Credit/Debt Recovery

Can 2-cycle billing be defended?

I'm pretty hard on creditors. I've called them "evil" here many times. Some of those times I was joking, but not every time.

I was recently doing some reading on 2-cycle billing, and it struck me that this is the most indefensible evil creditor practice there is. Even universal default can be defended by a true believer (they'd be wrong to defend it, but at least I can conceive of how they'd formulate the argument).

I did some looking, and I couldn't find anything but attacks on 2-cycle billing. No one attempted to defend it anywhere. It makes me wonder: can it be done?

Consider this Bankrate article on how 2-cycle billing works. The author, Don Taylor, gives a good quick summary of the practice, and even includes charts that show the actual effect 2-cycle billing would have on a hypothetical cardholder's finance charges. The conclusion is that 2-cycle billing won't have much of an effect if your balance is consistent each month, but if it fluctuates wildly, the practice will burn you.

But he's stopped short in his analysis. He's looked at 2 scenarios: one where the balance is roughly consistent, and one where it bounces from high to zero to high to zero.

There are two other scenarios that have been left out, and one of them might paint a different picture of 2-cycle billing. Say you have a balance that starts low, and jumps up each month. if it goes from $0 one month to $1000 the next, the 2-cycle daily balance is approximately $500, not $1,000. That's good for the cardholder. If it then goes up to $2000, the approximate daily balance would be $1,500, which is better than the $2,000 one might be charged against in single cycle billing.

Does this mean that 2-cycle billing might be a good thing in some circumstances?

No.

There's a fourth scenario I had in mind; the opposite of the one I just described. If your balance is dropping steadily over time, 2-cycle billing burns you. And if you gradually raised your balance like I just described, you're eventually going to be paying it off, and the 2-cycle billing that favored you before is going to come back and get you.

This is especially evil because it rewards you for going deeper into debt and punishes you for working your way out.

So even though there's a scenario where 2-cycle billing might be good for your bottom line, it's still a bad thing. I suppose if you worked your way up with 2-cycle billing and then transferred the balance to a better card you might avoid the higher fees on the back side, but you're still left with a bunch of credit card debt to pay off. Just avoid it.

By the way, in my searching I did find one article that quoted a Bank One representative defending their 2-cycle billing practice.

Most of our card portfolio has two-cycle billing... If a card member does not pay off a balance within the grace period, he or she has borrowed money from the bank and the two-cycle billing allows interest to be collected for monies that have been borrowed.

So the bank's position is that credit card bills paid off within the grace period aren't loans? But if some small part of that balance isn't paid off, then the entire amount borrowed (including what was paid off within the grace period) was a loan? If the balance wasn't paid off within the grace period, then the bank charges interest, sure... because there's a remaining balance being carried over. But I don't see how that justifies 2-cycle billing.

Askville

I checked out Amazon's new Askville site, where people can post questions for others to answer. As you can imagine, there's a bit of Wikipedia-style idiocy in some of the answers, and a lot of spam. But there are also some real gems in some of the answers, and I don't see too much infighting among people supplying different answers to the same question.

I'd say it's worthwhile to check out some of their answers if one is curious about some credit or debt-related topic. Just watch out for questions and answers that seem like an obvious set up (For example, Q:"can someone recommend a debt negotiation company this is reputable and offers great service for a fair price?" A:"Why certainly, anonymous internet stranger! The law firm of D,H, and C helped me settle my debts and I saved thousands!")

Give them a spin here.

Inheriting Debt

I was asked in the comments some time ago about inheriting debts from one's parents when they die. Sorry I didn't get to it sooner.

The short answer is: you're not responsible for your parent's (or parents') debts. The only way a collector or creditor can legitimately come after you for debts incurred by your parents is if you co-signed for the debt with them (in which case the debt is actually partly yours). If the debt is entirely the responsibility of someone who is deceased, no one else can be responsible for repaying it.

(Collectors have been known to to harrass survivors of deceased debtors demanding repayment. But that doesn't mean the suvivors have to pay them. Many collectors will lie to get payment, in violation of the FDCPA. This is one of those areas where you have to know your rights.)

Now, if you die with more debts than assets, the creditor is out of luck. But if you are leaving an estate to your children, the creditor is entitled to be repaid out of that estate before it is distributed to your heirs. In this case, it's technically not the heirs but the estate of the debtor that is repaying the debt, so it's still consistent with what I said above.

If it is your spouse who passes away with debts outstanding, things get more complicated. Can the creditor force a widow to say, sell the couple's home in order to collect their payment from the estate of the deceased? So far my research is suggesting this is something that may vary according to jurisdiction. It's probably in your interest to contact an attorney in this situation and figure out what your rights are.

Credit card late payments down, home equity late payments up

In this good news/bad news story from the AP, the bad outweighs the good. They're reporting that late payments are down for credit cards, which is good news, but late payments are up for home equity loans, which is very bad news.

Home equity loans should be put up front with your mortgage in terms of priority. Any loan that could cost you your home if you have a delinquency should be paid well before any unsecured credit card bills you may have. And certainly, if you're in a position where you might have trouble paying your mortgage and/or home equity loan payments, you shouldn't be incurring credit card debt at all.