%, and I don’t want it. Nor do I appreciate having to waste my time in their punch-a-button maze to get rid of the thing.

Didn’t they make that illegal?

If you’re a Sears customer, watch for this coming your way. And if you already have a perfectly fine general-purpose credit card, ask yourself why you need another one. If the answer is “I don’t,” note that you have to call them to “opt out” of this unsolicited gift.

Credit cards, debit cards, cash cards

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Good grief! Rousted out of the sack at 6:30 ayem by the bulk trash pickup, flashing their lights into the bedroom. I thought it was the Fire Department! Grr…I’d planned to sleep in for a while today, after working myself stupid yesterday on a horrifically mind-numbing project.

{Ugh!} Speaking of bulk trash, what do we have here but an e-mail from the sidekick reporting that our brilliant author’s 87 gerjillion ditzy boxed pullouts disappeared from the file I sent her!? How many more hours am I going to have to spend on this garbage?

Where was I? Yesterday, comes in the snail-mail a notice from Sears saying its credit-card issuer, Citibank, has made “some changes.” I’ll bet, think I. Actually, I expected the “change” would be to cancel the account, which I opened only to get the benefit of a 12-month no-interest scam on some appliances and have never used since.

No. They’re writing mostly to say they’re upping the already usurious interest rate another couple of points.

Interest on this card, in the wacko free-for-all age of the unregulated market, can go as high as (hang onto your hat) 29.9 percent! For heaven’s sake. And this is on a card for Sears, a joint commonly patronized by folks who never spend their time swimming in money. Is that or is that not the most rapacious thing you ever heard?

Over at Consumerism Commentary, Flexo has a discussion going about the merits of debit cards vs. credit cards. I’ve never used a debit card, partly because I have enough numbers to memorize, thank you, without yet another PIN, but mostly because I think they’re dangerous. If someone steals it, he can not only empty your checking account, he can drain it to the bottom of your check-cashing credit line. In my case, that’s $3,000 plus whatever cash is in the account at the time.

I realize they’ve changed the law since these things first came out, so that you do have some protection from rip-off artists. But the fact remains that you may not realize what’s happening until the account is already bouncing EFTs. So even if the bank reimburses you for the stolen money, you still are faced with the enormous hassle trying to explain to all your creditors that you’re not, no indeed not, a deadbeat. Your credit could be damaged, and who has time to run through every punch-a-button maze for every faceless corporation with which we all have the pleasure of doing business? That’s a nightmare scenario that I’ve preferred to avoid.

A credit card—providing you pay it off on time—has many advantages. First, most credit card issuers back you up to some degree in a dispute with a merchant. Second, many credit card issuers provide insurance for products that are lost, damaged, or stolen shortly after the purchase. Third, many credit cards give you kickbacks in the form of cash or “rewards.” And finally, you make only one transaction a month in your checking account, rather than a score of them. This allows you to keep your money in a money market account, which earns a sou or so more in interest than a checking account does.

There is, as many PF bloggers note, the risk that you’ll spend more money when you’re waving a card around than when you’re forking over cold, hard cash. Personally, I have the opposite experience. Cash disappears out of my purse like water flowing through a pipe. Put $100 in my hand in the morning, and by evening it will be gone and, more to the point, I’ll have no idea where it went!A credit card statement gives me a paper trail, so at least I know where I diddled away the money.

And as a practical matter, I don’t diddle it away with a credit card. I budget a specific amount each month that can be charged to the credit card. The credit union automatically transfers that amount out of my paycheck into a money market checking account, from which I pay credit-card bills. Using an Excel spreadsheet, I enter each transaction as a debit against the budgeted amount, so that at any given time I know exactly how much remains to spend. I also know when I’ve spent it all, and so I know when to stop charging stuff.

This works effectively to keep me from spending more than I have.

Recently, however, American Express, which issues the card I use most, changed the closing date on a billing cycle. I dodged an overcharge only because I was ill and so didn’t make it out to buy groceries on the extra day that appeared in that cycle.

Needless to say, I was less than pleased. Because I was running pretty tight on the budget, had I bought the groceries I needed that day, I would have had to raid savings to pay last month’s bill.

It occurred to me that I could get around this problem by purchasing cash cards at Costco and Safeway (which collect most of my money) in the amount that I normally spend at those emporiums each month. This would set my budget in stone: run out of cash on a card, quit buying. It would moot any cute little changes designed to trip up credit-card users. But if I charged them on my AMEX card, I’d still get a bit of a kickback (not as much, because the Costco gasoline purchases get a very nice kickback, but something). It would also mean that if I had not used the entire balance on such a card, that much more would be available to spend the following month.

Let us ruminate…

If indeed I have not spent a month’s alloted budget at Safeway, so that I have, say, $150 left over at the end of a budget cycle, then the only place I can spend that money is at Safeway. Wouldn’t I rather have that money in the money market account, where it’s earning a little interest and where I can spend anywhere? While it’s true that the next paycheck puts another $150 spendable dollars in there, if the leftover cash remains in my account, the account contains 300 interest-bearing dollars rather than only 150 of the same.

And if a debit card is risky, how much riskier is a cash card? Anyone can use it, and as far as I can see, there’s no protection at all if you lose it or if it’s stolen. With a debit card you have a hassle. With a cash card, the money is already spent (effectively), and it’s as stealable as cash itself. Bad.

Costco’s cash card can be used to buy gasoline as well as food and household products. Costco will not take cash or checks at its gas pumps, which consistently underprice all other gas stations: you have to use an AMEX or a Costco card. If AMEX continues to close its billing cycle on unpredictable days, a cash card in the amount of $50 or so would allow me to buy gas near the end of a cycle without worrying about whether I would overrun my budget. While gas prices are low, it would even leave enough to buy a day’s worth of groceries. The theft of an entire month’s food budget would of course be a disaster, but fifty bucks wouldn’t break the bank.

It would be convenient to have a cash card to buy food and gas if, as happened a few months ago, the AMEX card mysteriously quits working. On the other hand…cash would serve the same purpose and need not be carried around in a wallet, where it’s infinitely vulnerable to diddling way, theft, or loss. It probably would be better to stash a hundred bucks in a file folder and use it as a small emergency fund.

Overall, then, pretty clearly a cash card has no advantage over a debit card and no advantage over cash. For those of us who need to see actual dollars in order to keep a grip on them, a cash card poses the same budget-busting risk as a credit card. In stop-loss terms.the debit card has only a slight advantage over cash should you lose it or have it stolen from you.

IMHO, the credit card has got it all over either a debit card or cash, assuming you can exercise a modicum of self-discipline. It’s safer, it lets you see where you’ve spent your money, and it gives you a kickback.

So… In the past I’ve made the day before and the day of the AMEX billing cycle end date “no-buy” days, to be sure all payments clear on the statement I’ve budgeted for. Now I’ll also refrain from spending on the day after the billing cycle is supposed to end. That should obviate any repercussions from this new “gotcha.”

Privacy: It’s none of their business

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Peter at Bible Money Matters reports that when he called American Express to cancel an old credit card account that hadn’t been used in years, he was blitzed with a high-pressure pitch to keep the card. Among other things, the person who answered his phone call asked him why he would want to cancel a perfectly fine credit card. One of Peter’s readers also reported having been asked a similar question and then pursuedwith attempts to discuss balances on other cards and her arrangements for emergency funds. Wow! All of these matters come under the heading of nobody’s business but yours. Stand in front of the mirror and practice uttering these phrases:
That’s none of your business.
Why do you want to know?
I don’t share that kind of information with strangers.

Be prepared to use them at the drop of a hat.

The psychology of phone interactions between companies and consumers is fascinating. Decades ago, my mother worked for the phone company in California. Part of her job was to check up on fraudulent long-distance calls, which in those days were pretty easy to make. When a customer called in and said a call to thus-&-such a number was incorrectly billed to him, she would telephone the number and ask whoever answered who had called them at the time and date shown on the bill. Amazingly, when asked point-blank most people would blurt out the perp’s name without thinking.

She said she’d been taught during the phone company’s training sessions that when confronted with an unexpected personal question, most people will answer honestly before they think about it. A lot of the conversation that Peter and his readers report entails having some minimum wage employee at a phone bank—possibly in some other country—engage the mark in a conversation about matters that are none of his or her business, solely for the purpose of manipulation.

It’s another reason we should protect our privacy and draw a line where information that belongs to us is concerned.

Remember: Just say no!

The limits of automatic bill-paying

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In this morning’s New York Times, Ron Lieber reconsiders an earlier rave he wrote for “Your Money” about automating every penny you pay out. He notes that some people are wary of allowing business entities access to their checking accounts, largely out of concern over potentially costly errors. Others, he reports, have run into serious problems: one woman, for example, arranged to pay her phone bill on her credit card. Alas, when the expiration date came and went, no one bothered to tell the phone company, which soon sent a surly letter threatening to cut off her service.

While I’m an enthusiastic proponent of automatic bill paying, I do draw some lines. And I draw a wide, bold black line at charging up utilities on a credit card!

If anything happens that the card is canceled — whether to protect you from identity theft or because you decide to close the account — you are the one who gets to call every creditor and change your payment arrangements, a major nuisance, indeed. The potential hassle factor is just too high.

In fact, credit card statements are the only bills I do not have paid by automatic electronic funds transfer. Why? I just can’t bring myself to trust credit-card issuers. Those folks are not our friends. I want to see each statement and check each charge off against my Quicken or Excel records before forking over any cash.

For a long time, I felt that way about the phone company, too. Not so much because Qwest seemed untrustworthy (though a degree of incompetence presented itself, the company never seemed outright treacherous, the way credit-card lenders do), but because I’ve had people hack into my phone number and run up fraudulent toll calls. Here, too, I wanted to check the statement before sending any money.

I do authorize the utility companies, the city water department, and two insurance companies to bill my checking account directly. I did so because, before I switched my accounts to a credit union, the bank where I did business charged a fee when customers had money automatically transferred from the bank’s end but charged nothing when the creditor itself absorbed money out of the customer’s account. Why, I do not understand.

If I had it to do over again, I would go the other way around: retain control of the amount and date of payment, rather than permitting creditors to directly debit the account. This service is free at the credit union, but I didn’t know that when I made the switch. Now I’m too lazy and too busy to mess with changing a half-dozen payment arrangements.

Undoubtedly other issues present themselves. Identity theft? Seems to me you’re as much at risk of that when you send a check to some boiler room as you are when you pay electronically — possibly more so. Service snafus? They’re everywhere. Overdrafts? You need a system and some self-discipline to be sure enough money resides in your account to pay your bills…just as you do when you pay by check or cash.

Automatic bill-paying has many advantages. As with everything in life, we need to apply some common sense.

Dealin’ with the devil

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Have you been following the “Debt Trap” series in the New York Times? Lordie! A couple of days ago they told the story of one Diane McLeod, who despite a modest lifestyle managed to sink so deep in debt she’s being evicted from her little two-bedroom home. The unholy combination of a divorce, a couple of unexpected medical problems (does one ever expect to get sick?), a job loss, and a habit of shopping to allay depression saddled her with interest payments alone that exceeded 40% of her pre-tax pay

The conversations this harrowing story generated are clustered in the usual two camps: the All-Her-Own-Fault side and the Damn-Greedy-Capitalists side. One letter to the editor in the print edition cattily remarks that if McLeod would quit smoking (she was shown with a cigarette in her hand), she’d save $100 to $300 a month. Hello? You can be a supersophisticated Easterner and never have heard “the quality of mercy is not strained”?

Rapacious Lending Practices

The point is, though, that the lenders who got their claws into this naive and unhappy woman really did not care whether she ever paid her debts. Lenders today make their money by charging usurious interest, at rates that used to be felonious. A loan is not seen as something to be repaid, but as a long-term earning asset. Says the Times:

Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 – a difference that adds billions of dollars in interest charges annually to credit card bills.

Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.

Mortgage lenders similarly added or raised fees associated with borrowing to buy a home – like $75 e-mail charges, $100 document preparation costs and $70 courier fees – bringing the average to $700 a mortgage, according to the Department of Housing and Urban Development. These “junk fees” have risen 50 percent in recent years, said Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on mortgages.

A 17% interest rate is nothing other than usury. In my state, usury laws once limited the amount of interest a lender could charge to 11%-until big lenders’ lobbyists persuaded the federal government to override state usury regulations.

The issue is not that Ms. McLeod spent irresponsibly or diddles away money on her nicotine addiction. The point is that abrogation of laws and regulations that formerly protected consumers from unbridled greed is about to drive this country’s economy into the toilet, down the drain, and permanently out to sea.

The Big Picture

Again quoting the Times of July 20, 2008:

Today, Americans carry $2.56 trillion in consumer debt, up 22 percent since 2000 alone, according to the Federal Reserve Board. The average household’s credit card debt is $8,565, up almost 15 percent from 2000.

College debt has more than doubled since 1995. The average student emerges from college carrying $20,000 in educational debt.

Household debt, including mortgages and credit cards, represents 19 percent of household assets, according to the Fed, compared with 13 percent in 1980.

Even as this debt was mounting, incomes stagnated for many Americans. As a result, the percentage of disposable income that consumers must set aside to service their debt – a figure that includes monthly credit card payments, car loans, mortgage interest and principal – has risen to 14.5 percent from 11 percent just 15 years ago.

By contrast, the nation’s savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year, according to the Bureau of Economic Analysis.

More ominous, as Americans have dug themselves deeper into debt, the value of their assets has started to fall. Mortgage debt stood at $10.5 trillion at the end of last year, more than double the $4.8 trillion just seven years earlier, but home prices that were rising to support increasing levels of debt, like home equity lines of credit, are now dropping.

The combination of increased debt, falling asset prices and stagnant incomes does not threaten just imprudent borrowers. The entire economy has become vulnerable to the spending slowdown that results when consumers like Ms. McLeod hit the wall.

If you don’t think what happened to Russia can happen here, think again. Right now the world has one superpower with a (fading) supereconomy. It could very well end up with none, at least until China or the EU takes America’s place

And the Small Picture

As individuals in a megasovereignty run by entities with vast quantities of money, there’s little or nothing any of us can do about this, other than get out of debt and stay out of debt. I would suggest that far from being un-American, putting the brakes on your spending impulses and shucking off as much debt as you possibly can is the best thing you can do for your country. It may take us into some hard times, but a change in habits among consumers is about the only message that will get through to elected representatives who are supposed to speak for us, not for those who can purchase their attention.

On the individual level, avoid rapacious mortgages and watch your credit card spending carefully. If you agree with me that a credit card can be a useful tool, remember that every time you use it, you are entering into a deal with the Devil. Proceed accordingly

2 comments left on the iWeb site

!wanda

The graph on the NYT website depicting average savings vs. debts for all Americans really surprised me.Aside from a few years in the 1940’s, there has never been some mythical time when people were all prudent and frugal, making average savings exceed average debts.People are people, apparently; if you give them credit, they’ll use it.What’s changed in the past decade is how much credit people have been offered.

Why would lenders offer more and more credit to more and more people?One reason that lenders, particularly mortgage lenders, are repackaging loans and reselling them, so they don’t suffer the consequences if people default.By the time the loans were repackaged three or four times, no one knew what the real risks were.People were modeling risk based on historical models that weren’t accurate because people had never been offered such large loans before.The incentives for the financial companies were to encourage personal irresponsibility.

For individual people, I want to emphasize personal responsibility.After all, you’re the only one who can dig yourself out of your own debt, and people who take responsibility are generally more proactive about fixing their own problems.But, the financial system should also be changed to encourage more responsible lending.The system will partially fix itself- now we have better data on what people will do if you offer them dangerously large loans, and credit will tighten.We’ve begun to see this already.But there’s also a role here for regulatory changes.

Wednesday, July 23, 2008 – 11:03 A

Funny about Money

Absolutely!

About regulation: We all could do without being treated like children by the federal government. However, it’s one thing when your own stupidity harms only you and your family; it’s another when mass stupidity and greed bring down the entire country’s economy. In “killing the beast,” the idealogues who acceded to power over the past two decades may have succeeded in killing America’s well-being. It is, in a word, inexcusable.

As more and more Americans retreat into enforced frugality, our economy will continue to suffer, because its operation has been based on a false perception of affluence. People have confused debt with buying power, with the predictable result.

Thursday, July 24, 2008 – 08:18 A