How to Haggle for the Best Deal

Sticker prices are for suckers. That's Stephen Popick's theory. From iPods to about-to-expire cuts of meat, Popick (a government economist) has taken up the habit of asking retailers if the stated price is the best they can do. And guess what?: His tactic often works. He's saved $100 on a bicycle, bought Christmas decorations for 75 percent off, and talked Best Buy into matching Costco's online price for an iPod Touch.

A recent Washington Post article examines the new trend in haggling. People have become more assertive, thanks to a recession that has hurt just about everybody's bank account, says Nancy Koehn, Harvard Business School retail historian. Haggling in the United States is "the biggest sea change of consumer behavior since the end of the Second World War," she says.

Consumer Reports released a study which found that 66 percent of Americans have tried haggling one or more times in the last six months, and that they have been successful more often than not.

The author of The Washington Post article tried a number of negotiating tactics and saved $730 in one week, including a better cable TV deal and a $100 cell phone credit.

The article also mentions a haggling service for people who are too shy to haggle themselves. Its called Negotiate4U and they claim they can get a better deal for you on everything from cell phone bills to automobiles.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

"Maxed Out" Documentary Features Abusive Practices by the Credit Card Industry

There’s a good documentary out there, made in 2006 and released nationally in 2007. It’s called “Maxed Out”, and it has some poignant and fitting commentary about credit card companies, debt, and how many Americans, from first-year college students to widowed retirees, are affected by predatory lending practices.

A main thread throughout the documentary is an interview with Elizabeth Warren, Harvard Law School professor and head of the Congressional Oversight Panel created to investigate the US bank bailout (formally known as the Troubled Assets Relief Program). Ms. Warren was the original person to suggest the creation of a Consumer Financial Protection Agency, which President Obama and Congress are currently considering. Ms. Warren has made many media appearances since the economic crisis began, including a recent appearance on The Daily Show on January 26th, 2010 (view interview).

We would all like to hope that current legislation like the CARD Act will prevent some of the abusive and harmful credit industry practices of years past. But the fact of the matter is that being vigilant is and always will be the best protection, because the credit industry has been known to be creative – even slippery; at the end of the day, it is a for-profit industry, after all. This documentary is very useful in this sense: as both a learning opportunity and as a cautionary tale. If you get a chance, check it out. I rented it from NetFlix, but it’s possible that your local video store would have it too.

To watch clips from the documentary, check out:

http://www.youtube.com/watch?v=GsrA6AfS8UE&feature=related

http://www.youtube.com/watch?v=ZHsKhC2_3Ic
 

Only 3% of Consumers Read Their Bank Mail?

On Friday, January 29th, I made a CARD Act presentation at the Federal Reserve Bank of Atlanta. One of the CARD Act provisions requires that credit card issuers notify their cardholders at least 45 days in advance if the terms of their account are going to change adversely. Specifically, cardholders must be notified if their interest rate will increase or if an annual fee will be implemented.

My hypothesis is that the notice is irrelevant, because most consumers don't read the mail that comes from their credit card issuers unless it's their statement. And since I had 100 people in the room, I felt it was time to test my theory. I asked the crowd, "How many of you read the non-statement mail (what some consider to be junkmail) you get from your credit card issuers?" Three people initially raised their hands. After a few seconds a fourth raised his hand. I'm calling his pause my “"margin of error."

So, there you have it. It's very possible that only three percent of the population reads the notices from their credit card issuers. Now, I recognize this is a bold and empirically unstable statement, but I have reason to believe it's actually inflated. The people in the room were all bankers, financial counselors, finance professors, or otherwise deep in the finance industry. I would expect the percentage from that group to be much higher than a more reasonable cross section of the population. So three percent might actually be on the high end.

Either way, I still believe the 45-day notice provision is the most meaningless of all the CARD Act provisions. And now I have proof, albeit "kind of" proof.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Using Game Theory to Buy a Car

Here's an interesting approach to buying a car, created by Bruce Bueno de Mesquita, a professor of politics at New York University and a Senior Fellow at the Hoover Institution at Stanford University. The professor says he has used his method "to buy eight or nine cars in the past, saving myself thousands of dollars."

It works like this: He first decides on a make, model, and trim. The he gets on the phone and calls every dealer in his area and gives them the following spiel:

“At 5pm today, I want to buy a car (Mazda, Ford, Fiat, or whatever). I am calling every dealership within a 50-mile radius of my home and I am telling each of them what I am telling you. That is, I will come in at 5pm today with a cheque to buy a car from the dealer who offers me the best price.”

A few dealers tell him to take a hike, and that just means his technique really works. Most dealers will give him a quote on the phone, because they don't want to lose a sale. He writes the price next to each dealer on his list, and when he's done, he heads over to the dealership with the best deal.

The author of this article in The Irish Times put Professor Bueno de Mesquita's technique to the test, and saved €2,450 off the opening price on a used car.

I've written about buying cars on CreditBloggers in the past: See Car Dealers' Tricks -- and How to Dodge Them. My favorite method is to use a car broker, who basically does what Professor Bueno de Mesquita recommends. I pay him a few hundred dollars for the service, which is well worth it for me.

By the way, Credit.com offers a wealth of information about buying a car and about auto loans through Credit.com's partner company.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

CARD Act Round II: February 22, 2010

Odds are you've probably heard a mention or two about the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). The CARD Act was signed into law by President Obama in May 2009 and was scheduled to roll out in three phases over a 15-month period. The first phase went into effect on August 20th, 2009, and included the new 45-day advance notice to cardholders regarding significant account changes or interest rate increases. It also required that issuers mail out statements 21 days (rather than 14 days) before the due date.

The second phase of the roll out, the most extensive one, is scheduled to go into effect on February 22 -- a little less than a month away. So what does it mean for consumers? Here's a quick rundown of the major provisions that will go into effect next month:

Interest Rate Increases:

• No more retroactive rate increases or universal default clauses. Credit card issuers will not be able to raise an interest rate on an existing balance unless the cardholder goes 60 days past due on the account.
• Credit card issuers will not be able to raise the interest rate on new accounts during the first year the account is opened and promotional rates must remain in effect for a minimum of 6 months.

Fee Restrictions:

• Over-limit fees will only be allowed if the cardholder gives their consent prior to fees being charged. If the cardholder agrees to accept over-limit transaction fees, only one over-limit fee is allowed per billing cycle.
• Card issuers will not be allowed to charge additional fees to cardholders for accepting payments by mail, phone, or online -- but they will be able to charge a fee to expedite a payment.
• Payments received by the due date, even if the due date falls on a weekend or holiday, will not be charged a late fee. In addition, payments made at a local branch or office must be credited the same day.
• Sub-prime or "fee harvester" credit cards will have fee limits where non-penalty fees cannot exceed more than 25% of the credit limit when the account is opened.

Student Cards:

• Credit card issuers will need to verify proof of income or otherwise require a co-signer before issuing a credit card to consumers between the ages of 18-21.

Billing Cycle & Payment Allocation:

• Double-cycle billing, or the practice of calculating interest charges on both the current balance and the previous month's balance, will be banned.
• Any payment over the minimum balance due will be required to automatically be applied to the highest interest balance first.
• Credit card statements will be required to include a minimum payment disclosure that explains how long it will take to pay off the existing balance as well as the total cost in interest if the cardholder were to only pay the minimum amount due each month. They will also be required to include minimum payment and interest costs to pay off the existing balance within 3 years.
• Credit card issuers will be required to make account terms and cardholder agreements available for their cardholders online.

The remaining provisions will go into effect on August 22, 2010, and will give consumers the right to earn back their previous interest rate if they continue to make their payments on time for 6 months. It will also include the new rules that will limit fees on gift cards and prohibit them from expiring for the first 5 years.

Even though the CARD Act is still working through the roll out, we're already seeing signs that card issuers are finding other and more creative ways of imposing fees. It will be interesting to see how the card industry evolves as these changes take place.

CARD Act Review at the Federal Reserve Bank of Atlanta

On Friday, January 29th, John Ulzheimer of Credit.com presented a CARD Act summary to 100 members of the Georgia Consortium for Personal Financial Literacy at the Federal Reserve Bank of Georgia. In attendance were college students, large and small lenders, credit reporting agencies, credit counselors, college professors, bankruptcy judges, and Federal Reserve employees.

The summary included a review and discussion of the August 2009 provisions, the February 2010 provisions and the August 2010 provisions of the CARD Act.

Credit.com and IdentityTheft911 were acknowledged as new "Diamond"-level sponsors of the non-profit Consortium.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Can You Trust Your Bank?

I strongly believe that when a consumer is researching buying a product or service that he can rely upon the provider to give him accurate information from which he can base his decision. That's not always true, hence the concept and term "buyer beware."

Nordstrom, probably the most trusted name in retailing, got their exalted position by earning it year after year, customer after customer. But you don't know anything about the street vendor, and if you buy a purse from one, as my wife recently did in the SoHo area of New York City, you realize that you are taking a chance.
 
When it comes to financial products, there have likely been more dishonest individuals per square foot than any industry I can think of. My end of it, mortgage lending, may be the worst, with fly-by-night mortgage brokers and subprime lenders who taught classes in how to deceive customers. And they did. And while I try to have sympathy for borrowers who were hornswaggled, there were so many warnings about shady characters in the mortgage business that those borrowers should have done a better job of verifying the reliability of the lender they chose.

But when it comes to the big banks known world-wide -- and, theoretically, highly regulated ones -- you would think that a consumer could trust the information. More particularly, when a bank has over 1,000 branches, you would think that you would get the same rate whether you went into an office in a big city like San Francisco, a branch in a small town like Yuba City, to the bank's Internet website, or called an 800 number. Apparently that has not been the case. 

It has been reported that one big bank has eliminated the ability of their loan officers to make "overages."  In a nutshell, an "overage" is industry terminology for extra compensation the loan officer earns when he is able to smooth-talk the borrower into accepting a loan on terms that are higher than the best rate that the customer was qualified for.

For example, let's say that the best rate is 4.75 percent. If the loan officer tells the customer that the best rate he can get him is 4.875 percent and the customer agrees, then an overage comes into play. That loan has a higher value because outfits like Fannie Mae will, logically, pay more for a loan with a higher yield. 

The differential would typically be about one-half point, or $2,000 on a $400,000 loan. Of that, the loan officer might get half, or $1,000. The loan officer's normal compensation might be $1,000 per loan, so with the overage, he just doubled his income. And the bank made more too. You might think this is illegal, but it isn't.

You can also see that the loan officer can get away with this only under two circumstances. The first is when the customer doesn’t understand or know what the proper rate is. The second is when he completely trusts the bank and the loan officer.

Thus on the one hand, the loan officer and his employer are exploiting the customer's misunderstanding of the proper rate and on the other hand they are violating the relationship of trust the customer counted on. If it occurs to you that this is an awful way to run a business, especially one that is regulated, you would be right. 

Worse, I will guarantee you that no regulator is looking into practices like this so as to police their behavior. They believe, quite seriously but also quite incorrectly, that "market forces" will not allow such behavior to be successful.

Good for that bank to remove temptation, but bad for them to have allowed it for so long. And you wonder how many of their loan officers are looking for jobs at other banks that don't operate quite as ethically, that will still allow overages.

Bottom line: You need to look out for yourself because no one else will.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Interview with the author of "The New Frugality: How to Consume Less, Save More, and Live Better"

Lynn Truong of Wisebread recently interviewed Chris Farrell, author of The New Frugality: How to Consume Less, Save More, Live Better.

What is the difference between "new frugality" and "old frugality?" Farrell says old time frugality is about saving money at all costs, while modern frugality is about saving money and "helping your community." Old frugality is about self sacrifice, while new frugality is about having fun saving money in creative ways that don't detract from a rewarding and socially-active life.

One example of saving money and helping others in your community is swapping baby clothes, furniture, and toys. Yesterday, I was at my sister-in-law's house and I noticed her 20-month old boy walking around in pajamas that seemed a little short. When I commented that he was growing out of them, she told me she was going to soon give them to a friend with a baby on the way. She reminded me that the pajamas used to belong to my youngest daughter before we gave them to her for her daughter, who wore them for a year. My sister-in-law saved the pajamas and when her son Joe was a year old he started wearing them.

When I told my wife about the pajamas, she told me that they were also worn by our oldest daughter, and our other niece and nephew. It's neat to realize that one pair of pajamas have been worn by six kids, and they are soon on their way to a seventh. We save our kids' outgrown clothes in plastic bins with a label on them, like, "Jane's 3- and 4-year-old clothes." When a friend or relative's kid reaches that age, we give them the contents of the box.

Farrell's take on people who complain that modern frugalistas are hurting the economy by not buying as much as they can mirrors my own sentiments. An individual's foremost financial responsibility is to ensure that his or her family is doing well. Spending money on stuff you don't need just to give the economy a shot in the arm is unsustainable, and it's a big reason our economy is in the mess it's in. Isn't it better to reboot the system in a way that promotes stability and frugality?

The gist of Farrell's book can be summed us as: Don't use credit cards, don't borrow money unless it's for something important (like education), and set up an automatic savings plan to establish a "margin of safety." The most important thing to remember, says Farrell, is that being frugal and green "is fun, and it's fun over a lifetime."

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

CARD Act a Homerun? Think Again.

During a recent interview with a Salt Lake City newspaper, I told the reporter that I gave the CARD Act a C+. How can the most significant set of consumer protection laws since, well, ever, be anything less than a home run? Simple: Because some of the CARD Act is either meaningless, unfair, based on anecdotal evidence, or just plain silly:

45-Day Advance Notice for Interest Rate Increases – There’s nothing in the Act that requires the notice to be accompanied by fireworks, so if, say, 90 percent of the cardholders trash their notices without evening opening them (and many people do), then it won’t matter if they come 45 days in advance or 450 days in advance. Meaningless!

Under 21?: You Need a Co-signer – Would you trust a 21-year-old with $10,000 any more than you’d trust an 18-year-old? I didn’t think so. There’s no evidence that proves a 21-year-old is in any better shape to manage credit cards than an 18-year-old. Anecdotal!

No More Over-Limit Fees – Thanks for motivating the credit card issuers to come up with another fee to replace the revenue they’ll lose by not being able to charge me an over-limit fee if and when I do charge over my credit limit. At least I could see that one coming. This one was also unfair to credit card issuers, as it kicks them squarely in the wallet. Unfair!

Gift Cards Can’t Expire for Five Years – What a great idea... Give me no incentive to get rid of the small deck of gift cards that have been taking up space in my top drawer for years. Without a realistic expiration date, there is less of a sense or urgency to actually redeem them… and that’s NOT anecdotal. The law should have been that gift cards HAVE to expire after 30 days. Talk about a run on the mall. It would be like cash for clunkers. This was just plain silly!

John Ulzheimer is obviously beholden to no one, which is exactly the opposite of the people who wrote or fought to weaken the CARD Act.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

Digging Out of Debt

Gerri Detweiler, our very own Debt Expert and Credit Advisor for Credit.com, appeared on FOX 35 Good Day recently. Gerri shared her insight on all of the different options for getting out of debt, including DIY debt reduction, credit counseling, debt settlement and bankruptcy.

To find out more, watch the clip: