I've Been Mugged

Frontline: "The Card Game"

Prior posts in this blog have covered the excesses by banks with consumer credit cards. Frontline's "The Credit Card game" program debuted yesterday. I highly recommend this excellent program:

"As credit card companies face rising public anger, new regulation from Washington and staggering new rates of default and bankruptcy, FRONTLINE correspondent Lowell Bergman investigates the future of the massive consumer loan industry and its impact on a fragile national economy. In The Card Game, a follow-up to the Secret History of the Credit Card and a joint project with The New York Times, Bergman and the Times talk to industry insiders, lobbyists, politicians and consumer advocates as they square off over attempts to reform the way the industry has done business for decades."

If you want to learn about the ways banks have rigged the financial system against consumers, watch this program. In an interview during the program, Nessa Feddis, a lobbyist from the American Bankers Association, made some totally irritating comments.

Check your local PBS station for more broadcast times, or watch the Frontline program "The Card Game" online.

Woman Denied Credit When Credit Bureau Tells Her She Is Dead

This past weekend, KOMO News 4 television in Seattle reported:

"All Ann Howe wanted was lower mortgage payments. The last thing she expected was more stress. Months earlier, she'd discovered her husband of 55 years had died in his sleep. Then, she says, a lump in her forehead was misdiagnosed. It turned out to be cancer. Days after cancer surgery, doctors discovered Howe needed open heart surgery. She almost died. When she finally regained her strength, she applied for a mortgage refinance loan to reduce her payments and help her budget... Two of the credit reporting agencies showed her credit rating was close to 800. But her Experian report had a problem... Howe's Experian credit report had her listed as deceased. One of her creditors had reported her as dead."

You can watch a video clip of the KOMO report online. Howe's story highlights three two critical facts of life:

1. Credit bureaus make mistakes and include errors on consumers' credit reports. They are reluctant to advertise this fact, since they make money selling consumers' credit reports to potential lenders, whether those reports are accurate or not.
2. The three major credit bureaus routinely ship consumers' sensitive personal data across country borders worldwide. Often, the updating of records is performed by outsourcing vendors. To learn more, read this 4-part series.
3. It is your responsibility to check the accuracy of your Equifax, Experian, and TransUnion credit reports. Nobody else is going to do it for you. Errors can result in denied credit or higher interest rates.

I have personal experience with this. In 2004, I applied for an American Express card and was denied because I was listed as deceased by the Experian credit bureau.

After reviewing my Experian credit report, I found an error where the credit bureau co-mingled my information with my father's information. We are both named George, this error should not have happened. I was able to correct the problem by providing the credit bureau with a certified copy of my father's death certificate and highlighted the facts that we have different birth dates and Social Security numbers.

So, errors in credit reports happen more frequently than you'd expect. For your free annual credit reports, visit the official Web site annualcreditreport.com today.

Advice For Consumers About Holiday Shopping With Layaway Plans

Since banks and credit card companies have made it difficult to get and to keep credit, many consumers have turned to layway plans as a method to do their holiday shopping. If this situation describes you, then you should know that the U.S. Federal Trade Commission (FTC) issued an alert to consumers about layaway plans so you don't get "mugged" by a shady store or online retailer:

"... it’s important to ask questions about the layaway plan and the refund policy when considering the layaway option. The alert, “Layaway: Another Way to Buy,” also tells consumers to: check out the business offering the plan; get the merchant’s layaway policy in writing; and keep good records of payments."

To check out a business or retailer, visit the Attorney General’s Web site for your state (www.naag.org), the local consumer protection agency in your state, or the Better Business Bureau in your state. These resources can tell you if other consumers have already filed complaints about the retailer you are considering shopping at -- online or their physical store.

If you shop using layaway plans and encounter a problem, we'd love to hear about it. You can describe your situation below in a comment.

Debt Collection Scams And Identity Theft: How To Avoid Both

Last week a friend, Mary Grace, sent an e-mail message asking if I had:

"... heard of NCO Financial Debt Collectors? I got an automated call and when I called the number back it was busy. I called their main 800 number off of their website and they asked me for my social and name - they would not give me any information on the reference number that was left on the automated message. I did not give them my name or my social and ended up hanging up on the rep because he could not identify why they called me stating there were many names associated with the reference number and he needed my information to understand why they called."

I hadn't heard of NCO Financial Debt Collectors. There is a valid collections company with a similar name: NCO Group (a/k/a NCO Financial Systems. The call sounded sketchy since the reference number didn't identify Mary Grace specifically. I told her to contact the Better Business Bureau (BBB), and contact the U.S. Federal Trade Commission (FTC). I assured her that she was correct to not disclose her Social Security Number and other sensitive personal information without first getting written proof of the debt.

In her e-mail message, Mary Grace also wrote that she had:

"... called AT&T to check on the 888 number the automated message left and [the AT&T customer service representative] said it was probably an outbound number only and that he hears these kinds of calls all the time but can not give any advice because of legal reasons."

Yes, this debt collection call was definitely sounding like a scam.

Mary Grace couldn't think of any company she owed money to, as she is very good with her credit. Perhaps she had a debt at Cedars-Sinai Medical Center due to a recent surgery, but theyhadn't contact her.

Since Mary Grace lives in California, I suggested that she check the State of California attorney general's web site for advice about her rights and how to deal with debt collection phone calls and collection agencies. Every state has an attorney general (AG), and the AG's web site usually describes the rights consumers have and what constitutes harassment by a debt collector.

While California state law allows debt collectors to supply information about bills they are collecting to credit reporting agencies, the collection agency cannot threaten a consumer with this unless it is already a customer of the reporting agency. The collection agency must tell the reporting agency whether any dispute has been filed, and it must update the consumer's record to show when the debt is paid.

I did some light research and found that there tend to be two types of debt collection scams:

• Fake debt collection agencies
• Valid debt collection agencies with fake debts

The first type usually includes a scam artist calling with fake debts. The scammer is trying to trick consumers into revealing over the phone their sensitive personal data: Social Security number, bank account information, and so forth. Disclosing any of this could lead to identity fraud.

How do the collections scammers get consumers' name and address information? Any number of ways: from combing through online white pages web sites, or purchased on the black market from with data resold by thieves after a data breach.

If you receive a debt collection call, experts advise consumers to demand written proof of the debt. Tell the caller that you only reply to debts submitted in writing with written proof. If the scammer does send a letter via postal mail of a debt you know is fraudulent, then you have written proof of the scam.

The second type of scam is a little trickier. Sometimes a valid debt collection company is calling with a valid debt that they think is yours, but really belongs to another person. Perhaps you changed your phone number recently, and the collections agency has confused you with the prior owner of the phone number. Perhaps you moved recently and the collection agency has confused you with the prior resident at our current address. A less than honorable collector wants to collect money and may pressure the person they contact into paying.

Either way, the best response is to demand that the debt collection caller fully identify their company. Then, demand written proof via postal mail that the debt is yours. Ask the caller for a phone number so you can call them back. Scammers hate this and will serve up a variety of excuses why you can't call them back.

In this case, Cedars-Sinai sent a bill to Mary Grace's old address, even though the medical center also had her current address on file. The medical center then sent the unpaid debt to two valid collection agencies... a case of one internal department failing to communicate with another department.

A couple days later, I received a follow-up e-mail from Mary Grace:

"... Cedars-Sinai knew I had a stellar record with them. They called the true collection agencies, had them retract my name and restore my credit ratings, and I paid [Cedars-Sinai] directly. I should receive letters from Cedars, and the agencies stating just that. Then I will look at my credit report to ensure that it was restored. Who knew that a phony call could end up exposing all this!"

And, NCO Financial Debt Collectors turned out to be a scam -- a phony debt collection agency. So, if you get a phone call from them, hang up and report it to the BBB and FTC.

Mary Grace's experience provides clear instructions for consumers about how to handle debt collection phone calls:

• Asked the caller to identify their company
• Don't trust the caller at their word. Don't share sensitive personal data over the phone. Demand written proof via postal mail of any debts
• File a complaint with the BBB about any phony debt collector you encounter
• Demanded written proof of paid debts
• Demanded written proof from a creditor of debts sent in error to collection agencies
• Demanded correction of erroneous entries to credit reporting agencies

Are Defaults On Student Loans The Next Financial Bubble to Burst?

There are several posts in this blog about how banks are "mugging" consumers with higher credit card interest rates, lower card limits, increased minimums, and other fees. There is a debate about whether these changes, the high cost of college, and the recession will push many consumers to default on their student loans, or if the problem is poor financial planning and an attempt to avoid personal responsibility. At about the 13-minute mark are hints that the problem may be caused in part by predatory lending and collections policies:

Banks: The New Loan Sharks & Extortionists of the 21st Century?

[Editor's Note: today's blog post is by guest author William Seebeck. During the 1980's, Bill and I worked together at Lexis-Nexis in Dayton, Ohio. Bill has a wealth of experience in online systems, banking, publishing, and public relations. Bill also blogs at Seebeck's View.]

By Bill Seebeck

Well, here it is the 21st of June. It's Father's Day.

Yet today, millions of credit card holders that have received notices from their banks since June 1st, know this is the beginning of a new cycle in which the percentage of funds due monthly on their accounts has doubled. Instead of having to pay 3% of their total amounts due, they will now have to pay 6% and for some of them at an interest rate upwards of 29%.

You know, I bet there are still some guys in prison doing time for loan-sharking in this country. What's a loan shark? That's someone who charged greater than a rate considered just by the society. That rate before the banks and Congress changed it used to be 23%. It was called the usury rate.

The Catholic Encyclopedia states that usury is a sin and frankly is so in every major Abrahamic religion. "...Lending money at interest give us the opportunity to exploit the passions or necessities of other men by compelling them to submit to ruinous conditions...[Usury has been defined] as the abuse of a certain superiority at the expense of another man's necessity... It is in itself unjust extortion, or robbery."

So, who are the loan sharks now? Who are the extortionists?

What's extortion? Findlaw states, "Most states define extortion as the gaining of property or money by almost any kind of force, or threat of (1) violence, (2) property damage, (3) harm to reputation, or (4) unfavorable government action. While usually viewed as a form of theft/larceny, extortion differs from robbery in that the threat in question does not pose an imminent physical danger to the victim..."

I think it is fair to say that demanding high monthly minimums at interest rates up to 29.99% can be viewed by the "card holder" as threatening. Failure to pay can result in harm to their reputations in the form of credit scores and possible default, and in this world, "no credit" can put a person and their family on the street in a nanosecond.

So, if you think that the banks are OK and that everything has changed, you are living in a world of dreams. Take a look around your neighborhoods and see how many empty stores there are and how many people are out of work. In part, it is because of what some banks did and what some banks continue to do.

What they are doing is squeezing, you, the public for their own benefit.

Definitely actions that are not in the interest of the public good.

Who are their monitors? Where are their monitors? How do they continue to get away with this stuff?

I'm upset by this, are you?

By the way, Happy Father's Day!

Copyright 2009 WBSeebeck. Reprinted with permission.

Why Banks And Credit Card Issuers Analyze Your Credit Card Purchases

Prior posts in this blog have discussed why banks and credit card issuers are raising the interest rates, lowering the limits, and changing the billing periods on your credit cards. This Sunday New York Times newspaper has a fascinating that explains how banks and credit card issuers make money, and why they do the infuriating stuff that they do to consumers.

Historically, banks and credit card issuers made money by:

"... collecting annual dues and interest payments from cardholders as well as fees from merchants each time a customer used a card."

This money-making approach changed when:

"... the math whizzes arrived. They emphasized that the biggest profits didn’t come from people who always paid off their bills but rather from less-responsible clients who never paid their entire balance, and thus could be milked through silently skyrocketing interest rates, late fees and other penalties."

To make more money, the banks and credit card issuers changed their habits about who they marketed their credit cards to. The result:

"Since 1995, the percentage of the industry’s income from cardholder fees has more than doubled to 40 percent. In 2005, as the push to sign up cardholders peaked, the industry sent out more than 10.2 billion credit-card solicitations, which would cover more than the entire world’s population. Two years later, card companies collected $40.7 billion in profits before taxes... Americans carry an average of 5.3 all-purpose cards in their wallets, and the average household has $10,679 in credit-card debt..."

So, the banks and credit card issuers want as customers people who will steadily pay part of their monthly credit card bills. To find these "right" customers, the banks and credit card issuers needed to distinguish between the less-responsible customers who they could make money from (e.g., people who steadily pay part of their monthly credit card bills), from the less-responsible customers who would be dead-beats (e.g., never pay their credit card bills). To accomplish this:

"The exploration into cardholders’ minds hit a breakthrough in 2002, when J. P. Martin, a math-loving executive at Canadian Tire, decided to analyze almost every piece of information his company had collected from credit-card transactions the previous year... Martin could often see precisely what cardholders were purchasing, and he discovered that the brands we buy are the windows into our souls — or at least into our willingness to make good on our debts. His data indicated, for instance, that people who bought cheap, generic automotive oil were much more likely to miss a credit-card payment than someone who got the expensive, name-brand stuff. People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory... was pretty likely to miss paying his bill eventually."

How accurate was this analysis?

"Martin’s measurements were so precise that he could tell you the “riskiest” drinking establishment in Canada — Sharx Pool Bar in Montreal, where 47 percent of the patrons who used their Canadian Tire card missed four payments over 12 months. He could also tell you the “safest” products — premium birdseed and a device called a “snow roof rake”... Martin’s predictions, when paired with other commonly used data like cardholders’ credit histories and incomes, were often much more precise than what the industry traditionally used to forecast cardholder riskiness."

Now we know why banks and credit card issuers analyze your credit card purchases. (Bye bye privacy.) Your purchases indicate whether you will be a profitable or unprofitable customer for them; whether you will pay your monthly credit card bills on time and in full, partially, are a slow payer, or a true deadbeat.

Last year, I wrote about how Wall Street considers many consumers as chumps. That still seems to be Wall Street's attitude today, since banks and credit card issuers don't really want as customers people who pay their monthly billls in full and on time. Rather, they want customers who pay part of their credit card bills, often pay it late, never consider that everything costs more when using their credit cards this way, and don't change their financial habits.

Banks And Credit Card Issuers Increase Interest Rates On Consumer Credit Cards

It took a while to calm down so I could write this blog post. About the 13th of February I received a notice from my credit card issuer, Capital One, informing me that the interest rate and other terms for my credit card were all going up:

"At Capital One, we are committed to providing valuable customers like you with honest and open communications. Today, we're notifying you that terms of your Capital One account are changing... Due to extraordinary changes in the economic environment, we're reviewing our existing credit card accounts. Having considered these economic conditions, your account's current Purchase rate, and the length of time you've had this rate and account, we will be increasing your Purchase rate. We're also raising your Cash Advance and Default rates."

This copy seemed so dishonest. If the bank is having difficulty and is losing money with decisions its executives made about asset-backed securities, then say so. This copy makes it sound like the bank is an innocent bystander or victim in this financial and economic mess. The last time I checked, Capital One received about $3.5 billion in bailout money from taxpayers to facilitate credit and lending. The notice didn't mention that fact, or thank us taxpayers for the huge loan. Based on the text in this notice, Capital One is doing the opposite: restricting credit and lending.

More from Capital One's notice:

"The following changes will be effective for all billing periods that begin after April 17, 2009:
Purchase and Balance Transfer Annual Percentage rate (APR): A variable rate equal to 17.9% as of 1/28/2009. Your purchase and balance transfer APR may vary monthly. The rate will be determined by adding 14.65% to the Prime rate."

So, my credit card interest rate is going up from 10% to 17.9%, or more since the rate will be variable. That's a huge increase. I definitely have feeling that I've been mugged.

And why the two conflicting dates? Which date is the correct date: April 17 or January 28? The notice should have been worded more clearly. Consumers shouldn't need a PhD in finance to read a notice from their credit card issuer. More from Capital One's notice:

"Cash Advance Annual Percentage Rate (APR): A variable rate equal to 24.9% as of 1/28/2009. Your cash APR may vary monthly. The rate will be determined by adding 21.65% to the Prime rate."

I'm one of the lucky consumers who is able to pay off my credit card balance every month in full and on time. So, I haven't incurred interest charges on my Capital One credit card since 2004, when I paid off all of my credit cards. With a credit score north of 790 (which is higher than 98% of Americans), my credit is good. I don't do balance transfers and cash purchases with my credit cards. So, while I'm unaffected by the interest rate hikes, it's the principle of the matter that irks me. And other consumers have complained recently about Capital One's rate increase notices.

But not everyone is so fortunate. These huge interest rate increases will hurt a lot of consumers, and make it far more difficult for good customers to continue paying. More from Capital One's notice:

"Default Annual Percentage Rate (APR): A variable rate equal to 29.4% as of 1/28/209. Your default APR may vary monthly. the rate will b determined by adding 26.15% to the Prime rate. If we receive your payment three or more days after your payment due date twice within any 12 billing periods, we may increase your APRs immediately to the above Default APR."

Wow! The bank wants to charge late payers almost 30% interest. How can a consumer ever get ahead with a high interest rate like that. That's robbery. Consider this craziness: in Hong Kong Citibank agreed to limit credit card interest rates to 45%. Can you believe that? 45 freakin' percent! How nice of Citibank! How customer friendly of the bank!

Around the 17th of February, I received a similar notice from Discover Bank. The interest rate and terms for my Discover credit card are going up, too:

"We are changing the Discover Cardmember Agreement. these changes apply to your Account effective for billing periods that end after May 1, 2009... We are modifying the "Default Rates" section to provide that the Default Rate is a variable rate... Each time you do not make a required payment on time (a Default rate Event), we may increase the standard Annual percentage Rate for purchases, balance transfers and cash advances to a variable rate equal to the Prime Rate + up to 27.99%, but such rate will never exceed 29.99% (the "Default rate). At the same time, any special rates on purchases, balance transfers or cash advances will end, and the Default Rate may apply. As of November 28, 2008, the maximum Default Rate would be an Annual Percentage Rate of 29.99%..."

An interest rate near 30%! Can you believe that? Again, I'm one of the lucky consumers who is able to pay off my credit card balance every month in full and on time. So, I haven't incurred interest charges on my Discover credit card since 2004, when I paid off all of my credit cards. But not everyone is so fortunate. These huge interest rate increases will hurt a lot of consumers.

I called my grown son (age 23) to warn him to watch his credit card statements for interest rate increases. I also advised him to pay off his credit card balances as soon as possible, so he doesn't get stuck in a bad situation where his credit card balances rise so fast that he can't pay his debts.

So, what's up with the banks and credit card issuers? Why these notices with huge interest rate increases?

Many consumers would say the banks are doing it because they can.Yesterday's blog post by guest-author Bill Seebeck provided a more detailed explanation. The banks lost money in the asset-backed securities marketplace and are using any means necessary to increase revenues to avoid more financial losses. If that means screwing consumers, so be it.

My list of reasons why banks are raising interest rates so high:

• Because they can
• To increase revenues from bad investments and poor decisions by their executives
• Expecting consumers with credit card balances are unable to pay off those balances before the higher interest rates start
• Betting that more consumers will be laid off from work during 2009, and those people will run up large credit card balances
• Greed
• Comfortable that a compliant Congress won't do anything about it

If there's any good news, neither credit card issuer lowered the limits on my credit cards. That has happened to many consumers already. Will I shop around to switch to credit cards with better terms? You bet.

If you are furious (and I hope that you are) about these huge interest rate increases, I encourage you to contact your elected representatives in Congress and demand strong oversight of the TARP money received by Capital One and other banks. You might also send a letter to Richard D. Fairbank, Chairman and CEO of Capital One Financial Corporation (1680 Capital One Drive, McLean, VA 22102), and politely express your opinion regarding this decision to alienate their strongest customer base. You can also write to David W. Nelms, CEO, Discover Financial Services (2500 Lake Cook Road,
Riverwoods, IL 60015).

If you have received a rate increase notice from your credit card issuer, please share your story below.

FTC Continues Toward Credit-Based Auto And Homeowner Insurance Rates

Just before the Christmas holiday, the FTC released this news release:

"The Federal Trade Commission has ordered nine insurance companies to produce information for a study on the use and effect of credit-based insurance scores on consumers of homeowners insurance... The orders require information from the nine largest private providers of homeowners insurance, which have roughly 60 percent of the homeowners insurance market in the U.S..."

The nine insurance companies required to turn over data to the FTC:

1. State Farm Mutual Automobile Insurance Company,
2. The Allstate Corporation,
3. Fire Insurance Exchange,
4. Nationwide Mutual Insurance Company,
5. The Travelers Companies, Inc.,
6. United Services Automobile Association,
7. Liberty Mutual Holding Company, Inc.,
8. The Chubb Corporation, and
9. American Family Mutual Insurance Company.

The companies have until April 24, 2009 to respond to the FTC's data request, which will be used for the FTC's final rules and guidelines.

In June 2008, I wrote about the the FTC's intent to study of the use and effect of credit-based insurance scores on the availability and affordability of automobile and homeowners insurance, and the open comment period for consumers to voice their concerns and objections. I wrote about this because it has everything to do with how companies make money from your sensitive personal data; and how that sensitive personal data is used, archived, and shared between government and industry. According to the latest FTC press release:

"In May 2008, the Commission authorized the use of compulsory process in the homeowners insurance study (http://www.ftc.gov/opa/2008/05/comprofyi.shtm) and posted for public comment a draft model order to obtain data for the study. Based upon comments received, the FTC developed final orders that maximize its research capability while minimizing any unnecessary burden on insurers participating in the study."

Should you be concerned? If this project continues, your auto and homeowners insurance will be based mostly on your credit worthiness rather than on your driving and accident record. Does this make sense? It's another example of the "tilt in the playing field" towards the needs of companies and away from the needs of consumers.

Credit-based insurance rates also mean that consumers must spend more time and money inspecting their credit reports at the three major credit bureaus, because inaccurate credit report information could lead to higher insurance rates. Seems to me like your auto insurance should be based on our driving record; and your homeowner's insurance based on your claim history.

'Hard' Inquiries Will Negatively Affect your Credit Scores

While researching the three major credit bureaus, many months ago I learned that "hard" inquiries will negatively (e.g., temporarily reduce) affect your credit score. This Consumerist blog post contains the first good definition I've read of what constitutes a "hard" credit inquiry:

"A hard inquiry is when a person or organization requests your credit score and history and they intend to make a lending decision. Applying for a credit card? Hard inquiry. Getting approved for a car loan or mortgage loan? Hard inquiry. On your reports, each of the credit unions categorize these inquiries differently. TransUnion calls them "regular inquiries," Experian calls them "requests viewed by others," and Equifax calls them "Inquiries in the last 12 months." Hard inquiries usually drop your score by a few points for six months, then their effect is removed."

A "soft inquiry" is everything else. I don't worry about "hard" inquiries affecting my credit score because I have removed the causes. First, I opted out of pre-approved credit offers. Second, I placed a Security Freeze on my credit reports at the three national credit bureaus, so nobody can make a credit report inquiry without my consent. The primary reason I placed a Security Freeze on my credit reports was to protect my sensitive personal data since IBM exposed my identity data during its February 2007 data breach.

Doctor Phil: Financial 911

Last week, the Dr. Phil television show broadcast a show to help consumers manage stress, manage their household finances, and deal with the financial, credit, and mortgage crisis affecting the country. According to the Dr. Phil web site:

"Has the current financial crisis left you frightened and confused? Do you know where your money is and if it is safe? Along with top financial experts, Dr. Phil gives advice on protecting your assets and weathering a major money storm!"

I watched part of this show on Thursday evening October 9th, and found it informative. The show included three experts who answered common financial questions:

• Ben Stein, economist and author of How to Ruin the United States of America,
• Amelia Warren Tyagi, personal finance expert and author of All Your Worth, and
• Jim Cramer via satellite from his Mad Money cable TV show

Some of the questions answered during the show:

• How will the economic crisis affect me when I don’t even deal with Wall Street?
• How bad will it get? What’s next?
• What should me and my family do now before it's too late?
• If I have credit card debt, what should I do now?
• If the crisis and credit freeze continues, am I likely to lose my job? What then?
• Do I need to plan on working way past 65 in order to survive?
• If times get tough, which bills should I pay first and why?
• I am scared. How do I cope with the financial stress and fear?

In my opinion, a key message the experts warned was for consumers to pay off any credit card debt as soon as possible. Experts expect banks and credit card issuers to tighten access to credit cards, by using higher interest rates, lower card limits, and more. At the Dr. Phil web site, you can purchase a DVD or transcript of the show.

Some related I've Been Mugged posts:

1. What Causes Credit Card Issuers To Raise Interest Rates
2. Suze Orman And the FDIC Partner To Help Consumers With Determining Bank Account Insurance Status
3. Emerging Identity Fraud Scam: Credit Card Shaving
4. 5 Sneaky Ways To Ruin Your Credit Score

Federal Reserve Board Seeks Input From Consumers About Unfair Credit Card And Overdraft Practices

The U.S. Federal Reserve Board (FRB) seeks input and feedback from consumers about its proposed new rules to limit unfair credit card practices. According to the press release:

"The proposed changes to the Board’s Regulation AA (Unfair or Deceptive Acts or Practices) would be complemented by separate proposals that the Board is issuing under the Truth in Lending Act (Regulation Z) and the Truth in Savings Act (Regulation DD)."

To make these changes, the FRB is working with the FTC (Federal Trade Commission. The FTC Act includes five protections for consumers who use credit cards:

• "Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time."
• "Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges."
• "Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible."
• "Banks would be prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle."
• "Banks would be required to provide consumers a reasonable amount of time to make payments."

The proposed new rules also require banks that make credit offers with multiple interest rates or credit limits to disclose in the offer the factors that determine whether a consumer qualifies for the lowest rate and highest credit limit.

I encourage all consumers to submit feedback online to the FRB. Scroll about two-thirds down the page and click on the "Submit Comments" link under all three regulations. The deadline for feedback is August 4, 2008. The FRB has already received a lot of feedback, but more is needed.

The proposed "new" regulations are a good first step in the right direction. Most of these rules were lifted during the 1980's during the Reagan Presidency. The thinking way back then was that there was too much regulation and that business was suffering.

Before 1980, the maximum interest rate was about 18% and consumers didn't have to endure the variety of fees and abuses. Both major political parties parties participated in the removal of key regulations governing banks and financial institutions. 27 years later, we consumers have direct experience with the results of that de-regulation... the myriad of credit card fees, abuses of consumers, and unfair lending practices.

Sure, some consumers need to expect personal responsibility for taking out loans they knew they couldn't pay, or didn't take the time to understand the fine print. Similarly, not all lenders engaged in predatory lending practices. My point: arguments about personal responsibility should not give predatory lenders a free pass. There's enough blame to go around. Both sides need to accept responsibility.

There's that familiar saying that, "total power corrupts totally." Too much de-regulation allows companies to exercise their newly granted power and ultimately abuse consumers, which we have seen. A better balance between regulation and total de-regulation needs to be found. It exists, but do we, as a nation, have the will?

If you are unfamiliar with that history, or want a refresher, watch this Bill Moyers interview with author and journalist William Greider. It's part of the Moyers Journal episode "The Mortgage Meltdown." I strongly encourage everyone to watch it. Check your local PBS affiliate for broadcast times, or get the DVD when it's available.

FTC Seeks Consumers' Comments On Proposed System To Develop Credit-Based Homeowner Insurance Rates

I often write about the U.S. Federal Trade Commission (FTC), since its activities directly affects us (and our wallets or purses). Prior posts covered the FTC's annual analysis of identity theft and its proposed rules for behavioral advertising, which could affect your Internet usage and privacy. Currently, Congress has required the FTC to study ways to base homeowners insurance rates on credit-based insurance scores.

Yes, you read that correctly. The FTC is studying ways to base your homeowner insurance rates on your financial and credit information. This study was mandated by Section 6(b) of the FTC Act and Section 215 of the Fair and Accurate Credit Transactions Act (FACTA). I've Been Mugged readers know that insurance companies already based property insurance rates on C.L.U.E. reports, that compile consumers' auto and homeowners insurance claim histories.

In 2007, the FTC studied ways to for credit-based auto insurance rates. Some key findings from that July 2007 auto insurance study:

1. Scores effectively predict the number of claims consumers file and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.

2. Use of scores may result in benefits for consumers. For example, scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they otherwise would not be able to determine an appropriate premium. Scores also may allow insurers to grant and price coverage more efficiently, producing cost savings that could result in lower premiums. Little empirical data was submitted or available to the FTC that would allow the agency to quantify the magnitude of these benefits.

3. Scores are distributed differently among racial and ethnic groups, and these differences are likely to have an effect on the premiums that these groups pay, on average.

4. As a proxy for race and ethnicity in statistical models of insurance, scores have a 1.1 percent and 0.7 percent effect for African-Americans and Hispanics, respectively. This means that most of their predictive power is not as a substitute for membership in racial or ethnic groups. In addition, scores effectively predict risk of claims within racial and ethnic groups.

5. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.

From the auto insurance study, finding #1 above seems more focused on "risk" rather than "actual claims," which suggests that insurance companies can base auto rates on what they think your risk is, not your actual risk based on claims. Plus, there are a lot of "maybe's" in #2 above. This seems to be a big win for industry and not much of a benefit for consumers.

If this insurance study seems odd to you, it should. One would expect insurance rates to be based on you claim history and not your finances. Companies seem intent on changing this traditional approach. If you are concerned, I strongly encourage you to submit a comment to the FTC. The deadline for submissions is June 18, 2008 -- 2 weeks from today. You can submit comments via postal mail to:
Federal Trade Commission
Office of the Secretary
Room H-135 (Annex C)
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Be sure to include “Credit-based Insurance Score – Homeowners Insurance – P044804” on both your letter and the envelope.