Credit/Debt Recovery

NFCC's Tips For Holiday Spending

Check out the NFCC's tips for holiday spending. Here's hoping we can all avoid a massive financial holiday hangover.

Banks seeking Hispanic customers

Yesterday at BizzyBlog, Tom Blumer posted an astute observation about this article concerning the tactics banks are using to attract more Hispanic customers:

The secret is that the credit-card areas of the big banks want Hispanic cardholders, because they have found that they are much more likely than non-Hispanics to pay interest and make mistakes that generate late fees and over-limit fees. Aggressive wooing of Hispanics in this area of banking is right on the edge of race-based exploitation.

First, I want to point out that Springboard has published a translation of its "Consumer Guide to Good Credit," the "Guia del Consumidor Para Buen Credito", which is available by visiting Springboard's Spanish-language website, Plansabio.org. Because Springboard is situated in Southern California, they are always out front in providing services to Hispanic consumers.

One of my goals in providing financial literacy education has always been to help the unbanked get away from fringe banking services like payday loans and check-cashing outlets. According to the CNN article, 50 percent of Hispanics are unbanked in the United States. (Interesting, when I wrote about "the unbanked" in Repair Your Credit And Knock Out Your Debt, one of my editors kept trying to change the word, insisting that "unbanked" didn't exist.) So I support banks' efforts to include Hispanic consumers, but I caution everyone to do what it takes to become better stewards of their own money.

Schumer to consumers: don't use store cards

Senator Charles Schumer (NY) is warning consumers not to use store credit cards, saying they average 21.19 percent interest, and he's (surprise) urging the FTC to regulate store card interest rates.

Why stop at store cards? Let's cap interest rates for all credit cards and make sure only the wealthy have access to credit.

I'm sympathetic wth the Senator's goals in helping consumers avoid high-interest debt, but I'm loathe to call in the FTC to regulate private business.

My other concern is that it's awfully simplistic to say "avoid store credit cards." The truth is, a credit card is either right or wrong for you based on your spending habits, not necessarily the characteristics of the card. If you pay off all of your balances before the grace periods are up, why not take advantage of the discounts store cards offer? And not all store cards are what they seem. The Target Visa card was named one of the 10 best cards for consumers by Consumer Reports and Cardweb.com.

If you don't pay off all of your balances in full every month, then avoid high-interest cards, period. If you always manage to pay off your balaces before the grace period (as a third of us do), then a store card isn't necessarily a bad idea.

More consumer-friendly credit cards

A week ago, I blogged about Cardweb.com and Consumer Reports' survey of credit cards to find the ones that were the most friendly to consumers. Here are the other nine:

Bank:................Card:...................#:
1st Tennessee.......Visa Platinum......1-800-234-2840
Pulaski...............Visa Gold...........1-800-217-7715
Simmons ............Visa Platinum......1-800-245-1234
.1st National.......... Rewards
Target................Target Visa ........1-877-474-8378
BB&T.................Visa Platinum.......1-800-476-4228
Franklin............. Platinum............1-800-238-2761
.Templeton.......... Mastercard
RBC Centura ........Visa Platinum ......1-800-236-8872
Commerce...........Visa Platinum.......1-800-751-9000
Zions.................Visa Platinum ......1-800-789-8800

All of these cards have no Universal Default clauses, balance tranfer fees, or 2-cycle billing.They all have reasonable fees and interest (around 10% or lower) and have grace periods of 25 days or more.

Congress to limit credit counselors' DMPs

Anonymous poster "Joe" tried to comment about Congress' efforts to regulate DMP activity by commenting on the last post about Transunion's new scoring model for broadband/telecomm. Since the comment was way off-topic for that post, I'm moving it here to its own post so I can discuss it.

Highlights

LEGISLATIVE UPDATE

Debt Management Plans Take Direct Hit in Proposed Tax Bill

The Senate’s version of the tax reconciliation bill, now working its way through the Senate floor, takes direct aim at the large national credit counseling organizations that primarily use “debt managem ent plans” (DMPs) as a means to conduct credit counseling. The new provision, if it survives the legislative process, would limit DMP services to 25 percent of the organization’s total activities, if the entity is to qualify for nonprofit status under §501(c)(3) of the Internal Revenue Code. Moreover, the law would require DMP services to be treated as unrelated business income subject to taxation. The Senate provision, tucked away in the massive “reconciliation” bill, is authored by Sen. Chuck Grassley (R-Iowa), chairman of the Senate Finance Committee and also the chief sponsor of the recently enacted bankruptcy law (BAPCPA). Under the new bankruptcy law, all consumer debtors must go through credit counseling within 180 days of filing and receive a certificate from an approved nonprofit budget and credit counselor. The impact would be felt most directly by such entities as Springboard Credit Counseling, Money Management International and GreenPath, all of which rely on DMPs as a major part of their business model. The Senate leadership hopes to finish reconciliation tonight. However, the Senate provision is not in the companion House bill and, thus, would be subject to a House-Senate conference committee.

There's some truth in this; Congress is acting to limit DMP activity on the part of credit counseling agencies. This is part of an effort to answer concerns raised in a Senate subcommittee's investigation of profiteering in credit counseling. Not mentioned in Joe's post is the Senate's finding that the NFCC membership standards, if applied to the entire industry, would go a long way toward addressing the abusive practices that were rampant in some parts of the industry. I bring that up because GreenPath, MMI, and Springboard are all NFCC members. The fact that they are singled out here disturbs me, because it's an attempt yet again to link them to the profiteers in the industry, which they clearly aren't. Yes, they will be affected if this legislation passes, but no, they're not the reason this legislation was written.

At any rate, the stuff mentioned in Joe's post aren't really the problem; even several years ago, when I still worked for Springboard in California, we were talking about life after DMPs. The creditor funding model that DMPs are founded on is pretty ugly, giving the appearance of creditor control of the industry, and putting credit counseling agencies at the mercy of hostile forces. I've known for years that DMPs would someday become a thing of the past--I just didn't know it would happen quite this soon. And so that part about Springboard, GreenPath and MMI relying "on DMPs as a major part of their business model" is hyperbole.

There are other things in this legislation, though, that are disturbing, and not mentioned in the post above. They want to forbid non-profit credit counselors from "providing or promoting any service for the purpose of improving any consumer's credit record, credit history, or credit rating." That's a bad idea. There are brands of credit repair that are fraudulent, and those should exclude an agency from 501(c)3 status. But legally and legitimately helping a client improve his/her credit is a vital part of the package, both for consumers and for the credit counselors who serve them, especially in a post-DMP age.

The way I see it, the agencies hardest hit by these suggested restrictions are the growing number of non-profit agencies who have created for-profit spin-offs and subsidiaries, which to my knowledge doesn't include the three mentioned in the post.

In general, I'm not sure how they expect the industry to survive under some of these restrictions, so I'm predicting the proposal won't pass in its current form. But even this attempt is significant and raises a lot of other issues about bankruptcy and credit counseling--I'll discuss those some other time.

TransUnion brings credit scoring to the broadband industry

TransUnion gets it completely backward! They've instituted an odious new scoring model specifically for cable and broadband companies. (Press release.)

The idea is to help the cable industry figure out who is going to be more likely to be 90 days or more past due in paying their cable bill so companies can deny them broadband service in the first place.

I've been calling for alternative credit scores for a long time. Dr. Michael Turner of the Information Policy Institute even commented on this blog about the discussion. The idea is to use people's good history of paying their cable and phone bills to help them establish better credit. What TransUnion is doing is the opposite: using people's lack of established credit to help deny them cable and telecomm services. This move seriously hurts Americans who are currently underserved by the credit industry.

Consumer Reports' call for credit card user's rights

Continuing yesterday's thread, Consumer Reports has more called for Congress to punish creditors and protect credit card users in the following ways:

Credit card companies should be required to evaluate a consumer's ability to pay before issuing a credit card.

Creditors don't already do this? Creditors aren't in the business of losing money, and they're not going to lend to someone who can't repay. What CR is arguing against is the way creditors encourage borrowers to accumulate high balances and stay in debt their entire working lives. By calling for Congressional action, they want to limit consumer choices. "If you're poor, you shouldn't be able to borrow, for your own good." This kind of argument doesn't sit well with me, even if CR finds it intellectually defensible.

Card companies should be prohibited from increasing the periodic interest rate because a cardholder missed a payment to a different creditor or because his or her credit score changed.

This is the big one. The dreaded Universal Default clause. This practice is evil and should be banned. I know I defend the ability of businesses to operate freely, but universal default is really cheating; it doesn't take much to ding your credit score by a few points and trigger UD, even if the borrower hasn't become any riskier. The creditors have gone too far with this practice, and they deserve the Congressional smack-down CR is calling for.

Practices that trigger unnecessary fees, such as setting short grace periods ... should be banned. Consumers should be guaranteed 30 days to pay and shouldn't have to pay a late fee if the envelope is postmarked on time.

I'm uncomfortable with Congress telling lenders how long their grace periods should be. As long as the information is fully disclosed to the consumer when applying for the card, creditors should be able to set this themselves (and compete for customers by offering longer grace periods than their competitors).

Congress should clarify that both state and federal law and agencies can simultaneously protect credit-card consumers.

This is a loaded proposition. It sounds good, but it is extremely difficult to balance and comply with 50 different sets of laws regulating your business. Consumer's Union is a lawyer's group at heart, and they know that passing a law like this would simply cripple the credit card industry (or force them to abide by the rules of the most restrictive state, which essentially hands the governance of credit lending nation-wide to California).

Of course, that's just my take. For more on Consumer's Union's arguments for change, check out their YourWallet.org site.

Recommended Credt Card from CR

Consumer Reports and Cardweb.com have analyzed more than 10,000 credit cards looking for good terms, including no universal default clauses, ample grace periods, and reasonable fees and interest. One of the cards they've recommended is the TNB Members Platinum Mastercard from Town North Bank.

TNB's Credit Services number is 800-820-8417.

While I'm talking about Consumer Reports, they've published an editorial calling for congress to protect credit card users in the following ways:

• Cap interest rates on cards at no more than the prime interest rate plus 10 percent.
I'm with them in spirit; I've agreed in the past that congress should pass usury laws. But prime plus 10 percent is a bit low... mandating this rate may lock out a lot of riskier borrowers who need access to credit services.

• Credit card bills should disclose how much it will cost and how long it will take to pay off a credit card balance by making minimum payments.
The state of California passed a law requiring this yars ago, but the credit card industry fought it in court and got the rule suspended. I don't have a problem with making this a requirement.

• Fees should be restricted in number and type so consumers can more easily compare cards.
I agree that consumers should have full information at their disposal when choosing a credit card. But I don't see why this should include limiting the number or type of fees. I think creditors should be free to employ whatever business model they can justify, but they should have to do it out in the open so consumers have the choice to take their business elsewhere.

•Credit card companies shouldn't be allowed to add new terms and add increases after the consumer has signed on.
I agree here. It's amazing that creditors have the ability to do this at all. At the very least they should be required to get a new signed agreement from the consumer every time they change the terms.

I'll continue on this thread tomorrow. Also check out Consumer's Union's YourWallet.org web site for more.

Interest-Only Home Loans

A friend of mine is contemplating an interest-only loan. Normally I'm against them; where I'm from, we have another word for IO loans, and the word is "renting".

But there are some circumstances where an IO makes sense. My friend is on the right track, because she's planning to sell the house in less than two years. The new loan will free up more money to pay off higher-interest debt and make improvements on the home. If they're able to add enough value, they may completely offset the equity they won't be building by making interest-only payments.

So that's one situation where an IO can make sense: if you're selling the property soon. Also, if you're a financial wizard and can make good use of the money you'll be freeing up by opting for an IO loan, it might be a good idea (though if the housing market sours, you won't look like much of a wizard).

Ultimately, an IO loan is like leasing a car; it's a bad idea for most of us. If you're one of the few people for whom that arrangement is a good idea, you'll know it. If you're not sure whether an IO would be smart for you, it probably isn't.

Opting Out Online

I'm getting 4 or 5 credit card offers a week these days. That got me thinking about opting out.

I've said here before that everyone should opt out of receiving pre-screened credit card offers. I hadn't done it myself because up until this year, I didn't really receive that many credit card offers. Now that I'm apparently more attractive to the credit card lenders of the world, it's time to practice what I've preached. The number to call to opt out is 888-567-8688. But you can also opt out online at OptOutPrescreen.com.

You can opt out for five years, or permanently. You can also "opt-in" if you want, so there's no reason not to go ahead and do this now!