Credit/Debt Recovery

Two-Cycle Billing on the Rise

I was away on vacation for a full week, so there was no posting. I also just got around to the great comments on my post about BofA's changes to my customer agreement.

One of the comments comes from old friend Joseph Onesta, the Wallet Wizard:

One of the things I've noticed with some of my financial coaching clients is the resurgence of the two-cycle calculation for interest. This seemed to almost disappear a few years ago with A and B paper lenders but now, even A paper lenders are touting teaser interest rates with the two-cycle billing that, for all practical purposes, doubles the amount of interest paid. They do this to their existing borrower base by offering a more prestigious card--more available credit, "lower APR" but no one is reading the fine print. And they don't realize that they are actually getting a different account which is being offered under different terms.

This is sad news. I looked at 2-cycle billing a few months ago to see if it could be morally defended, and concluded that it cannot.

If 2-cycle billing is making a comeback, this lends ammunition to the arguments for the "Stop Unfair Practices in Credit Cards Act."

B of A changes terms

Over a year ago, I blogged about how Bank of America was changing the terms of my credit card agreement because they'd acquired MBNA, with whom I already had an account.

Now they're changing the terms of my other BofA credit card. I resisted closing the account because I've had it the longest, so it's responsible for a good chunk of the "length of credit history" part of my credit score. But after reading the document they've sent me, I think now I have to close it after all.

The changes to my credit card agreement:

1. Reclassification of balances and transactions
They spend a full page telling me how they're reclassifying balances into three categories; balance transfers, cash advances, and purchases. Then, late in this large section about reclassifying balances, they mention that they're raising my APR on balance transfers.

2. Default pricing
This one's fun. They're not changing my standard APR, they say, but they're raising my default rate. That means if I'm late making a payment or I exceed my balance twice in a twelve month period, they raise me to a newly-hiked default rate.
With this one, I can reject the new default pricing by writing a letter and sending by mail to an address provided. I can't reject the change electronically, by telephone or via the web. So if I don't read the 8 pages of fine print they sent me, I wouldn't know the top-secret adress to use to request that BofA honor their original written credit card agreement with me.

3. Calculating variable rates
Instead of using the prime rate at the end of the month to determine a variable rate, they will now set the prime rate to the highest published prime rate in the preceeding three months.

4. Transaction fee finance charges
They're "changing how (they) refer to certain transaction fees currently applicable to (my) account." Oh yeah, they're also raising the transaction fee for cash advances, balance transfers, and direct deposits.

5. Additional changes to my agreement
Barrel of laughs, this document. They're changing the terms of "my agreement." Without me having to agree to the changes. I also love how they lump a half-dozen changes to the way they calculate my finance charges into a category called "additional changes." They've also tacked on to the bottom of this section a simple 2-sentence change:

An important Amendment to the Arbitration and Litigation section of your agreement follows.

Unless otherwise noted, we are making the Amendments to this Notice primarily because of a change in our business practices.

Oh. Okay then. I wouldn't want to stand in the way of your "business practices." Go right ahead and change the Arbitration and Litigation section of my agreement. But don't bother asking me if I agree. I couldn't possibly understand the complexities of your "business practices." Best to sneak the changes by me in a 8-page wad of fine print.

I've said this before, and now I'll say it again; this is crap. I signed a credit card agreement. The terms were clearly laid out, and I agreed to them in writing. And now they're being changed in at least a half-dozen ways, all detrimental to me. I can't find a single change to the agreement that is in my favor. That's okay, though. I don't ask B of A to amend the agreement to benefit me in any way. I agreed to the original contract, the one I signed.

Here's another thing I've said before; if Sens. Levin and McCaskill want me to endorse the "Stop Unfair Practices in Credit Cards Act," all they need is a provision requiring creditors to honor their signed contracts with their borrowers.

For the sake of the blog, and as a learning exercise, I'm going to send the letter rejecting the new default pricing amendment, and see what kind of response I get. Once that shakes out and I've posted my take on it here, I'll close the account and be done with B of A for good. (Some may remember that I dropped my checking & savings accounts with them when they ruined online bill pay.)

The guy I want to borrow from

I've referred several times on this blog to Consumer Reports' list of consumer-friendly credit cards. As a guy who generally rejects more top-down regulation as a solution to consumer issues, I think that we as consumers need to get together, compare notes, and figure out which creditors and banks deserve our business.

One of these creditors in particular has repeatedly impressed me: BB&T. Recently, I was listening to this EconTalk podcast where Russ Roberts interviewed BB&T's CEO John Allison. The guy's a genius, and it's no wonder his bank is so successful while offering consumer-friendly policies.

I know I've written things like "the creditors are evil" a lot on this blog, but if you've got a spare hour to listen to this interview, you'll see that not all of them are. This man gets it.

An idea for Prosper.com

I've blogged here before about Prosper.com, the site that puts individuals together as lenders and borrowers. If loans go bad, Prosper will take care of collections efforts on behalf of the lenders.

What I'm hearing from Prosper lenders isn't good; a lot more loans are defaulting than they expected. The early days of feeling great about lending money to someone who truly needs it have given way to cautious lending based solely on creditworthiness and debt-to-income ratios. (I think I predicted as much.) I like that more people are learning that credit scoring isn't some evil scheme designed to punish one class or another, and that in fact it serves a useful purpose for all parties involved in a lending situation.

But it does take away some of the novelty of Prosper. The idea that you're helping a real life human being instead of a set of numbers seems to have waned.

My idea is this: how about partnering something like Prosper with something like Wesabe? I saw a mention of Wesabe.com in an advertising circular I get in the mail. They describe it as a site where "(y)ou upload your entire bank-account and credit-card information, and the site maintains a running list of every transaction. Then, you get advice from other users on your spending habits." The idea of laying one's personal finances bare in such a public forum may sound scary, but a lot of people are benefiting from it. Reminds me a bit of the online tools offered by Weight Watchers; you use the site to put in every meal you eat, and they track your points and give you advice and pointers on what you're doing wrong. Plus they have an active message board community where people swap recipes, cooking tips, etc.

So say a lender on our Prosper-like web site has a loan that's going badly. S/he can check the borrower's Wesabe page and see how their budgeting is going, and perhaps even offer them some assistance or advice. It may sound like a recipe for disaster, but so did Prosper and Wesabe to some people. It would take a real shift in thinking to grasp it.

This is kind of like credit counseling; many people simply don't get the concept, and they assume that credit counselors must be lackeys of the creditors. If your world view only has room for 2 types of people, good and evil, then you have to shoe-horn counselors into one side or the other. It doesn't match reality, but most Wikipedia editors don't care about that.

But even if we grant that corporate banks are evil lenders, most individuals who lend through Prosper probably aren't. If the borrowers were willing to voluntarily use something like Wesabe to share budget information with their lenders, couldn't that end up being good for all parties?

News from AADMO

AADMO's conference is coming up next month, and it looks like they'll be offering some insights into the IRS audit and non-profit revocation experience that some credit counselors are enduring. Should be very interesting.

The Actual Experience of Audit and Revocation by the IRS - One Credit Counseling Agency Shares it All!

The American Association of Debt Management Organizations (AADMO), the largest trade association for the credit counseling industry, will feature a program of the actual experience of one agency going through the IRS audit and revocation process at the AADMO Fall Conference in Austin, TX on October 22 and 23, 2007.

According to Mark Guimond, Executive Director of the AADMO, “We have one session that no one in credit counseling should miss – If you want to know the truth about the audit and revocation experience, this is the only opportunity to hear first hand from one of the front line veterans. You will learn directly from the top executive of a credit counseling agency that had its 501(c)(3) tax-exempt status revoked by the IRS what actually transpired and the identified problem areas that led to revocation.”

“This is an essential program if you’ve ever wondered what it’s like to receive an IRS examination notice, have an IRS document request, go through an actual audit, face revocation or go through the entire appeal process”, said Guimond.

Would you like to know what types of documents and records the IRS is looking at? Would you like to know what IRS field examiners are asking for? Would you like to know the process and duration of an appeal? If you said yes to any of these questions, the AADMO Fall Conference is the only place to find the answers”, added Guimond.

Other sessions will include:

Leads and Referrals: Not the Same Old Ballgame
Speaker: Jeffrey Tenenbaum, Venable

"60/60 Plans" and Less Than Full Balance Payments - Understanding the Applicable Laws
Speaker: Robby Birnbaum, Greenspoon Marder

Bankruptcy Reform: Value of Credit Counseling Requirement is Not Clear
Speaker: Jason Bromberg, U.S. General Accountability Office

Credit Counseling Industry Legislative Update
Speaker: Mark Guimond, AADMO Executive Director

Valuing Account Portfolios - Results and Analysis of the Industry Survey
Speakers: Paul A. Baumann, Leslie Moreau

Credit Counseling, Debtor Education and Bankruptcy Reform at the 2 Year Mark
Speaker: Henry Hobbs, Executive Office for United States Trustees

143 Audits - Why This Exact Number is Significant!

State Regulators

NCCUSL Uniform Debt Management Services Act - "Stand-By Committee" Recommendations

The AADMO Fall Conference program and registration information can be found at www.AADMO.org.

ABOUT AADMO
AADMO is the largest trade association for the credit counseling and debt management industry. Nationwide, the majority of licensed and legally operating credit counseling agencies are members of AADMO.

AADMO is working diligently to ensure the continued operation and viability of credit counseling and debt management organizations. AADMO provides important education and information for the entire industry.

AADMO members are consumer credit counseling agencies, debt management organizations, credit counselors, personal finance educators, credit and debt information educators, consumer lawyers and many others.

AADMO is the only trade association to have held state law compliance workshops with the New York State Banking Department and the California Department of Corporations upon enactment of their respective laws governing credit counseling. AADMO is also the only trade association for the industry to publish a formal summary of state laws that has been reviewed by state regulators.

Cancelling old accounts

Haven't posted in a while, but since I'm working all day today I wanted to pop in with something.

My wife was posting on a message board recently when someone asked if they should close their unused credit card accounts. A lot of answers were given, but none of them mirrored the advice I would have given, so I thought I'd post on it.

The short answer is, close the account unless it's your oldest.

Obviously, individual situations vary and it depends on your circumstances, but that's my general advice; I assume if you're considering closing the account in the first place that you probably don't need it. So closing is is a safe move.

Bear in mind this probably won't improve your credit score, especially in the short term. Simply closing an account doesn't necessarily remove it from your credit report. It might help your credit a bit in the long term, but only if your reduce your total overall debt. If you owe the same amount on fewer open accounts, it will more likely reduce your score. (This is all theorizing, of course... a lot of us have opinions about this, but no one but Fair, Isaac really knows the exact math of credit scoring.)

A more important factor in your score, as far as this discussion is concerned, is your "length of credit history," which is 15% of your FICO score (VantageScores and other FAKO scores are useless; don't concern yourself with them and don't work with lenders who rely upon them). That's why I say don't close your oldest account. That longstanding account that contributes to 15% of your score is especially impactful. Unless you've had your second-oldest account open for many years, I say hang on to your oldest account for the sake of your score.