New credit card rules add accountability

In a world where shopping online and booking a hotel or a rental car usually demands plastic, few people can survive without a credit card.

But vast changes in credit regulation coupled with a souring economy turned 2009 into the most turbulent credit year in decades, with a record number of rate hikes, consumer cancellations and changes in fees, terms and credit limits. And experts say there's more in store for 2010.

"2010 is going to be the year of accountability," said Adam Levin, chairman and co-founder of Credit.com, a credit-shopping website. "Credit card companies are going to be more accountable to consumers, but consumers are going to have to be more accountable too."

What should you expect in 2010, and how can you put yourself in the best position to lessen the pain, or even profit from the changes?

First it's helpful to recap what's already happened, said Bill Hardekopf, chief executive of LowCards.com. That's mainly because many of the anticipated changes are linked to a consumer protection law that was passed earlier this year but is taking effect in stages.

In May, Congress passed the CARD Act -- short for the Credit Card Accountability, Responsibility and Disclosure Act of 2009. But legislators gave banks time to acclimate to the new rules by putting in three effective dates. The first was in August, the second is in February and a final rule that affects gift cards applies next August.

What happened last August? Credit card issuers were required to give consumers 45 days' notice of rate hikes and bill people at least 21 days' before their payments were due. That was intended to assure that consumers were given adequate time to pay without getting hit with late fees.

In addition, consumers got the ability to "opt out" of a rate hike. The catch on this opt-out provision is that when you say no to the higher rate, the bank can close your account and double your minimum monthly payment, Levin said.

If you do elect to close the account, you can't be forced to pay off your balance all at once. But the new law does allow banks to set up a schedule that guarantees you'll have paid off your debt within five years. On the bright side, you pay off the debt at the old interest rate, not the higher one that the bank wanted to impose.

But most significant changes go into effect early next year.

As of Feb. 22, if you have a consistent history of paying on time your rates cannot be increased on outstanding balances except when a "teaser" rate expires or when you have a variable-rate credit card.

If a credit card company hikes rates on a fixed-rate card, they are only allowed to charge the higher rate on new charges.

Your rate can be increased if you've been irresponsible about your credit use, though. If your payment is more than 60 days late, the issuer can charge a penalty rate that could be vastly more expensive than what you were paying previously and that rate can be applied to an existing balance. However, the credit card company must reinstate the lower rate if you make at least six months of on-time payments.

And then there are those fees for exceeding your credit limit. You cannot be charged an "over-limit" fee unless you affirmatively opt-in to a program that will allow your card issuer to accept charges that put you over your credit limit. If you don't opt in, the bank will simply reject any such charges.

All consumers also must be told how long it will take to pay off their credit balances if they make only the minimum required payments.

Youthful borrowers those under 21 will not be able to get credit cards unless they have a co-signer or can show that they have income to pay their own bills.

Issuers of "subprime" cards those going to people with bad credit histories may not charge customers upfront fees to obtain the card that amount to more than 25% of the credit limit.

These changes have already spurred a flurry of activity. In an effort to maintain their ability to change rates, banks have been converting fixed-rate cards to variable-rate cards and they've hiked rates on millions of customers.

In addition, some 58 million individuals have had credit cards canceled or their credit limits cut, said Craig Watts, spokesman for Fair Isaac Co., the makers of the FICO score. These cuts aren't being imposed only on bad risks, either, Watts said.

The typical cardholder whose credit limit was affected had an excellent credit score, ranging from 760 to 770.

10% of underwater homeowners would walk away, survey finds

A new national survey looking at the phenomenon of strategic defaults, in which homeowners choose foreclosure over continuing to pay on underwater mortgages, has found that nearly one out of 10 homeowners say they would walk away if they felt financially vulnerable and owed more on their homes than they were worth.

The telephone poll of 1,000 homeowners, conducted for Reecon Advisors, publisher of Real Estate Economy Watch, revealed that most would choose other options: 61.7% would talk to their lenders about modifying loan modifications, 44.3% would try to sell and 25% would rent out a room to help meet expenses.

To what extent homeowners are underwater also plays a role in the decision making process. Owners with negative equity of 10% or less rarely default, according to researchers from the graduate schools of business at the University of Chicago’s Booth School of Business and Northwestern University. But once negative equity reaches 50%, close to one in five owners would walk away.

The findings show that one out of four homeowners who default on their mortgages are making a strategic decision.

Whether owners should feel guilty about walking away has also been the subject of recent reports. In "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis," University of Arizona law school professor Brent T. White urged homeowners to stop paying their underwater mortgages if it was in their best financial interests. Further, he said they should not think of the decision as doing something morally wrong.

It's a subject that's ripe for debate.

One debit-card overdraft can trigger an avalanche

Many banks rack up fees by counting the biggest transactions first and enrolling customers in overdraft programs without their knowledge or consent.

One mistake could cost Trina Lee her Christmas.

Things have been tight for the Arizona-based nursing assistant since she got laid off two years ago and suffered some medical problems that have kept her from working full-time. As a result, she's become meticulous about watching her bank balance, which is often uncomfortably close to zero.

Earlier this month, she was feeling temporarily flush because she has prepaid most of her bills and figured the rest of her December income from child support and a part-time job could be spent on Christmas gifts. So she splurged on a $65 meal with her mom and brother, knowing that it was possible that this one meal could overdraft her checking account. Debit card transactions like this one require a signature and usually take a couple of days to clear, so Lee monitored every purchase after that, copying her daily bank account activity into a computer file each night to make sure she wasn't stepping over the line.

On Dec. 7, the night before her son's child support payment was due, she breathed a sigh of relief. At 10:45 that night, the dinner charge still hadn't posted and wasn't even listed as pending. After subtracting every pending payment, she had precisely 16 cents in her checking account. She went to bed imagining that she'd dodged an overdraft because she would get a $156 payment in the morning.

She got a rude awakening.

Before crediting her account for the child support payment, Chase bank not only put through the dinner charge, it also "reordered" every one of her pending transactions, turning one potential overdraft into four. The mounting overdraft charges of $35 each then triggered two additional overdraft charges for small debit transactions that Lee did that day, before she'd realized that her account had gone into the red.

In total, Chase levied $210 in overdraft charges -- $175 more than Lee imagined was possible.

"I accept responsibility for one overdraft," said Lee, a 29-year-old mother of two. "But they created the rest of these. It's really frustrating."

Bank spokesman Greg Hassell said Chase would not reverse these charges because "Ms. Lee intentionally overdrafted her account, knowing she had insufficient funds for all her purchases."

The fact that Chase in effect created five of the six overdrafts by changing the order of her transactions -- deducting the biggest items first to drain her account faster -- is simply current policy, the spokesman said.

The policy is common among big banks, industry experts say.

Bankers justify the policy by saying that it ensures that big, important transactions -- such as mortgage payments -- are paid first and thus have a lower chance of bouncing. Critics, however, say that argument doesn't hold water because the banks pay all the transactions regardless. In that case, changing the posting order simply magnifies the effect of a single mistake by turning a single overdraft into several, just as it did with Lee. Indeed, an FDIC study completed late last year found that policies like this had caused overdraft fees to quadruple in just two years, ringing up some $24 billion in revenue for the banking industry in 2008.

Industry consultant Michael Moebs estimates that overdraft charges have continued to soar and are likely to account for some $38.5 billion in revenues this year, with roughly 90% of those fees being paid by just 10% of bank customers. Worse, the FDIC study found that most bank customers had no inkling they could suffer an overdraft charge in advance. Why? They'd been automatically enrolled in an overdraft program without their consent or knowledge.

Consequently, millions of bank customers used debit cards for small purchases, assuming that the swipe would be rejected if they didn't have sufficient funds. They learned later that, say, a $2 coffee cost $37 because it triggered a $35 overdraft fee - a practice so common that many experts now say using a debit card has become dangerous.

The Federal Reserve announced this year that it will require banks to get advance permission before enrolling customers in overdraft programs, but the rule doesn't go into effect until July. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and Rep. Carolyn Maloney (D-N.Y.) have also introduced legislation demanding that banks stop this practice of systematically "modifying posting order" and post transactions chronologically.

The overdraft legislation, which has been temporarily stalled while congressional leaders work on health reform and other financial regulations, would also require that fees bear some relationship to the cost of processing an overdraft; prohibit enrolling customers in an overdraft program without their consent; and limit the number of overdraft fees a bank could charge to a single consumer in any given month or year.

"To actively reorder checks to cause a tidal wave of overdrafts is unconscionable," said Ginna Green, a spokeswoman for the Center for Responsible Lending, which has been pushing for the legislative fix. "This is exactly why we still need legislation."

In the meantime, several banks including Chase have announced they will voluntarily revamp their policies.


Chase's new policy, spokesman Hassell said, will eliminate changing posting order the crux of Lee's complaint.

It will also reduce the maximum number of overdraft fees the bank would charge in a single day, reducing it to three per customer from six under current policy, and it will eliminate fees for overdrafts of $5 or less. Any of those changes would have dramatically helped Lee. Unfortunately, none has been implemented to date. The legislation is expected to be voted on early next year. Chase's policies have an amorphous starting date -- "in the first few months of 2010," according to Hassell.

In the meantime, Lee and consumers like her are out of luck.

Debtor's Dilemma: Pay the Mortgage or Walk Away

In Down Real-Estate Market, Homeowners Are Deciding to Abandon Their Loan Obligations Even if They Can Afford the Payments


PHOENIX -- Should I stay or should I go? That is the question more Americans are asking as the housing market continues to drag.

In good times, it would have been unthinkable to stop paying the mortgage. But for Derek Figg, a 30-year-old software engineer, it now seems like the best option.

Mr. Figg felt trapped in a home he bought two years ago in the Phoenix suburb of Tempe for $340,000. He still owes about $318,000 but figures the home's value has dropped to $230,000 or less. After agonizing over the pros and cons, he decided recently to stop making loan payments, even though he can afford them. Mr. Figg plans to rent an apartment nearby, saving about $700 a month.

A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a "strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

A standard mortgage-loan document reads, "I promise to pay" the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient.

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.

Developments: Is Walking Away FromYour Mortgage Immoral?

Walking away isn't risk-free. A foreclosure stays on a consumer's credit record for seven years and can send a credit score (based on a scale of 300 to 850) plunging by as much as 160 points, according to Fair Isaac Corp., which provides tools for analyzing credit records. A lower credit score means auto and other loans are likely to come with much higher interest rates, and credit card issuers may charge more interest or refuse to issue a card.

In addition, many states give lenders varying degrees of scope to seize bank deposits, cars or other assets of people who default on mortgages.

Even so, in neighborhoods with high concentrations of foreclosures, "it's going to be really difficult to prevent a cascade effect" as one strategic default emboldens others to take that drastic step, says Paola Sapienza, a professor of finance at Northwestern University. A study by researchers at Northwestern and the University of Chicago found that as many as one in four defaults may be strategic.

Driving this phenomenon is the rising number of households that are deeply "under water," owing much more than the current value of their homes. First American CoreLogic, a real-estate information company, estimates that 5.3 million U.S. households have mortgage balances at least 20% higher than their homes' value, and 2.2 million of those households are at least 50% under water. The problem is concentrated in Arizona, California, Florida, Michigan and Nevada.

Josh Cotner, who owns an insurance agency, says his mortgage balance is about $100,000 more than the market value of his home in Gilbert, Ariz. Mr. Cotner could rent a bigger home nearby for $600 a month, far below the $1,655 he now pays on his mortgage, home insurance and property tax. He says he recently stopped making mortgage payments because his lender wouldn't help him reduce the principal on his loan under a federal program in which he believes he is qualified to participate. Given the sometimes lengthy legal process of foreclosure, he may be able to stay in the home for at least another nine months without making any payments.

Banks warn they may get tough with strategic defaulters by pursuing legal claims on a borrower's other assets. "We will try to reduce people's payments if they have a hardship," says Thomas Kelly, a spokesman for J.P. Morgan Chase & Co. "But we have a financial responsibility to get people to pay what they owe if they can afford it."

Steven Olson, a loan officer and roof installer in Roseville, Minn., defaulted in 2007 on a plot of land in Florida he had bought as an investment. "I thought I could move on with my life," he says. But the lender, RBC Bank, a subsidiary of Royal Bank of Canada, sued him, seeking to make him pay more than $400,000 to the bank to cover its losses on the loan. Mr. Olson has hired a Florida lawyer, Roy Oppenheim, to resist the claim. An RBC spokesman declined to comment.

The Burning Questions



States where lenders generally can pursue such legal claims include Florida and Nevada but not California and Arizona, where laws generally prohibit lenders from pursuing other assets of mortgage borrowers. A new Nevada law will protect many borrowers from these judgments if they bought a home for their own use after Sept. 30, 2009.
Another risk for defaulters is that banks could sell the rights to pursue claims to collection agencies or other firms, which could then dun the borrowers for up to 20 years after a foreclosure. Such threats appear to deter some borrowers. A recent study from the Federal Reserve Bank of Richmond found that under-water borrowers were 20% more likely to default in a state where mortgage lenders can't pursue claims on other assets than in those where they can.

How much of your home's value do you owe on your mortgage?

Brent White, an associate law professor at the University of Arizona who has written about this issue, says homeowners should make the decision on whether to keep paying based on their own interests, "unclouded by unnecessary guilt or shame." He says borrowers can take a cue from lenders that "ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility."

But it isn't just a matter of the borrower's personal interest, says John Courson, chief executive of the Mortgage Bankers Association, a trade group. Defaults hurt neighborhoods by lowering property values, he says, adding: "What about the message they will send to their family and their kids and their friends?"

In Mesa, another suburb of Phoenix, low prices are helping to draw buyers who may walk away from other homes. Christina Delapp bought a house out of foreclosure in July for $49,000 in cash. She says she will stop paying the mortgage on another home she still owns in Tempe if she can't sell in the next few months for more than the $312,000 that she owes.

Ms. Delapp, who has been jobless for 18 months, says that the new home is part of her survival strategy. "I feel very fortunate," she says. "Regardless of what happens to my credit, we've managed to put together the best safety plan that I possibly could."

Mr. Figg says that deciding to default on his loan was "the toughest decision I ever made." He worried that if he ever loses his job he would be marooned in a home that he couldn't sell for enough to pay off his loan, limiting his ability to find work in other parts of the country: "I couldn't move up. I couldn't move down. I couldn't move out of the city. It was a very claustrophobic situation."

By moving to an apartment, Mr. Figg expects to lower his costs by about $700 a month. He plans to put that into his savings account and says he is willing to rent for the next five years or so.

Lenders are guilty of having "manipulated" the housing market during the boom by accepting dubious appraisals, Mr. Figg says. "When I weighed everything," he says, "I was able to sleep at night."

Experian loses ruling that could strengthen Fair Credit Reporting Act

The U.S. 9th Circuit Court of Appeals rules in favor of a woman who had been pursued by a collection agency that used an Experian credit report to try to recover a towing fee owed by her son.

For seven years, a bill collector enabled by the powerful Experian credit reporting bureau pursued Maria Pintos over a $3,000 towing bill.

"They used to call me at work and threaten to ruin my good credit," Pintos, 71, said of Pacific Creditors agents who hounded her at her San Mateo County mental health department job for months after the May 2002 towing. "It was so embarrassing, because there were patients around who could hear."

On Thursday, the 71-year-old Pacifica, Calif., woman beat the firms in federal appeals court, winning a ruling that could have wider implications for the credit industry.

A divided three-judge panel of the U.S. 9th Circuit Court of Appeals ruled that Pacific Creditors Assn. and Experian Information Systems Inc. violated Pintos' privacy, as well as the Fair Credit Reporting Act.

Pintos had bought a sport utility vehicle for her son, turning over the title to him after he paid her back.

Based on a review of her Experian credit report, Pacific Creditors tried to collect on behalf of a towing business that had towed and impounded the vehicle. The collection agency had pegged Pintos a better bet for paying the bill than her son, who had financial problems and poor credit.

The appeals panel ruled that the agency had no right to request, nor Experian to provide, Pintos' credit report, because she had never initiated a credit application or failed to pay a debt willingly assumed.

Experian spokeswoman Roslyn Whitehurst said it was "corporate policy not to comment on anything pertaining to pending litigation."

The California Department of Consumer Affairs was reviewing the ruling and still assessing its implications for consumers, said spokesman Luis Farias.

The decision could lead to the two firms' paying damages to Pintos. It could also serve as a warning to the credit industry to adhere to the specific conditions outlined in the Fair Credit Reporting Act for buying and selling consumer credit histories.

"This is a very important case for victims of identity theft because credit reporting agencies have been arguing for years that they can give your credit report to anyone they think is reliable," said Andrew J. Ogilvie, the San Francisco attorney to whom Pintos was referred when she appealed for help from the San Mateo legal aid services for seniors.

The 9th Circuit ruling could lead to broader adherence to the Fair Credit Reporting Act, which firms routinely violate without consequences because of the expense of litigation and poor prospects of winning monetary compensation, Ogilvie said.

Barring appeal by the credit agencies, the case will go to trial in federal court on whether Pintos is due compensation for emotional suffering and lost wages.

They can also point to the dissent of one of the three judges, Carlos T. Bea, who argued that Pintos did trigger the agencies' sharing of her credit history by her decision to leave the vehicle on a public street "where she knew it might be towed."

Redeem All of Gift Card, or Give Store a Present

Like it or not, gift cards are now a fixture of the holiday season. And this year, some of the changes in the card world seem favorable at first glance.

Giving gift cards this year? Hope to get one?

Nearly $5 billion of the money that is given this year as presents on gift cards is likely to go unspent.

Last month, the Federal Reserve proposed new guidelines for the industry, rules that legislators had outlined in the sweeping credit card legislation that passed earlier this year. They prohibit fees for cards that have been inactive for less than a year, outlaw expiration of funds within five years of when someone has loaded the cards with money, and call for clear and conspicuous disclosures.

That is fine as far as it goes, though most major retailers already follow these rules. American Express, which issues cards that are good at any retailer that accepts its plastic, went even further. It did away with all consumer fees, other than the ones you pay to purchase and load the gift card in the first place.

But a big problem remains, and it’s awfully hard to legislate away. This year, nearly $5 billion of the money that well-meaning givers have put onto gift cards will go unspent, according to Tower Group, a financial services consulting firm. The money then reverts back mostly to the retailers and banks that loaded the plastic initially.

In the industry, this is known as breakage, and here’s what it means: If you buy a gift card for a family member or friend, there’s a good chance you’ll give a little gift to the retailer or bank that issued it as well.

How does breakage happen? People lose their cards. Or they abandon them in a drawer and assume they’re expired when they’re unearthed years later. Fees can still eat away at some of them. And people may use $46 of a $50 card and then throw it out rather than make another trip back to the store.

The most obvious question here is whether retailers and banks like it when this happens. On one hand, enlightened companies may see the cards as akin to frequent-flier miles. Customers are unhappy when any miles expire, and if they are able to redeem them easily, they’re more likely to patronize the airline and collect more miles in the future. That’s how loyalty works, and one would assume that gift card issuers want to create the same seamless experience.

Some third-party providers that set up gift card systems see it a bit differently, however. Head over to the Gift Card USA home page, and you’ll see the company behind the site announcing: “Experience shows that 5-15% of gift card values are never redeemed. This fact can pay for your program by itself.”

It isn’t just a break-even proposition either, according to the people behind Acceptvisamastercards.com. If you count 10 to 12 percent breakage in your calculations, the site contends, the gift card display can become the “most profitable square foot of space in the place.”

This is how some of the people in the industry talk about gift cards when they think consumers aren’t listening. And for big companies, breakage can add up to real money. Not every big retailer or bank discloses it, but Best Buy was kind enough to note that it kept $38 million in breakage in its most recent fiscal year. Home Depot cleared $37 million. Breakage can be total when a retailer goes out of business.

Retailers will generally still let you redeem your gift card many years after you received it. But they still record the revenue once they’re certain, based on historical redemption patterns, that most of the unspent money from years ago will stay that way. And yes, most of them do tend to keep it, though some states may try to seize the money as unclaimed property (which leads many companies to place subsidiaries in friendly states to try to avoid this).

Even as gift cards exploded in popularity over the last decade, it was reasonably easy to avoid getting them, as long as you put together a specific enough holiday wish list for friends and family. But recently, companies have started sending rebates in the form of gift cards, instead of old-fashioned paper checks. So you may end up with the cards whether you want them or not.

Why is this happening? Because you wanted it to happen, of course. “It’s the convenience,” said Cletis Hoffer, treasurer at Young America, a marketing company that specializes in rebates and has studied the issue in focus groups. “Consumers are more interested in getting a card than a check. You have to take a check to the bank. But with a card, you can spend it immediately.”

This makes little sense to me. I can drop a check in the mail to my bank in about two minutes. But with the gift card like the Citi Visa that I recently received from Verizon, I have to remember to put it in my wallet and take it out at a store. Then, I need to find a retailer where the people at the register won’t look at me cross-eyed when I request that they split the transaction between the gift card and another form of payment. It holds up the line, too.

At least that Citi card gives you the right to take its gift card to any Visa member bank and extract the cash. I took it to arch rival Chase. The transaction was seamless and it took just 10 minutes, five times as long as it would have for me to send a rebate check to my bank. I was that lucky, though, only because I work across the street from a bank.

Perhaps I’m in the minority in finding all of this a bit too complicated. “We have seen incredible increased utilization, in terms of people getting the cards down to zero, than we were two years ago,” Mr. Hoffer said. “Particularly the Visa and other cards.”

Brian Riley, the research director at Tower Group, confirms that overall breakage numbers have fallen in the last year or two, as consumers have gotten wise to the disappearing funds. “People realize they can lose it,” he said. “And the fact that we’re in a bad economy gives the $3 a bit more meaning now.”

If you do end up with an unwanted card, there are a few ways to get rid of it. You could sell or swap it at Web sites like Plastic Jungle, GiftCardRescue and Swapagift, though you’ll lose some of the card’s value in the process. A charity might take it off your hands, too.

If you’re going to use the card, try buying something that costs a bit more than the loaded amount, so you’re not faced with a tiny leftover balance that you’ll be tempted to abandon. If you have a Visa or similar card, calling a catalog merchant with an order may make you feel less sheepish than holding up lines with an in-person split transaction.

As a giver, it’s easy to tune all of this out when buying a card is so much easier than redeeming it. And recipients often treat it like found money; what’s a loss of $4 when the $96 you did get to use was money you didn’t have before?

But we could put an end to all of this waste if the givers got wise to the billions in annual giveaways to retailers and banks and just handed over cash. You’re kidding yourself if you think that loading money onto a plastic card is somehow more polite than slipping money into a paper envelope.

Nobody neglects to spend cash. The reason they came up with the word breakage is that the gift card system was more than a little bit broken.

Credit card's newest trick: 79.9% interest

NEW YORK — It's no mistake. This credit card's interest rate is 79.9%.

The bloated APR is how First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry. It's a strategy other subprime card issuers could start adopting to get around the new rules.

Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25% of a card's credit line.

In a recent mailing for a preapproved card, First Premier lowers fees to just that limit — $75 in the first year for a credit line of $300. But the new law doesn't set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9%.

"It's the highest on the market. It's the highest we've ever seen," said Anuj Shahani, an analyst with Synovate, a research firm that tracks credit card mailings.

The terms are eyebrow raising, but First Premier targets people with bad credit who likely can't get approved for cards elsewhere. It's a group that tends to lean heavily on credit too, meaning they'll likely incur steep financing charges.

So for a $300 balance, a cardholder would pay $20 a month in interest.

First Premier said the 79.9 APR offer is a test and that it's too early to tell whether it will be continued, according to an e-mailed statement. To comply with the new law, the bank said it will no longer offer the card that has $256 in first-year fees as of Feb. 21, 2010. However, customers will still be able to use their existing cards.



According to First Premier's website, the credit cards are issued by its sister organization Premier Bankcard. The company, based in Sioux Falls, S.D., says Premier Bankcard is the 10th largest issuer of MasterCard and Visa cards in the country, with more than 3.5 million customers.

In a mailing sent to prospective customers in October with the revamped terms, First Premier writes "...you might have less-than-perfect credit and we're OK with that." The letter notes that an online application or phone call is still required, but guarantees a 60-second status confirmation.

The letter also states there are no hidden fees that aren't disclosed in the attached form. That's where the 79.9% interest rate and $75 annual fee are listed. There's also $29 penalty if you pay late or go over your credit limit. The credit limit is $300.

The bank did not say how many people were offered the 79.9 APR card, but noted that it needed to "price our product based on the risk associated with this market."

Even if First Premier doesn't stick with the 79.9 APR, it will likely hike rates considerably from the current 9.9% to offset the lower fees, said Shahani of Synovate.

The revamped terms may not be the only changes; First Premier also appears to be moving away from the riskiest borrowers.

The bank typically mails offers to subprime households, meaning those with credit scores below 700. In the third quarter, however, 84% of its offers were sent to subprime households, down from 91% the same period last year, according to Synovate.

First Premier could be cleaning up its credit card portfolio since the new regulations will limit its ability to raise interest rates. That could mean First Premier won't issue cards as liberally to those with bad credit.

As harsh as First Premier's terms seem, that could be a blow to those who rely on the card, said Odysseas Papadimitriou, CEO of CardHub.com.

"Even when the cost of credit is astronomical, for people in true emergencies, it's much better than not having access to credit," said Papadimitriou.

Until Feb. 21, First Premier is still offering its even-higher-fee card online. So the price for credit the bank charges is at least $256 in first-year fees.

How to Invest in a Certificate of Deposit (CD)

Certificates of deposit (CDs) make financial sense for people of all ages who want a low-risk investment to park cash they don’t plan to use immediately. Maybe you want to use your cash to buy a car or make a down payment on a house pretty soon.

If you won’t need your cash reserve the day after tomorrow or next week, you’ll likely want that money to earn a better rate of return than your checking account offers—without taking on too much risk. This is when a CD is useful.

Two factors to consider when deciding whether a CD is right for you:

• Your time horizon. When will you need part or all of your cash? Do you have other cash resources to access in a pinch? If you have a sum of money and don’t expect you’ll need to use it for six months or longer, a CD may be ideal.

• Interest rates. The anticipated direction of interest rates will help you determine how long to tie up your money. If rates are rising (usually when inflation is on the rise), a short-term CD may be best. If rates are falling (usually when the economy is on a downswing), a longer-term CD may earn you more money, since you’ll lock in a higher rate.

How to Invest

Before you shop for a CD, there are two numbers you need to know:

• APR —The annual percentage rate, or the interest rate a bank is offering on the CD.
• APY —The annual percentage yield, which tells you what you’ll earn over the multiyear life of the CD as your money compounds.

What’s compounding? Put simply, it’s how your investment grows over time. Let’s say you invest $10,000 in a three-year CD earning 5% annually. In the first year, your $10,000 investment will earn $500. In the second year, 5% of the new total ($10,500) will be $525. In the third year, 5% of $11,025 will be about $551. The total amount of money grows each year, so the amount representing 5% of your investment also grows. That’s compounding.

You’ve decided a CD is an ideal investment for your cash. Here’s what to do next:

1. Choose your term. Determine how long you want to tie up your money. This will depend on when you need the money or whether you have other cash assets to tide you over until the CD matures.

2. Pick your type. Decide which kind of CD suits you best. For example, if you want to invest for two years and don’t want the risk of being stuck with a low rate, then a bump-up CD may be ideal. Afraid you’ll need part of your deposit for an emergency? Consider a liquid CD. (Look here for an explanation of the basic types of CDs.)

3. Review the rates. Once you’ve selected the duration and type of CD you want, find out what rates are available at different banks.

Consider a ladder

One way to reduce a CD’s drawbacks is to use a technique called “laddering.” This strategy gives you regular access to part of your cash and protects you against rising interest rates.

Laddering is simple. Instead of investing one big chunk of cash in one CD, you divide your lump sum into equal parts and invest each in CDs of varying durations.

Here’s how it works: Let’s say you want to invest $15,000. By laddering, you would invest $5,000 in a one-year CD, $5,000 in a two-year CD and $5,000 in a three-year CD. Then, each time one of the three CDs matures, you would either take the cash or re-invest it in another three-year CD to keep your ladder in place.

Laddering provides three benefits:

• Penalty-free access to cash each time a CD matures.
• More favorable interest rates, since you’re always investing in a longer-term CD.
• A shot at better returns if interest rates are higher when you re-invest.

Tips
1. You'll earn more in a longer-term CD, but be sure you won't need the money before the term is up -- the penalties for early withdrawal can be severe.
2. Compare CD rates at Bankrate. Also see if you'd be better off with a high-yield online savings account.
3. Staggering your CD investments, a tactic called laddering, can give you periodic access to the money within your CDs.

Credit-Card Mail May Be Boring, But Ignoring It Could Cost You

Here's some friendly year-end advice: Read those disclosure letters that banks and credit-card companies are sending you in coming months—or at least try really hard.

The text of these mailings may seem like gobbledygook. But they may require you to make important choices soon. Ignoring them could mean paying a lot more money to your credit-card company, having a credit card rejected or getting an unpleasant surprise at the ATM.
In the Fine Print

Some changes to bank and credit-card accounts may require your response. Look for:

* Changes in credit-card interest rates or annual fees. You can opt out, canceling your credit card for new purchases.
* An end to the practice of automatically allowing you to exceed your credit limit. You can "opt in" to run over your limit but will pay fees if you do.
* An end to automatic enrollment in overdraft programs for debit cards. You can enroll and pay the fees—but there are cheaper options.


New legislation and Federal Reserve rules that go into effect in February and next summer will force banks and credit-card companies to give more notice of significant changes in card terms, limit some interest-rate hikes and require more detailed billing statements. But the rules will also require us to decide whether to opt in or out of rate increases and programs such as "overdraft protection" that we may have been automatically enrolled in previously.

The letters may be easy to miss, since some of them look like junk mail. And don't expect reader-friendly prose. The banks' approach is: "It's not our job to teach you the law; it's our job to comply with the law," says Adam Levin, co-founder and chairman of Credit.com, a credit-information Web site.

When you open the envelopes, here are some details to look for and moves you may want to consider:

• Is the credit-card's interest rate or annual fee changing? Many companies have been aggressively raising rates as high as 29.99%. But you now have the right to "opt out" of these changes before they become effective, essentially canceling the card for new purchases, though you can continue to pay off the balance at the old interest rate.

If you have an outstanding balance, this option especially matters right now because credit-card companies have a narrow window to hit you with higher interest rates. After the second round of the Credit Card Act goes into effect Feb. 22, the companies can raise rates on future transactions but not on your current balances unless you are at least 60 days behind in your payments. But until Feb. 22, any interest-rate increase can apply to both future purchases and current balances—which could mean substantially higher costs.

You may worry that canceling a credit card will hurt your credit score. Those fears are not unfounded. But let's do the math: Say you owe $5,000 on the card and you're paying $250 a month. If the original rate was 11.99% and you canceled the card, you'd pay off the balance in 23 months and pay about $600 in interest. If the rate spikes up to 19.99%, however, and you don't make additional purchases, you would pay off the balance in 25 months, along with more than $1,100 in interest—a $500 difference.

So here's another way to look at it: If you cancel the card and your credit score falls, your score likely will rebound in a year or two if you pay your bills on time and keep your debt levels in check. But if you keep the card and pay the higher rate, your $500 will be gone forever.

Of course, if you truly need the credit and fear you won't be able to get a card somewhere else, it may be worth the money to keep the card. And if you pay your bill in full every month, the higher rate may be irrelevant.

• Has your credit limit been lowered? And do you borrow close to your limit? Starting in February, the new law will bar credit-card companies from charging fees (typically up to $39) for exceeding a credit cap unless the customer "opts in," or agrees to pay fees for the convenience of busting the limit. If you don't opt in, you run the risk that your credit card will be rejected when you near your limit. That could put those with small credit limits or high balances in an awkward position at the cash register. It also makes travel trickier since hotels and rental-car companies often put a hold on your card as a precaution, reducing your available credit.

Statute of Limitations on Debts

Below are the State Statutes of Limitations for various kinds of agreements. All figures are in years.

Oral Contract: You agree to pay money loaned to you by someone, but this contract or agreement is verbal (i.e., no written contract, "handshake agreement"). Remember a verbal contract is legal, if tougher to prove in court.

Written Contract: You agree to pay on a loan under the terms written in a document, which you and your debtor have signed.

Promissory Note: You agree to pay on a loan via a written contract, just like the written contract. The big difference between a promissory note and a regular written contract is that the scheduled payments and interest on the loan also is spelled out in the promissory note. A mortgage is an example of a promissory note.


Open-ended Accounts: These are revolving lines of credit with varying balances. The best example is a credit card account. Please note: a credit card is ALWAYS an open account. This is established under the Truth-in-Lending Act:

TITLE 15 > CHAPTER 41 > SUBCHAPTER I > Part A > § 1602
§ 1602. Definitions and rules of construction(i) The term “open end credit plan” means a plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance. A credit plan which is an open end credit plan within the meaning of the preceding sentence is an open end credit plan even if credit information is verified from time to time.

Keep in mind, though, that the state statute of limitations on a credit card may come down to whether the agreement is in writing or not; whether it meets the required elements of a written contract. For instance, in Missouri if the creditor is able to produce a written credit card contract, then the 10 year statute applies. If the creditor cannot show the existence of a written contract, then the 5 year statute would apply - credit card or not. Here is case law in Missouri to illustrate this point:

In Capital One Bank v. Creed, 220 S.W.3d 874 (S.D. Mo.2000), the company alleged the parties entered into a contract, whereby the company would extend credit to the customer. The company alleged that the customer breached the terms of her contract by failing to pay the amounts for which credit was extended. The customer denied the allegations and asserted the affirmative defense that the action was barred by the statute of limitations. The appellate court ruled that the action was barred by the five year statute of limitations under Mo. Rev. Stat. § 516.120 (2000). The customer made a partial payment on December 2, 1999, and the company's petition was not filed until January 3, 2005. The ten year statute of limitations under Mo. Rev. Stat. § 516.110 was not applicable because the company did not produce a written promise by the customer to pay money.

A Change in Credit Card Strategy

If you have an unpaid credit card balance and not much saved up in emergency savings I need you to listen up. My advice has changed.

I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can.

Let me tell you why I am now telling you to do this. With rising unemployment, having a big emergency cash fund is vital, even if it means curtailing your credit card repayment strategy.

The sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been about paying your bills on time. The problem is that most credit card companies are either reducing your credit limits, raising your interest rates and are even paying you to close down your account. Many of you are even finding that when you do finally pay off your credit card debt that the issuing credit card company of that card is closing that card down as fast as they can so you cannot ever charge on it again. You did everything right, and yet still you could have your credit limit reduced, which can have a negative impact on your credit score.

So here is the problem. If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down—what are you going to live on if you lose your job? Chances are you may not have any available credit, or too little credit, to use in the event you are laid off. Nor will you be able to get a new card if you are unemployed.

That’s why I am telling you to pay just the minimum required on your card each month and then use every extra penny you have to build up your emergency savings fund. You want to have a fund that can cover your living expenses for up to eight months.

If you revert to paying just the minimum on your credit card there’s a chance it may indeed hurt your credit score. But as I just explained, even if you do pay it down there’s a chance your credit score will be hurt if the credit limit is reduced.

I want to be very clear: I still believe getting out of credit card debt and making sure your FICO score is as high as possible is incredibly important. For those of you with a fully-funded emergency account please make it a priority to pay off any credit card balances as soon as possible. My new advice is solely for those of you who do not have an emergency savings account, or too small of an account. The single most important Action to take in this severe recession is to build savings so you and your family will be able to have money to cover your basic necessities if you lose your job. As you have heard me say before: Hope for the Best, Prepare for the Worst. And right now we all need to be redoubling our preparation efforts.

Rates on 30-year loans set record low

The average interest rate for a 30-year mortgage dropped to a record low of 4.71 percent this week, pushed down by an aggressive government campaign to reduce borrowing costs.

The rate, published Thursday by Freddie Mac, is the lowest since the mortgage finance company began tracking the data in 1971. The previous record of 4.78 percent was set during the week ending April 30 and matched last week.

The Federal Reserve is pumping $1.25 trillion into mortgage-backed securities to try to bring down mortgage rates, but that money is set to run out next spring. The goal of the program is to make home buying more affordable and prop up the housing market.

Despite the government support, qualifying for a loan is still tough. Lenders have tightened their standards dramatically, so the best rates are available to those with solid credit and a 20 percent down payment.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders across the country. Rates often fluctuate significantly, even within a given day, often tracking yields on long-term Treasury bonds.

This week drop reflects a rush of investors into the security of government debt after concerns about financial trouble in Dubai drove investors to safe harbors. But rates climbed back later in the week, and analysts say they are likely to remain volatile.

"There are no guarantees that mortgage rates are going to stay at these low levels," said Greg McBride, senior financial analyst at Bankrate.com.

And millions of American families have not been able to take advantage of them, particularly in the areas where home prices have fallen the most.

About 11 million households, or 23 percent of homeowners with a mortgage, owe more on their home loans than their house is currently worth according to First American CoreLogic, a real estate information company.

That makes refinancing difficult.

While the government has launched a program designed to help these "underwater" borrowers, only about 140,000 homeowners have used it so far.

In Orlando, mortgage broker Chris Brown says the low rates are a boon to first-time homebuyers who can qualify for a loan. But he says he isn't getting much business from homeowners looking to refinance.

"Most of the people that could refinance probably have" done so, he said. "Rates have been artificially low for quite some time."

The average rate on a 15-year fixed-rate mortgage fell to a record low of 4.27 percent, from 4.29 percent last week, according to Freddie Mac.

Rates on five-year, adjustable-rate mortgages averaged 4.19 percent, up from 4.18 percent a week earlier. Rates on one-year, adjustable-rate mortgages fell to 4.25 percent from 4.35 percent.

Fewer Shoppers Using Credit Cards for Gifts

Climbing interest rates, lower spending limits and canceled accounts are prompting more holiday shoppers to leave their credit cards at home this year.

"There is definitely an overall shift from credit to debit," says Curtis Arnold of CardRatings

"This holiday season, it has been accentuated by the credit crunch and the economy."


An estimated 28.3% of people will be using credit to pay for gifts this year.

An estimated 28.3% of people will be using credit to pay for gifts this year, according to a recent survey of 8,692 consumers conducted by the National Retail Federation and BIGresearch. That's down from the 31.5% of shoppers who paid with credit cards during the 2008 holidays, according to the survey.

Mike Cleary's family has ditched credit cards this holiday season. He and his wife had three credit cards with a total balance of about $6,200, but paid those off because of high interest rates. "We were going to get rid of those, bite the bullet and use cash from that point," says Mr. Cleary, a 53-year-old from Duluth, Ga.

Instead of the usual $3,000 to $4,000 he typically spent for the holidays, Mr. Cleary says he will be spending below $1,000 on his family this year. "We just told them, 'Hey, it's going to be a light Christmas.' "

Consumer credit has deteriorated since the last holiday season, when interest rates were lower and spending limits higher, says Mr. Arnold. "Even if you got good credit, no one is immune from having their account closed."

Last holiday season "we charged into it thinking things would end a lot quicker," says Brian Riley, research director at TowerGroup, a financial-research consultant. Unemployment is still high and consumers are skittish about adding debt. Also, credit-card companies are under pressure from upcoming regulations concerning the credit industry, which go into effect early next year.

Plus, "there has been a practical change in people's buying habits," Mr. Riley says. That change has been on display this entire year. In the third quarter of 2009, credit transactions for Visa and MasterCard reached $313 billion, an 11.58% decline over the same quarter in 2008, according to TowerGroup. Debit transaction volume for Visa and MasterCard was $303 billion, a 5.21% increase over the third quarter in 2008.

"Consumers are preferring to use their PIN debit card as compared to credit or even cash," according to Silvio Tavares, senior vice president of industry relations for First Data Corp., a transaction processor for merchants. PIN debit-card transactions, in which the consumer enters a numerical pass code, increased by 9% this Black Friday over last year, according to First Data, which processes transactions for sellers.

Watered-down rewards programs may also be keeping some shoppers away from credit spending. "I think that could be impacting the amount of people who are using their credit cards in their holiday shopping," says Bill Hardekopf, chief executive of LowCards.com, which tracks credit card usage.

Still, there's at least one area where consumers are sticking with credit cards: online purchases. "Credit does tend to be more actively used than debit transactions" for online shopping, says Mr. Riley of TowerGroup. "One of the good reasons for using credit online is the protections are better than using debit." If a debit card gets stolen, it may be harder to sort out fraudulent overdrafts.

Despite the holiday cutbacks, credit-card balances keep rising among U.S. consumers overall. The average credit-card balance went up to $8,083 in the third quarter of 2009, according to Mail Monitor, a credit-card direct-mail service from Synovate, a market-research firm. In the second quarter of 2009, it was $7,489.

"Some people are just maxed out on their cards," says Gerri Detweiler, a personal-finance adviser with a consumer-information site in San Francisco.