Another Shoe

It has never been clear to us common folk what mortgage-backed securities look like when Wall Street sells them. A pessimist would say something like, "Those guys would sell ANYTHING regardless of its investment merit."  One trick seems to be to come up with a clever name, like Bear Stearns High-Grade Structured Credit Strategies fund.  Do you know what that means? Neither do I.  High-Grade is a nice sounding name but high-grade compared with what? And what is a structured credit strategy?

What it means is whatever it says in the prospectus that was given to investors, and that may not have much similarity with its name. A relatively small specialty in the legal profession creates these many-paged documents that the average investor never reads.  Even professional investors are probably relying more on what the salesman tells him about the safety of the product than in specific wording in the prospectus. Yet, when the fund heads south and investors want to sue to get their losses covered, you can bet the Wall Street firm will say, "This was properly disclosed in the prospectus."

Then comes along the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund. What this means is that the fund can go borrow more money than just what investors put into the fund and buy more mortgages.  Word has it that these kinds of funds routinely borrow $9 for every $1 in equity. That means that a fund can start out with $100 million in investor money, borrow $900 million and buy $1 billion in mortgages.

Now let's assume for the moment that each mortgage does not exceed 90% loan-to-value, more conservative than the 100% financing widely available.  That means that the equity behind those mortgages is only $100 million. It doesn’t take a rocket scientist to tell that a modest decline in property values and an increase in the foreclosure rate can destroy most of the equity in the fund. 

And then there's that $900 million of money that some lender probably wants back. Depending on what the credit agreement says, the lenders might have some ability to step in and TAKE enough mortgages to cover its loans, and that may mean the investors get wiped out.

At this point, Bear Stearns has indicated that it will put $3.2 billion (gag!!) into the first fund mentioned, hoping to stave off collapse. But it looks as if the leveraged fund investors are on their own and that they will suffer significant losses.

That's another shoe, and I think that there are still others around.

Stay tuned.

For more information, check out http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aYDTeHYnV3ms 

Funny Money Friday: The Daily Show's Tips for Students with Credit Cards

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

We've covered credit card tips for students and graduates several times here at CreditBloggers. In one post, we made a case for not having any credit in college. In another, we had three warnings for college freshmen. We even have a whole section of Credit.com devoted to helping college students start on the right foot financially.

But none of our advice is quite as funny as Demetri Martin's in his latest Trendspotting segment for The Daily Show. Click here and then on "Trendspotting - Credit" to watch for yourself:

Happy Friday!

Brookfield Lending: Portrait of a Loan Scam Company

If you stumbled across the Brookfield Lending website while searching for a loan, you probably wouldn't think twice.

It's nicely designed, with flash navigation and lots of photos. There's all sorts of warm and friendly text, including a reference to them being "one of the fastest growing credit brokers in North America."

But if you were to apply with this seemingly authentic lender, it would be a nightmare. Brookfield Lending is a cover for an advanced-fee loan scam. If you contacted them, they supposedly approve your loan and would ask you to wire a deposit or insurance payment. After you sent your hundreds or thousands of dollars, you'd never hear from them again.

We heard about this latest loan scammer directly from a branch manager with the Better Business Bureau. He had called our offices to warn us about this particularly convincing scam. A quick Google search turns up the real story of Brookfield lending. The Ripoff Report has 13 reports from consumers about these fraudsters. 

The Brookfield website offers a rare opportunity to study an advanced-fee loan scammer up close. When you start digging around the site in more detail, it is easy to spot some warning signs:

• No VeriSign or Trust-e security seals at the bottom of the page. Check out the bottom of E-loan or Credit.com for an example. Nearly every authentic online retailer posts these important online security certification.
• No physical address. They don't even refer to being in one state or area.
• Typos in the text of the website.
• Not compatible with Firefox internet browser.
• No meta tags on the website. The page has no title in the top left of your browser window, a basic web marketing element used by established companies.
• No application. Most online lenders have actual online applications to process your request. Always check to see that these applications are on secure (https) pages.
• Only email contact. A real lender would offer multiple ways to contact them, not just an online email form.
• Better Business Report. Brookfield has a report with the BBB. It is only when you read the details that you realize the BBB is trying to warn you that they're a fake company. A closer reading shows that "It is the position of the Bureau that Brookfield Lending Service's advanced fee loan offer is deceptive and misleading."

Take a look at the Brookside Lending website for yourself. Hopefully, it can help you learn how to avoid other scam lenders in the future. And tell your friends and family about this dangerous loan fraud. If you want to read more about advanced-fee loan fraud, this FTC article is a great place to start.

And if you are contacted by a lender asking you to send money in exchange for a loan, DON'T DO IT! Instead, immediately report your case to the Federal Trade Commission, Consumer Affairs and Phone Busters in Canada (usually where the funds are sent). You may also want to share your story with your political representatives, state attorney general, local news media, friends and family.

Update: Here's another bad lender to add to the list: Kennedy Advantage Plus. We received a call from a customer who had sent these fraudsters $1,600 for a $10,000 loan.

Making Money with 0% Credit Cards: Is Free-Credit-Card-Capital for You?

The Wall Street Journal recently ran an article on the pros and cons of using balance transfers on 0% credit cards as a source of investment capital. It raised more questions for me about what I'll call "Free-Credit-Card-Capital" (FCCC) than it answered, so I did some research and spent some time thinking about this investment idea, which can be as easy or complicated as you want to make it, if you're cut out to have anything to do with it at all.

Before you read any further … if you aren't good with details or deadlines, if you owe money on your credit cards, if you live paycheck to paycheck, if your credit picture isn't pretty … then this is not a good investment option for you. Don't ask for trouble.

If it's any consolation, FCCC wouldn't work for me, either! I have a knee-jerk negative reaction because I'm disorganized and feel it's likely that I'd mess up. I'm also a worrywart, so even if I set up automatic payments for the required monthly amounts, I'd fret that something would go wrong and my interest rates will go up across the board, while my FICO score would tumble. But that's me.

How You Can Benefit from Free-Credit-Card-Capital
The first step is finding some FCCC. It's important that you choose the right card. You want one that offers the 0% balance transfer come-on -– and does not limit your use of those handy convenience checks for transferring balances from other credit cards. You want to be able to cut a check to yourself for FCCC purposes with no strings or fees. If there's a balance transfer fee associated with the transaction and/or if the card issuer will treat it as a cash advance, it's not worth considering the card for investment purposes. Similarly, if the introductory term is short, find a card with a longer term, ideally a year.

Even if the fine print doesn't raise any red flags, I recommend calling the customer service number to ask about the convenience check policy before you apply for the piece of plastic. Assuming everything checks out, if you choose carefully, you'll soon get the card and the check.

Once you get the check, invest your FCCC in a low-risk savings or money market account, where you can earn in the range of 5%, say at an online bank or via your credit union. Don't put the money in the stock market, because you won't be able to keep it there long enough to weather any economic storms that might sink the Dow.

Key, of course, is remembering to make required monthly minimum payments on the credit card and to pay back the total of what you've borrowed before the card's introductory rate expires.

Don't use your FCCC card for purchases. Why? Because they're quite likely to be billed at a high rate. Even if you intend to pay off the balance right away, and even if you send in enough to cover the purchases, the lender will credit your payment against what you owe at  0% … while the debt at the higher rate grows by a hefty amount, month after month.

As for the interest you earn in the process, that's yours to keep, minus the assortment of dear old income taxes you have to pay. The more FCCC you can access, the more you'll earn. This has led some folks to use a strategy known as "App-O-Rama," where you apply for multiple credit cards at the same sitting, hoping that your applications will be approved and your credit limits will be high … before your FICO score reflects the increased lines of credit in your name and the multiple applications. On the assumption that your FICO score is high, you may be able to amass a larger pot of FCCC than you thought possible. But please watch out!

"App-O-Rama" Warnings

1. Be sure you know what you're getting yourself in for with each card before you apply. Cards that treat FCCC balance transfers as cash advances should be ruled out. Ditto for cards that charge balance transfer fees.
2. Take advantage of automatic payments or come up with another way to be certain that you'll never be late or miss a payment. For some, a spreadsheet might do the job. Whatever. You want to make sure nothing will go wrong. Otherwise, you'll end up paying a lot in fees and a higher interest rate –- across the board, for years to come.
3. Don't build up an FCCC fund if you'll need additional credit in the near future, for example, to buy a home. You don't want your FCCC mucking up the works and making your mortgage more costly.

If you want more information about FCCC, I highly recommend "0% Daredevils Chase 'Free' Cash," by MSN Money's personal finance columnist, Liz Pulliam Weston.

Have you used free credit card capital to make money? Please tell us about your experiences!

Dump Your Debit Card?

The Privacy Rights Clearinghouse is recommending you dump your debit card. Their main concern is that if your debit card is used fraudulently, your card issuer can take up to two weeks to get the stolen funds into your account while they investigate. In the meantime, you may bounce checks or be unable to pay other bills. Their fact sheet goes into great detail as to the dangers of debit cards, especially for those purchases where no Personal Identification Number (PIN) is required.

If you're vigilant and catch fraudulent use of your debit card, you're not likely to be held responsible for the purchases under the card associations "Zero Liability" policies. With Visa's Zero Liability policy, for example, you won't be responsible for fraudulent charges to your Visa Debit card unless by chance the thief used your PIN number and the transaction was processed on a network outside Visa's network. Even then, you would still be protected under the Electronic Funds Transfer Act rules which limit your liability to $50 if you report a loss or theft promptly. 

Visa also requires its card issuer members to provisionally credit your account within five business days, rather than fourteen, and reports that many issuers will credit the victim's account within 24 -- 48 hours. Bank of America, for example, offers credit within the next business day if your card is lost or stolen and used by a thief.

Mastercard also offers Zero Liability for most transactions, though I don't have any more details than those listed on its website, since my calls to clarify its requirements for provisional credit were not returned.

I respect the PRC a great deal, and their fact sheets (some 50 plus) are excellent, but I'll confess I still use a debit card for some purchases. They do have a point, though, if you can use a no-fee credit card and pay it in full each month, do you need a debit card?

If you do use a debit card, I recommend you:
1. Talk to your issuer and find out their policy for provisional credit if it is lost or stolen, and
2. Monitor your account online and set up alerts for unusual activity on your account (most issuers offer this service these days).

What do you think? Do you use your debit card or dump it?

Credit Card Foreign Transaction Fees: What You Need to Know Now

If your summer vacation will take you out of the United States, it 's worth it to take the time to figure out which piece of plastic you're going to use where. While the safety and convenience of getting to say, "Charge it!" are well-known, there's another benefit to using a card overseas: The exchange rates credit card issuers use are usually quite favorable and hard to beat.

The foreign transaction fees, on the other hand, can be a costly, unwelcome surprise.

Almost every credit card issuer charges extra for purchases made outside the United States. Both MasterCard and Visa have a 1% processing fee and most banks add on additional fees of their own, which are generally a percentage of cost of the transaction in US dollars. For example, say you did lunch in Milan for 100 Euros, which translated to $125.00 US. The foreign transaction fees would be charged on the $125.00 amount.

A recent survey of credit card issuers by Heshan Demel, one of my CardRatings.com colleagues, found the following foreign transaction fees:

• American Express - 2%
• Bank of America - 3%
• Chase - 3%
• Citibank - 3%
• Washington Mutual - 1%
• Wells Fargo - 3%
• Capital One - No foreign transaction fees
• Discover – No foreign transaction fees … but this card is rarely accepted overseas

Before You Go

Call your card issuers and find out what their current foreign transaction fees are. While you have them on the phone, it's a good idea to mention that your travel plans will be taking you out of the country, so that your international charges aren't inadvertently declined as part of a card issuer's fraud protection program.

Did You Take a Trip Last Year?

You may be due a refund if you paid any foreign transaction fees between February 1, 2006 and March 8, 2006. Without admitting to conspiring to set and conceal foreign transaction fees, the following major players in the credit card industry have set up a $336,000,000 settlement fund: MasterCard, Visa, Diners Club, Bank of America, Bank One/First USA, Chase, Citibank, MBNA, HSBC/Household, and Washington Mutual/Providian. Click here to find out if you're eligible for a piece of this hefty refund pie.

Watch for Special Promos

Always be on the look out for special credit card promotional offers. For example, last week Citibank launched the brand new Citi Chairman American Express Card. This card is targeted to Smith Barney and Citi Private Bank clients and boasts no foreign currency transaction fees until January 2009.

Happy Travels!

Any tips or thoughts on using your credit card overseas? Please share your thoughts!

Curtis Arnold, is the Founder of CardRatings.com, a website that provides ratings and reviews of over 20,000 credit card offers.

VantageScore and Equifax Risk Score 3.0 Also Exclude Authorized User Accounts

With all this recent controversy about changes to FICO credit scores, it is interesting to note that there are other credit scoring models that have always excluded authorized user accounts. According to an Equifax press release, the VantageScore and Equifax Risk Score 3.0 have never included authorized user accounts in their score calculations.

"Being an authorized user on someone else's account does not demonstrate an individual's ability to pay their credit obligations. For this reason, it does not make sense to include authorized users in the calculation of a credit score," said Lisa Zarikian, who leads Equifax Predictive Sciences and was a member of the team that created VantageScore.

If you recall, the VantageScore is a new credit scoring system developed jointly by the three credit bureaus in order to better compete with FICO. Announced in March 2006, the VantageScore has a very limited reach compared with more established credit scoring systems.  VantageScores became available to consumers online last June and use a scale from 501 to 990.

Equifax Risk Score 3.0 is a business scoring model designed in 2004 by the bureau for business clients.  You can read a brochure about the score online here.

Funny Money Friday: FICO the Terrible

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

There's a lot of name calling going on in regards to Fair Isaac's recent decision to stop counting authorized user accounts. A lot of consumers are hopping mad about the negative impact this change will have on their credit scores. The comments section of our reader poll and other posts about this change are full of accusations and concerns.

Over the past two weeks, we've heard that:

• The FICO score change is discriminatory  against women.
• The FICO score change is "just another insult to the American people."
• The FICO score change is going to harm the gay community.
• The FICO score change is another sign of "modern day economic slavery" and that "America needs to wake up this economic HITLER (FAIR ISSAC)."
• The FICO score change is so bad that we should "just bring back slavery. At least I could see who my owner is that is suppressing me and my family."
• The FICO score change will cause the mortgage industry to "crumble. Just fall apart."
• The FICO score change is a "perfect storm" that will destroy the economy and devastate families.

Hold the phone! I'm not happy about the FICO score change either, but I think these readers are taking it a little too far. Yes, the FICO change is going to hurt the credit scores of many in order to stop the fraud of a few. But the change is basically logical. Why should someone get full score credit for an account that they didn't open and are not legally responsible for paying back?

And, yes, it is often married women who are the most dependent on authorized user accounts. But there is no rule that married couples need to manage their accounts this way. It's not really even a good idea. We always recommend that both people in a marriage or a domestic partnership have their own, individual credit accounts.

What do you think about the FICO change? Are you on the side of the "torch and pitchfork" folks? Are you inconvenienced, but not that mad? Or do you think the change is for the best? Share your opinion the comments section below and have a great weekend!

Regulator- Schmegulator

I never cease to be amazed at the naivete of lawmakers who think that just because they pass a law, that behavior is modified and whatever social purpose they had in mind will be advanced.  This is strange because I think that in politics there is a huge gulf between perception and reality anyway. You think that people who saw this all around them would understand that it happens in the rest of the world too.

The fact is that passing a law is just the first step in a long process.  Someone has to put that law into some kind of bureaucratese, what we would call regulations.  Next, someone has to figure out who is in charge of enforcing the rules and what the penalties are going to be for failure to follow them.

Finally, someone has to be enabled to go out and enforce the regulations, like have an enforcement staff up to the task.  You can already see the problem. There are lots of opportunities for failure between the halls of Congress and Main Street.

A topic of current interest is the ability of consumers to fix mistakes on their credit reports.  The intention of the law that consumers can dispute erroneous items and have them removed quickly and easily.  All of us who work with borrowers who have credit problems realize that this has been a joke for years, not just because Congress wants to hold hearings.

The current hearings on all matter of mortgage and credit related malfeasance have been brought on by this very problem. One Congressman chided the Federal Reserve Board for not having implemented rules that would have "enabled" previously passed legislation.

We'll see how that one turns out, but I'm not holding my breath.  Right now, it looks as if the creditors seem to be taking the position that they have a lot to lose by not including information that may or may not be true. Balance that against the damage to consumers from making it hard to eliminate that same information. Thus it's not really a stand-off. The creditors are holding the cards.

Whatever agency ends up in charge, someone needs to step in and TELL creditors that they don't have a choice on this, that they have to make it easier to remove questionable data and make it painful when they don't.

Scam Alert: New Version of Advanced-Fee Loan Fraud

I hate these advanced-fee loan scammers. For the past year, there has been a dramatic increase in this particular type of loan fraud. Unfortunately, I haven't seen any law enforcement action to stop it and Chris Hansen from Dateline's "To catch an ID thief" hasn't returned my messages.

Advanced-fee loan scams are pretty simple. Basically, a fraudster posing as a lender contacts a person and offers them a loan. We think they are using spyware in some occasions to target people who have recently applied for loans and some have official looking loan applications set up online as well. The catch is that they require the "borrower" to wire hundreds or thousands of dollars to Canada under the guise of a downpayment or insurance expense. When the customer sends their money, they never hear from the fake lender again.

A lot of victims have contacted our team looking for help in reporting or undoing the crime. And they've sent us copies of the seemingly-official letters, loan applications and contracts. In the past, the thieves say they are from a made-up company like FairView Financial, Longway Financial, Royal Oak Financial or  Kaitland Insurance Group.

But recently the scammers have been saying that they are from established, authentic banks. Here's one case we received by email this week:

I received a call from a Donald White. He said he is from Lending Tree and that I would have to pay the first month and last month payment in order to receive a loan. Is this true? They are asking for $250 sent by Western Union.

This is definitely not true. Lenders will never ask you to send this sort of money before getting a loan and they certainly will never ask you to wire those funds via Western Union. You can read more about advanced-fee loan scams online.

If you are contacted by a lender asking you to send money in exchange for a loan, DON'T DO IT! Instead, immediately report your case to the Federal Trade Commission, Consumer Affairs and Phone Busters in Canada (usually where the funds are sent). You may also want to share your story with your political representatives, state attorney general, local news media, friends and family.

Bad Credit Consumers Paying Credit Cards Before Mortgages

Experian's recent subprime lending study has revealed a fascinating insight into about borrowers with bad credit: Consumers with a score under 620 (subprime) are more likely to be 30-days late on their mortgage payment than with their credit card payments. Inversely, consumers with scores above 680 (prime) are likely to pay their mortgage before their credit cards.

It's been standard wisdom for years that borrowers in a financial crisis will pay their mortgage first, followed by their auto loan and then credit cards. The consequences that come with non-payment in this order make sense. Most consumers would rather have a credit card sent to collections than risk losing their house or their car.

So it is something of a mystery why suprime borrowers appear to be choosing their credit cards over their mortgages.  It could be that they fear their mortgage lender less than they fear their credit card issuers. Or that they've heard about mortgage lenders being lenient with borrowers in financial trouble. Perhaps, they think that a mortgage late payment is reported differently than a credit card late payment (it usually isn't) and won't damage their credit scores as much (it will).

The most probable explanation is simply that the subprime borrower's credit card payments are less expensive than their mortgage payments. If you can't afford your mortgage payment in full, I guess it makes sense to pay the credit card payment that you can afford instead. Why have two late payments when you could have one?

This reason lines up with some of the other facts from the Experian study. Mortgage delinquencies are highest in the west (where home prices are often exorbitant) and these late payments have grown sharply (13.2%) over the last four years (when home prices have surged).

What do you think about the Experian study? Have you ever been forced to choose between a mortgage payment and a credit card payment? Which did you pay?

Beating a Dead Horse: Check Your Credit Reports & Scores!

Has checking your credit become the new flossing? It's amazing to me after all these years that there are so many people who still don't check their credit or know their credit scores. A recent study promoted by Bankrate reveals how far we still have to go.

• Even though credit reports are available 100% free from each of the credit bureaus every 12 months online, 32% of consumers have never checked their credit report.
• And credit scores (you know, that little three digit number that determines how much you'll pay for practically anything) are even worse: 45% of consumers don't know their credit score.

If you have never checked your credit reports and have no idea where your credit score stands, make today the day. For just $14.95, you can order your TransUnion, Equifax and Experian credit reports in an easy-to-read illustrated format and you can see all three matching credit scores. I promise, it's not that painful.

Once you have checked your credit data, we'd be glad to help answer any questions you have. You can email our team of credit experts at tidbits@credit.com. Carpe diem!   

Reader Question: How will the FICO Change Impact my Refinance?

We are continuing to get great email questions from our readers about the recent FICO announcement. Fair Isaac's decision to change their FICO score formula is causing a lot of people to worry about the impact on their own scores. Here's one question from our reader, Amy: 

My husband and I were able to get our first mortgage loan last year, we have high percentage rate and we only took it so we could get into our house. We were told that we would be able to refinance this year, it has been a year since we closed.  Will the news of the big "FICO" change to remove me as an authorized user from our shared accounts? Is this going to affect us if we try to refinance?

First things first, the FICO change will not do anything to change your existing accounts. Credit scores work as filters that interpret your credit data, they don't have an impact on the information on your credit reports. FICO's decision not to include authorized user accounts in their credit scores means that the "filter" will simply ignore those records.

If you want to be removed as an authorized user from a shared credit card account, you should contact the credit card issuer directly with your request. And if you want to have the old authorized user records removed from your credit report, you can dispute them with the credit bureaus.

Unless the shared credit card had late payments or was maxed out, removing it from your credit score calculation will probably not help to improve your credit scores. It's more likely that your credit scores will drop from the loss of the extra credit limit and established account. This credit score change is true for both removing the account by disputing or after the FICO change takes effect in a few months.

What does this mean for Amy's refinance? She should take a close look at where her FICO credit scores stand. If her scores are higher than 700, it would probably be smart to refinance before the FICO change comes this fall. If she's in the 650-700 range, there's a danger that her credit score could easily drop to "subprime" levels with the change and she might have trouble finding a refinance loan. If her score needs some help, she can read this article about "sprucing up credit scores."

Do you have a question about the FICO score announcement or credit in general? Send us an email!

Funny Money Friday: Identity Theft Caper in San Francisco

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

A large percentage of identity theft crimes are committed by anonymous fraudsters that are never identified or caught.  For a victim, these loose strings can be one of the most frustrating parts of their experience. Usually, it is hard to get a sense of closure with identity theft crimes. But one woman in California had a different experience.

San Francisco's Karen Lodrick had been an identity theft victim for six months following a mail theft incident. Her accounts had been taken over by a thief to the tune of over $9,000. But luckily for Karen her identity thief was a local - a neighbor in fact. And in April, she ran into the fake "Karen Lodrick" at a Starbucks.

The subsequent two-mile foot chase had Karen running all over the streets of San Francisco with 911 on the line via cell phone. Thanks to her pursuit, the identity thief was eventually caught hiding in a Walgreen's parking garage and was arrested by police. "She was sentenced by Superior Court Judge Harold Kahn to the 44 days she had already served in county jail and three years' probation." Lodrick's bravery so impressed the police that she was invited to become an San Francisco officer.

How's that for a happy ending! You can read the whole story of Karen Lodrick's identity theft caper online from the San Francisco Chronicle. Happy Friday!

What is the Difference Between Joint and Authorized Accounts in the FICO Score Change?

We continue to get great questions from our readers about the recent FICO announcement about changing their credit scoring formula. You can click here to learn more about this change, what caused it and how it applies to you.

I am added to my girlfriend's credit card. How does this impact my credit score and what will happen when the FICO score changes? What is the difference between joint account holder and authorized user?

Good question! Our credit score guru and FICO insider, John Ulzheimer, has the answers:

A joint account is when you and someone else (the joint account holder) are both liable for the payments.  And, it also means that the account will show up on both of your credit reports and your scores will take them into account.  There's also a good chance that both of your credit reports were pulled and reviewed when the account was opened.

An authorized user is someone who has the ability to use the credit card that belongs to someone else.  You do not have any financial liability and the account MAY be reported on your credit files.  As of now, the authorized user account will count in your score but that's going to change when FICO launches their new formula this fall. If you had been getting credit score "points" for the authorized account, your credit score could drop when this changes. 

Do you have a question about FICO's decision to stop counting authorized user accounts? Send us an email!

Credit Cards Now Charge Very Low Minimum Payments: Don't Fall for It!

One of the most insidious things about credit card debt has to do with the way the math works. It isn't designed to get you out of debt. If it was, it would be based on a time frame or a fixed monthly payment, like mortgages and most other loans. Instead, each month's required payment on a credit card bill is a percentage of what you owe.

In "days of yore," minimum payments were pretty straightforward, averaging about 5% of the outstanding balance. But over the last decade or so, that has dropped to around 2%, and most recently, to even less than that on many credit cards. In fact, Consumer Action's recent survey on the credit card industry found quite an assortment of minimum payment calculation methods, with some lenders now only requiring 1% plus fees and interest rate hikes.

And certainly, no one in their right mind would call the current calculations straightforward! Some lenders have amazingly complicated formulas, so next time you're in need of a sleep aide, skip it on the pricey pills and look at this table from Consumer Action's survey, which details how the top ten lenders do the math.

What a Difference a Few Percentage Points Make
No matter how your card issuers calculate the minimum payments, if you only send in that amount, you are going to pay a lot more in interest than you realize. For example, consider two $5,000 credit card bills, both at 15%, both based on the assumption that there won't be any additional charges. The first is typical of what might be in your wallet today, while the second one is based on the rate from those days of yore:

1. With 2% minimum payments, you'll pay $7,789 in interest by the time the bill is paid off – in around 32 years. Your first required payment would be $100, with the required amount going down very slowly, month after month, until it reaches $10 a month … in the middle of year #25. (If you're wondering about that $10, it's because lenders have minimum dollar amounts that eventually kick in.)
2. With the days of yore 5% minimum payments, you'd pay $1,632 in interest by the time the bill is paid off – in around 9 years. Your first required payment would be $250, with the amount going down, month after month, until it reaches $10 a month … at the start of year #7. (Ditto.)

While it's true that there's a big difference in the required payments at the outset, I hope the $6,157 in savings is enough to inspire you to ALWAYS come up with more than the required minimum amount on your cards. You don't have to crunch the numbers and think in terms of percents to save big. Just send in more every month than the amount required.  For example, take a look at what happens to today's 2% minimum card if you …

• Send in $3 more than the required amount every month. You'll save $1,293 in interest and almost 8 years of payments.
• Send in $25 more a month. You'll save $4,533 and 22 years of payments.
• Send in $50 more a month. You'll save $5,652 and 26 years of payments.
• Send in $100 more a month. You'll save $6,506 and over 28 years of payments.

If you're wondering why $100 a month on a 2% minimum card can save you so much … it's because of the way credit card math works, with its minimum percents and dollar amounts. Confusing? Think about it late at night to help you fall asleep, if you must, but please don't be tempted to only pay the minimum amounts. Simply come up with an additional sum you'd never notice, invest, or miss and send that in every month, along with your required payment. While you may not catch up on your sleep, you'll surely save a bundle.

FICO's Credit Score Change will Cause Mortgage Industry to "Crumble"

I had a fascinating call with a mortgage broker from Alabama yesterday afternoon. He had seen our blog posts and articles about the recent FICO decision to no longer count authorized user accounts and wanted to learn more. 

By the end of our 20 minute call, the mortgage broker was feeling pretty bleak about the impact this change would have on his industry. "The mortgage industry is going to crumble. Just fall apart," was his exact quote.

Authorized user accounts have been a favorite trick of mortgage brokers for some time. If a potential client doesn't have a high enough credit score, they'll often advise the client to have some one with good credit add them to an established account as an authorized user. Once the new account appears on their credit report (usually within a few weeks), their credit score can increase. In the event of someone with no score or a very low score, the increase could be significant. Voila! Instant credit improvement and a better loan candidate.

A case could be made for this use of authorized user accounts being fraudulent. Sure, it's not as bad as the credit repair companies that sell piggybacking services for thousands of dollars, but it is still a misrepresentation of the client's real credit data. I'm sure there are some borrowers who got artificially low rates or loan deals based on this "instant" credit fix.

Fair Isaac has stated that this credit scoring algorithm change was designed to protect lenders from fraud. And by stopping brokers from recommending authorized user accounts, I suppose they are. But to an already ailing subprime mortgage industry, this change may just be another nail in the coffin.

What do you think will be the impact of the FICO score change on the mortgage industry? Did you use an authorized user account to boost your credit before a mortgage application? Share your feedback in the comments section below.

Reader Question: Does the FICO credit score impact my joint accounts?

The FICO formula change has everyone with an authorized user account on their credit report asking questions. Here's a great example from our reader Brianna:

I read your article What does the FICO score change mean to you? and I have a question regarding item #6: "If you are married and do not have any credit cards where you are the primary cardholder or a joint cardholder, you may want to open one or two in your name."
 
I am married and I am the primary cardholder for our credit cards. I am almost positive (I need to call the credit card companies to make sure) that I added my husband as a "joint" cardholder. Just to clarify - as long as he is on the credit cards as a "joint" cardholder then it will still affect his FICO score, right? But if he were only an "authorized" card user then it would NO LONGER affect his FICO score...? Should he (and/or I) still get our own credit cards with our own names soley on them or are we OK with him being a joint cardholder on my cards?

Brianna is smart to think about this change now, rather than when the formula change takes effect this fall. Our credit scoring expert, and former FICO insider, John Ulzheimer has the answers:

As long as her husband is a joint cardholder (and the account is reported as such on his credit reports) then he's fine.  This change won't impact joint accounts, just accounts that are identified as "authorized user" accounts.

Brianna is correct on the second point as well...if the account is reported on his credit files as him being the authorized user then this change WILL impact him.  That account will eventually stop counting in his scores and could lower them.

Double check to see how he's listed.  Check with the credit card companies and then have him double check how they are listed on his credit report. He can get his credit reports for free at AnnualCreditReport.com. If he's listed as an authorized user then you may want to consider converting him to a joint holder.

Do you have a question about how the FICO credit scoring formula change will impact your credit? Contact us!

Proposed Regulations for the Credit Card Industry- Do They Go Far Enough?

In late May, the Federal Reserve came out with its proposals for changing the rules that the credit card industry must follow. The goal, according to Federal Reserve Board Chairman Ben S. Bernanke:

"… is to make sure that consumers get key information about credit card terms in a clear and conspicuous format and at a time when it would be most useful to them … . Greater clarity in credit disclosures allows consumers to make more informed credit decisions and enhances competition among credit card issuers."

The proposed changes primarily focus on how information is disclosed to us – how it should look, when we should receive it, and what we must be told.

Three Examples

1. The interest rates and fees would be clearer and easier to comprehend.
Under the Fed's proposal, whether it's on an application, a credit card offer, or a statement, some of that fine print will actually have to be in a larger type-face, with key rates and terms in bold-face. Also, the details on penalty rates would be highlighted. In other words, it would be clearer that you'll be hit with a penalty rate if you pay late.

2. Issuers would have to give us more time.
The Fed wants lenders to give us 45 days' notice – instead of the current 15 – before they make changes to the terms of card agreements. That way, we'd have more time to pursue other options. Fixed-rate credit cards would have to come with a guaranteed rate for a specific amount of time. Believe it or not, the way the regs now read, credit card issuers only have to give us 15 days' notice before they hike the interest up on fixed-rate cards.

3. Credit card bills would have to be a lot clearer.
We'd be able to better see how much we are being charged for what, be it in interest or in fees. Lenders will have to show how they allocate payments, what the effect of that will be, and even where you should go for consumer education – to the Fed's own website. LOL! Perhaps the most interesting of the Fed's proposed changes is that it wants lenders to have to show how much it will cost if you only send in the required monthly minimum amounts. They would also have to show how long it would take to get out from under paying only the minimums.

Do They Go Far Enough?
The consensus among consumer advocates seems to be that the proposals are okay … as far as they go. But they don't go far enough, especially when it comes to some of the most consumer-unfriendly of the credit card industry's practices. It would have been great, for example, if the Fed had proposed an end to the practice of universal default, where if you're late on one bill, lenders can raise your rates way up on all your other accounts.  Another key industry practice that would be left unchanged under these rules allows card issuers to charge the new sky-high rate on your already existing balances, even though they had already lent you that money at the old rate.

For more on what consumer advocates and even some card issuers have to say, I recommend Kathy M. Kristof's excellent article in the Los Angeles Times, where she interviews many experts. Please check out the proposed regs as well, and then you can tell the Federal Reserve what you think of them. Please let us know your thoughts as well!

Curtis Arnold, is the Founder of CardRatings.com, a website that provides ratings and reviews of over 20,000 credit card offers.

Vote: Do You Think the FICO Score Change is Fair?

Fair Isaac announced that they're no longer going to include authorized user accounts in their FICO credit score calculations starting this fall. Our team of credit experts created a detailed article to explain exactly what this FICO algorithm change means to your credit.

The FICO formula change was designed to stop credit repair fraudsters from selling access to established credit accounts, a practice called "piggybacking." However, 30% of the US population has at least one authorized user credit card account on their credit files. The score change will likely lower this group's credit scores fairly significantly. It will also make it harder for new consumers to establish their credit.

Given the benefits (stopping credit repair fraud) and the negatives (damaging credit scores), do you think the FICO credit score formula change is fair? Vote today:

Opinion Polls & Market Research

Feel free to share your feedback in the comments section below. And if you have a question about the FICO score change, you can email us anytime.

Mortgage Urgency

A walk-in medical clinic near me has a big sign out front that says URGENT CARE.  I don't think that it is a real substitute for the Emergency Room at our closest hospital, but they are able to provide instant medical assistance for people who can't afford to wait 4 weeks until their regular doctor has an opening.

What I like about it is their name: URGENT CARE.  I am a person who is characterized by what psychologists call "a bias toward action." I like to "do something" as opposed to "sitting around thinking about doing something."

Not all of my clients share my view of life. Those who don't share it need some urging to get them to take action.  I have had many clients who came in to discuss a refinance who should have come in a year before.  They have spent perhaps thousands of dollars in interest because they waited.

In some cases, it is because of ignorance.  Many people, more than you can possibly imagine, just don't know the particulars of their current loan.  Many think that they are paying a lower rate than they actually are. How can they be motivated when they are ignorant of the most important facts of their mortgage?

Others are in denial. They have this nagging suspicion that their rate may be high, but they are afraid to go get out their loan docs and find out the reality. Others make up stories in their minds about how complicated and expensive it is to refinance, so they don't do anything.

Others are just plain procrastinators. They make up excuses so as not to have to take action today, excuses like, "my son's soccer team is in the playoffs and I'm busy with that until next month." It's easy to think that it has no adverse consequence until we have a month when the rates go up one-half percent, as they have just done.

If we ever get around to refinancing his $420,000 mortgage, it's going to cost him an extra $2,100 every year in interest because he didn't jump on it when we first met.  That's $21,000 over the next ten years.

Sure hope those soccer games were worth it.

Funny Money Friday: Weddings Cost How Much?!

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

The average wedding costs a whopping $27,000 these days! That's an incredible amount for an event that lasts 8 hours at the most. And average costs are even higher if you live in a major city. As someone who is recently engaged and living in San Francisco, I know these statistics all too well.

Consider the alternatives: $27,000 will easily buy you a fancy brand new car or a good start on a down payment for a moderately priced home. If you choose to invest that money, you could turn it into $48,353 in just ten years. Or use it to pay for a full year of tuition and board at a private university.  It can als o buy you a $27,000 bottle of Johnnie Walker scotch.

Click on the photo below to watch Credit.com's President, Adam Levin, talk to WCBS in New York about how to save on wedding costs:

Happy Friday!

What Does the FICO Score Change Mean to You?

Our office is buzzing with the recent Fair Isaac announcement about a change to their scoring formula. The FICO score algorithm rarely changes this significantly. In fact, the last major FICO score update was in the 1990's.

If you haven't heard yet, Fair Isaac has decided to no longer count authorized user accounts in their credit score calculations. That means that you won't get credit score "points" for accounts where you are listed as an authorized user anymore. You can read all about this FICO score change in a detailed article I wrote with our credit scoring expert, John Ulzheimer. John used his connections with FICO, where used to work, to get the inside scoop.

So what does this change mean to your personal credit scores? We came up with a list of eight things to look out for:

1. Once this change goes into effect you will no longer get any value out of being an authorized user on someone else's credit card.
2. It is quite  possible that your credit scores could go down, significantly, because of this  change.
3. If you have paid to have your name added to someone else's credit card as an authorized user it is possible that you are guilty of defrauding lenders.  It would be in your best interest to have your name removed as soon as possible and stop doing business with these companies as they are violating federal and state laws.
4. If you have been paid by a company to rent out your credit card accounts then you may be guilty of enabling credit fraud.  It would be in your best interest to stop the presses.
5. If you are getting married soon and were planning on closing your credit card accounts because you were going to be added as an authorized user on your spouse's credit cards it is a good idea to rethink that move.
6. If you are married and do not have any credit cards where you are the primary cardholder or a joint cardholder, you may want to open one or two in your name.
7. Women will be disproportionately impacted (negatively) than men because more times than not, it's the woman who is added as an authorized user.
8. Those of you who are new to this country or are a young person trying to establish credit (or re-establish credit), you may have to depend on secured credit cards or other non-prime credit products to esta