January 2009 Topic - Credit Card Updates & Consumer Profiling

01.  Credit Card Updates & Consumer Profiling
02.  Credit Card Reforms
03.  What Contributes to your Credit Score
04.  Tips to Avoid Fees & Save Money in 2009

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1.Credit Card Updates & Consumer Profiling

United Financial would like to wish everyone a happy new year. We have many interesting financial topics to cover in 2009. Our goal has always been to keep you a step ahead in the financial world.

The U.S economy is struggling. Americans are walking away from mortgage and credit card payments for a variety of reasons. Banks are struggling to stay afloat. The demise of Washington Mutual was the biggest US bank failure in history. Due to many factors, lenders are looking for more ways to make money. In this newsletter we will cover the latest updates from credit card companies, including the new tactic creditors are using called consumer profiling.

Consumer profiling is the newest way that credit card companies are using to raise your interest rates and increase penalties. I will touch on all the information that has been released to keep you informed. I urge all of you to check the financial news often regarding consumer profiling. Somehow it does not make breaking news so be sure to do your homework. A little research could save you hundreds of dollars.

Credit card companies have been in financial strain longer than most of us are aware of. The reality is if banks and lenders are financially squeezed; borrowers are going to be penalized for it. In April of 2008 Washington Mutual announced that some customers would receive a significant rate increase on credit cards. In the same month, Discover announced that effective May 1, 2008 the new penalty rate would be 31%. More recently Bank of America has been under pressure with many customers for raising interest rates to 28% with no justification in doing so. In addition to this they are also raising minimum payments but have not specified by how much.

It does not stop with those banks. Chase followed suit and released notification that minimum payments would increase by 3%. Currently customers must pay 2% of balance, by increasing it to 5% it will more than double what is required. There are many customers who have a hard time meeting the required payments as it stands now. The increase in minimum payments is going to have a trickle affect in default rates and reduced credit scores in the future. In addition to increasing minimum payments there would be a $10 monthly "management" fee for customers who carry a large balance longer than 2 years.

Where do you shop? Where do you live? This may actually affect your terms on your credit card. American Express is now analyzing where you live and shop to determine your credit standings. They have been slashing credit limits and increasing fees and interest rates depending on where you spend money and live. People who reside in a zip code where the foreclosure rate is high may notice that their credit limit has been decreased. If other cardholders have used American Express at places where you shop and have a poor payment history then you may be hit with higher interest or a reduced credit line.

Lenders across the board are lowering credit lines on credit cards and home equity loans, even for people with good credit history. This can be detrimental for certain borrowers. Considering the soaring unemployment rate, along with the economy many people depend on credit cards for everyday basics. Many people are actually taking money out of home equity lines and credit cards and putting it in the bank just in case they should need it. By liquidating the money from these accounts you eliminate the risk that the lender will decrease or eliminate you credit line.

A huge disadvantage to lowering credit lines is the poor effect it has on someone's credit score. About 30% of a credit score is based on how much someone owes. For example, a person who has a $2,000 balance on a $10,000 card is only utilizing 20% of their credit. Now if that same person's limit gets reduced to $4,000 the cardholder is 50% maxed out which reflects poorly toward credit.

2.Credit Card Reforms

Regulators stepped in on December 18,2008 to approve credit card reforms that will benefit consumers greatly. The regulations will protect borrowers against certain things like universal default, and double cycle billing. The reforms will not go into effect until July 1, 2010. The reform limits the credit card companies in many practices. Below is a list of some of the things that were covered.

Credit card companies cannot increase rates on existing balances. The lender may only raise an interest rate if you are 30 days late making a payment, or a promotional rate expires. The company must notify you at least 45 days prior to increasing your rate. As of right now they only have to give you a 15 day notice. The lender must only apply the new rate to future purchases not past.

No more double cycle billing. Most companies do not use this billing method any longer. It is a way of calculating interest charges by looking at the average from the current month and the previous month.

All payments must be distributed fairly. Currently, consumers who have balances with different interest rates are making payments and the money is going to the lowest rate. With this reform any money paid to principal must be distributed equally or applied to the highest interest. This practice alone will save consumers a lot of money annually.

More time to pay bills. The reform states that issuers must send bills 21 days prior to the due date. The will give the borrowers more time to make the payment and avoid late fees.

This reform will save consumers a lot of money, but not immediately since the laws do not go into effect until 2010, however there is a downfall. Since the consumers are saving money, lenders are losing profits. In the meantime numerous guidelines will be changing. Creditors are going to try to cash in while they still can. It has already been announced that credit score minimums will be increased. Last year consumers with a credit score of 700 were given the best credit terms. Now that minimum is being increased to 730. It is recommended to check your credit score every six months. You can receive a free credit report once a year, however it will not have your score.

Consider investing in your score at least once a year by going to www.annualcreditreport.com. It will benefit you greatly to know the kinds of terms you may expect from lenders. It also gives you a chance to find out what is affecting your score and ways to improve it prior to applying for a loan or credit. Below is a chart breaking down credit scores and ways to improve them. In previous years people were given cards and mortgages that had scores of 550 and even lower. That is going to change in the New Year.

Banks and lenders are going to be more cautious as to who they lend funds to. In addition to that, reward programs are going to be reduced drastically. Currently, numerous credit card companies give many incentives and perks for using their card. Due to the reforms they will most likely be harder to achieve. It is predicted that the programs will not be cancelled but will require a lot more spending to earn the same benefits.

3. What Contributes to your Credit Score

Payment History - How well you pay your bills is a huge factor for your score. If you are late or miss payments it will have a derogatory effect on your credit. To improve your score always make payments on time. In addition to that try to make more than the minimum.

Amounts Owed - This also has a huge impact on your credit rating. A potential borrower who is at their limit on current credit cards is a high risk.

Try to keep your debt level as low as possible

Types of Credit Used Lenders do look at individual accounts such as mortgages, loans, credit cards or lines of credit. With that information they can determine if you will be a risk to lend to.

New Credit - Many people are not aware that inquiries affect your credit in a negative way. Inquiries are any time someone pulls your credit. You can pull your credit everyday and it will not count against you, but if you allow someone else to it will. All of us encounter this multiple times throughout the year. Let's think to the last time you were at the store and they offered you a savings if you opened a credit card. Several people will take advantage of the savings not realizing the damaging effect it has on their credit score. Think twice before you allow someone to look up your credit.

Length of Credit History - Have you ever heard the term no credit is worse than bad credit? This is 100% true. The reason behind it is if you have bad credit you are a known risk to the lender. On the other hand, if you have no credit history you are a mystery. The lender does not know whether you will pay your bills on time. The best thing to do is build a credit history by applying for one card and using it sparingly. Since you have no credit history you will not get the best terms. Charge every month a little bit and pay it off before the account cycles. After doing this for about 6 months you have built a good credit history with the lender and can be eligible for better terms.

4. Tips to Avoid Fees & Save Money in 2009

Avoid carrying a balance on your credit card. Make an effort to charge only what you can pay. This way you will avoid interest and any other fees.

Think twice before swiping your credit card. Try not to use your credit card for everyday items such as food and clothes. Also try to avoid using your credit card for an item that is not a necessity such as a big screen TV. If you want a "toy" save the cash and then buy it.

Limit yourself to one credit card. There is no reason to have a handful of credit cards. Having only one credit card with a low balance on it will also help your credit score.

Keep track of what you spend. You don't want to overspend on a credit card since you will get hit with over the limit fees. Also be sure payments are issued to the creditor on or before the due date or else you are facing a late fee. Fees usually are around $30. If you get a late fee and over the limit fee you are looking at $60 just in fees.

Never take a cash advance out on your card. The rates are usually high and you start paying interest immediately.

Always monitor your statements. Be on the lookout for hidden fees or rate increases.

Cancel your theft insurance. It is useless because if your card gets stolen you are not liable for it anyways.

Always try to pay more than the minimum. Minimum payments generally cover interest only; therefore anything over will go to the principal.

Contact your creditor and ask for reduced rates. If you have been a good customer who has not missed any payments, negotiate with your creditor. No lender is going to offer you a lower rate just to be nice. Contact them and ask them to reduce terms.

Balance transfers may benefit you, however I don't usually recommend taking out more credit. You get in the game where you rob Peter to pay Paul; therefore it can turn into a vicious cycle. However, if you are carrying a large balance on a high interest rate credit card it may be beneficial to pay the transfer fee and move the balance. Try not to get into this habit though. It is best to renegotiate the terms of your card with the bank.

Never pay your credit card debt off with a home equity line of credit. The worst mistake you can make is taking unsecured debt and turning it into secured debt. Unsecured debt is credit cards, medical bills, etc. Basically any debt you have with no collateral to secure it. Secured debt is a mortgage or a car. If you cannot pay your credit cards the lender cannot take your home. Now if you are not able to pay a Home Equity Line Of Credit the lender can take your house or put a lien on it. Credit if debt is unavoidable than credit card debt is better than placing debt on a Home Equity Line or other real asset.

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Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us. To reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 01
Rev.1
January, 2009