How’s that working for ya Mr. Banker?

Credit Card Interest RatesCurrently the cost of money for the banks is next to nothing, but they loan it out charging consumers as much as 30%. That is quite a spread!

The argument I hear for high interest rates is often one of risk. The banks use available data from resources like your credit report which may (or may not) suggest that your behavior reflects a higher risk of default. This risk data is then used, by applying some twisted logic, as justification for increasing your interest rates. Let’s see… some arbitrary or even actual data shows an account holder is at higher risk for not being able to make one of their payments and so the bank’s solution is to increase your rates making your payment higher than those at a lower risk. Gee… that will assure timely payment! How’s that working for ya Mr. Banker?

Judging from the increase in bankruptcies, delinquencies and charge offs… Not so much!

People walking the payment ledge do not need a push off of it.

Obviously, the current job market is adding to the payment pressure consumers are under, but even those who are employed are often just one interest rate increase away from the edge of a financial cliff. I speak to them daily.

This Bloomberg article from yesterday: A CLUE, shows that some in a position to affect change, via the proposed legislation, actually get it.  It doesn’t take a crystal ball to see that a cap on interest rates will provide for a future where consumers can actually afford to borrow, spend, and successfully pay back their debt, thereby assisting in an economic recovery. There are lawmakers who possess, or are willing to borrow from their constituents, the backbone needed to support a return to sound lending principles.

Yes, I understand that we are approaching an election cycle and perhaps there is a desire by politicians to look good at home, but this legislation has never been more relevant than it is today.

Let’s hope it gets the traction it needs this time!

For anyone struggling with the credit card payments, and who could manage the situation better if the interest rates on the cards were lower, could benefit from consolidating the bills, or perhaps talking to creditors selectively.

Shunning credit.

There is a growing movement of people who do not use unsecured revolving credit, or who are shunning credit.

Debit cards tied to your checking account offer the same type of purchasing flexibility that a credit card does. And you can overcome fraud and hacking concerns by having a debt card tied to an specific account that you keep only so much money in.

Prepaid credit cards have quickly become a way to shun revolving balance credit cards. If the fees on these cards become more reasonable, they will be an even better answer to bank issued plastic.

I would love to hear from people in the comments below if you have reduced or eliminated your credit card use. How much have you replaced credit card use with your debit card (prepaid or not)? What are your thoughts on interest rate caps?

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FICO Reveals Timely Credit Score Damage Details For the Struggling Consumer

FICO, the company that calculates consumers’ credit scores — the scores that are the most widely used by American creditors to determine whether or not they will extend credit to a particular consumer and the terms of that credit — recently released data showing how different negative actions consumers might take in regard to their credit will affect their scores.

Among other things, the data shows that settling your debts is far less damaging to your FICO scores than filing for bankruptcy. In other words, the data helps make the case for why settlement rather than bankruptcy is an excellent alternative for many cash-strapped consumers, assuming that they either settle their own debts or work with a reputable settlement firm that charges fairly for its services.

The data released by FICO and available on its web site at: http://www.myfico.com/crediteducation/questions/Credit_Problem_Comparison.aspx, shows that as a consequence of filing for bankruptcy, consumers may see as much as a 240 point drop in their FICO scores. In contrast, if they settle their debts, their FICO scores may drop by 125 points at most. Interestingly because of the way that FICO scores are calculated, when consumers have higher scores prior to either filing for bankruptcy or settling their debts, their credit scores are harmed more by settlement or bankruptcy than are the scores of consumers who had lower FICO scores to begin with. According to FICO, the reason for this difference is that the scores of lower scoring consumers already reflect their credit missteps.

Unaffordable debt can often hurt longer than your credit scores can stay depressed.

Despite the FICO data, I must caution you not to base your decision about which debt relief option to pursue based on that information. All debt relief options — credit counseling, settlement and bankruptcy — will have a negative effect on your credit histories and/or FICO scores for some time. 

When you are deciding how to deal with your debt, your primary concerns should be gaining a clear understanding of how each option works and its pros and cons, and determining whether the numbers associated with a particular option make sense for you.

For example, your first test if you are considering settlement should be whether or not you can accumulate the money you need to fund your creditors’ settlement offers before your risk of being sued by them for what you owe begins to escalate. If you cannot come up with the money you need to settle your debts relatively quickly, then bankruptcy is probably your better option.

If you are overly sensitive to your credit score dropping from pending credit and finance decisions you need to make, you should hold off settling debts, or any other debt relief option for that matter. If you do not have an immediate need for your FICO score to stay strong, get started dealing with resolving debt problems. For many people, debts can cause issues far longer than the credit scores can be depressed.

Anyone can post questions and concerns about FICO credit scores in the comments below for feedback.

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Credit Card Interest Rate Reduction Robo Calls a Scam

The FTC announced this week that it had filed lawsuits against three companies: Economic Relief Technologies LLC, Dynamic Financial Group (U.S.A.) Inc., and JPM Accelerated Services, http://www.ftc.gov/opa/2009/12/robocall.shtm. The lawsuits, which were filed in Florida, Georgia and Illinois, allege that the companies have been marketing worthless credit card interest rate reduction programs to consumers via automated phone calls, also known as ‘robo” calls. According to the FTC, not only have the companies failed to deliver on their promises, but their calls have violated the federal Telemarketing the Do Not Call Rules.

Telemarketers working for the three companies told consumers who were interested in the program that the program would allow them to save thousands of dollars in interest within a short period of time and would make it possible for them to pay off their debts faster. Consumers were also told that to achieve these benefits they would have to pay as much as $1,495 up-front, but were promised that if they did not save a “guaranteed” amount — usually $2,500 — they could get their up-front payment back. Few consumers ever received a refund however.

Consumers who want to learn more about their rights and responsibilities regarding pre-recorded telemarketing calls, should read the following two FTC alerts: New Rules for Robocalls and Reining in Robocalls, which can be found at http://ftc.gov/bcp/edu/pubs/consumer/alerts/alt162.shtm.

Getting your interest rates lowered yourself.

Consumers should know that they have just as much likelihood (if not more) of successfully reducing their interest rates with their creditors on their own, rather than by paying someone to attempt to do it for them. If you try it on your own and you hit a brick wall, do not get discouraged. Try again a week or so later and you may have success.

One little tip for those consumers whose high interest rate credit cards may force them to make a payment late: Missing a payment by as a little as a week or two will often give your account a different status that will qualify you for interest rate and minimum payment reductions that were unavailable to you prior to your late payment.

I should stress that this strategy for getting such reductions is only appropriate for someone who was already unlikely to be able to meet the minimum payment requirement. I have seen instances where calling in to ask for your interest rate to be lowered can end with a no, and a closed account, or lowered credit limit.

Anyone with questions about phone calls or solicitations that offer you credit card interest rate reduction, or any other form of debt relief, can post in the comments below for feedback.

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