Thursday, December 17, 2009

Federal Reserve again leaves interest rates unchanged

Experts say rates won't increase until unemployment rate falls

By Jeremy M. Simon

Federal Reserve

The Federal Reserve left its lending rates unchanged again on Wednesday, and experts say it's likely to continue that plan until sizable numbers of unemployed Americans begin finding work.

That central bank decision came at the conclusion of a two-day meeting, with Fed officials voting unanimously to leave its federal funds rate at a range of 0 percent to 0.25 percent, keeping the prime rate at 3.25. Variable rate credit cards -- which account for the majority of plastic -- have annual percentage rates that are set using the prime rate. That means when the central bank eventually raises the fed funds rate, which it last did in December 2008, most cardholders in the United States can expect to pay higher rates on their credit cards.

However, that decision may be months away. With unemployment currently at 10 percent, economists weren't surprised by the Fed's latest decision to hold off on hiking interest rates. "They're not going to do it before they have positive employment numbers," likely around the second quarter of 2010, says John Silvia, chief economist with Wells Fargo.

Fed points to job losses
The Fed highlighted the unemployment problem in the first sentence of the statement accompanying its decision. "Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating," the Fed said.

Still, despite that note of optimism, the Fed says that joblessness remains a challenge. "Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit," the statement said.

Amid other key portions of the Fed's statement, its language didn't change at all from earlier statements -- for example, when saying that the strength of the economic growth isn't enough to warrant interest rate hikes. The Fed said it continues to expect the health of the economy to require "exceptionally low levels of the federal funds rate for an extended period."

Unemployment continues to influence lending rates
Analysts agree the Fed is waiting on the labor market's recovery. Although the U.S. economy has shown signs of life, the unemployment rate remains in the double digits. In October, unemployment reached 10.2 percent, before dipping slightly to 10 percent in November.

"The Fed typically waits for the unemployment rate to fall notably for a number of months before it is willing to raise rates, and we believe this should prove especially true with the unemployment rate at a 10.0 percent level," Barclays Capital's economics team said in its weekly report on Dec. 11.

That means, for the time being, any changes to annual percentage rates will come from the card issuers themselves rather than the Fed.

Banks making moves
Banks continue to suffer losses as unemployed workers struggle to repay their loans. On Tuesday, Capital One said its U.S. credit card charge-offs -- or the amount of loans the bank has given up on collecting -- rose to 9.6 percent in November, Discover reported that its credit card charge-offs increased to 8.98 percent and Chase said its write-offs advanced to 8.81. Bank of America, meanwhile, posted a 13 percent write-off rate in November, down from the previous months' rates, but still the highest rate among those banks that have so far reported their results.

To offset these losses, banks have made borrowing more costly and difficult for cardholders. For card issuers, "you tighten the standards in a recession and loosen the standards as the recovery proceeds," Silvia says. Banks have also blamed their tighter lending standards on increasing regulation, which lenders say makes doing business more expensive.

For now, banks are more focused on the current recession than a pending recovery. As of last week, interest rates on new credit card offers reached 12.75 percent, according to the Weekly Credit Card Rate Report. That's the eighth increase in the past 12 weeks, and it represents an increase of more than three-quarters of a point from June and a point and a half since summer of 2008. Cardholders may also find themselves paying higher fees for late payments, balance transfers and cash advances, as well as inactivity fees.

However, Silvia says that card issuers have likely already implemented the bulk of their interest rate increases. "I have to believe most of the change occurs in availability rather than the rate itself," he says, with consumers still finding it difficult to get their existing credit lines extended or get approved for new credit cards.

As for interest rates, Silvia says credit card APRs could start to come down after the Fed begins to adjust its monetary policy next summer. (The prime rate is just one of the factors that influences credit card APRs, so banks still have significant control over many of the others.) "I think the banks are going to lag whatever the Fed does, so it won't be until the end of next year before anything gets done" by card issuers, he says.

'No payment, no interest' credit card deal? No way

Make no mistake: If there's a balance, you owe a minimum monthly payment

By Erica Sandberg

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families."

Ask a question.

'Opening Credits' stories

Question for the expert

Dear Opening Credits,
I did a balance transfer to a Chase card. I did not realize, nor was I told when the card was issued, that it had monthly minimum payments. I have usually done payment transfers where if the balance is not paid off by a certain date, the interest is retroactive. I would pay on the balance when I could. I did the same with the Chase card, not realizing the balance. I made two payments, missed two months, then paid it off. Now, five months have gone by, and they finally called me to tell me I have a balance in excess of $300, and a payment of $180 will bring the account current. I explained my situation, and they are unwilling to listen/help. Do I have any recourse? Is there anywhere I can go to get help? I offered to pay a portion, but they won't budge. -- Shelley

Answer for the expert

Dear Shelley,
I must say that I'm mystified that you weren't aware that minimum required payments are an intrinsic aspect of revolving credit cards. Did you really think that you could add a balance to a new credit account and not be expected to send them some money each month?

The only rationale I can imagine is that you mistook a "zero APR on balance transfers for X months" offer from Chase for the financing arrangements that some retailers offer for furniture or major appliances. Typically, in those cases, as long as you pay 100 percent of the sales price within a certain time frame, you won't have to make any payments and won't be charged a penny in interest.

However, what you got is a standard credit card, and all companies that issue such products require monthly payments on what you owe whether you actively made purchases with that account or have transferred the balance from another card. To be sure you got that information, though, I asked Gail Hurdis, Chase Card Service's communication & public affairs vice president about your situation. "There is a section in the customer agreement that calls for a minimum payment," says Hurdis, who goes on to say that it also explains in detail how the payment and interest is calculated.

Apparently you managed this account fine in the beginning, as you submitted two consecutive payments. Then, for whatever reason, you skipped a couple of cycles before sending in what you thought was the remaining balance. Your troubles began when you missed the payments, as it caused finance charges and other fees to be added to the account. The end result: that unanticipated bill of about $300.

This leads me to my first piece of advice, which is to make sure you open all of your mail. You say you first heard of this surprise debt when Chase called you, but it is standard protocol for issuers to send letters alerting customers that their account is delinquent before making collection calls. Because you weren't expecting a bill, you may not have been as diligent about checking the correspondence from the bank.

Now, I understand that you don't want to pay the debt and have attempted to have it purged. Chase won't budge and, frankly, I don't see why it should. You were under an obligation to pay at least the monthly minimum (the "payment due" printed on your statements was further indisputable proof that remittance was expected), which, at least for a couple of months, you did not do. Because of that, Chase is fully within its rights to add on the charges.

So what should you do? This leads to my second and most pressing piece of advice: Pay it. Now. You legitimately owe the money. It's been five months since Chase has received any cash from you. Though the amount due is not large, chances are it's being reported on your credit report and doing some major damage. I'm willing to bet that it won't be long before Chase charges the debt off and sends it to a collection agency. When that happens, troubles will only increase. Your credit report will take another bad hit, and you'll be dealing with collectors, who are not typically a joy to work with.

Do not miss this opportunity to get back on track, Shelley. For a mere $180, you can offset the problems that will surely happen if you don't. And next time you enter into a contract with a credit card company, read the application and agreement carefully before accepting the offer. The terms will be spelled out -- from how much you are expected to pay each month to the grace period and fees. For now, consider this a valuable life lesson in the real world of credit.

Creative new fees escape CARD Act rules, surprise consumers

New report highlights ways issuers have gotten around new law

By Tamara E. Holmes

While the Credit CARD Act of 2009 puts an end to abusive tactics card issuers have long used to boost their profits, consumers need only to look at their card statements to know there's no reason to celebrate.

New credit card traps

In the past year, card issuers have rolled out or expanded their use of other ways to collect millions more in fees each year, many of which are hidden to consumers, according to the Durham, N.C.-based Center for Responsible Lending's Dec. 10 report, "Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate."

"Credit card issuers are going to more than ever try to find ways to make extra profits," says Joshua M. Frank, a senior researcher with the Center and author of the report. New charges and changes to the way fees are calculated are adding to the balances of a growing number of cardholders. While some of the practices were instituted after the Credit CARD Act was approved in May, others were quietly being put in place earlier as a result of the recession. The one thing they have in common, says Frank, is that "none of them are explicitly prohibited by the Credit CARD Act."

Hidden rate changes
Consumers with fixed rate credit cards won't have to worry about interest rate changes to current balances if they pay on time, under the Credit CARD Act. The vast majority of cardholders, however, carry variable rate cards, in which the interest rate is determined by adding a fixed percentage to the rate of an index such as the prime rate. For them, things get a little murkier.

In the past, issuers would generally use the highest prime rate in a cardholder's current billing cycle as the starting point for determining a credit card's rate for the month. However, a number of issuers have amended their terms this year so that they now can select the highest prime rate in the previous 90-day cycle, a move that costs consumers $720 million a year, the Center for Responsible Lending estimates. As a result, the interest rate paid by cardholders may not go down in a given month even if the prime rate goes down. "It's so hidden and obscure that it can't be interpreted as anything other than a way to extract money from people in ways they don't understand," says Frank.

Credit card issuers are going to more than ever try to find ways to make extra profits.

-- Joshua Franks
Center for Responsible Lending

Variable rate cardholders are also impacted by another pricing strategy, as many issuers have begun setting "floors" -- limits to how low a cardholder's variable rate can go. While the rate will rise with the prime rate, it won't go any lower than the flooreven if the prime rate goes beneath that point. As of December 2009, the prime rate is at the historically low level of 3.25 percent. But "if you get a card in the future and the prime rate is, say 6 percent, then you wouldn't get the benefits of a decrease in the rate that would likely occur," Frank says.

New and expanded fees
Changes to interest rate calculations aren't the only ways issuers are mounting charges on consumers. A number of fees have become more prevalent this year, according to the center's study.

  • Minimum finance charges can be greater than the amount of interest owed. As a result, if a consumer owes only $0.50 in interest, he may have to pay $2 because that's the minimum interest fee.
  • Card issuers charge late fees that vary according to the card balance, so those who owe the most pay the highest fees. "But right now almost nine out of 10 people are in the top late fee category," says Frank. Though issuers often tout the lowest late fees, "the average fee that people pay has gotten higher and higher."
  • Cardholders who don't incur regular charges risk being hit with inactivity fees. This strategy is even applied to cardholders who've opted out of a change of terms to the account and can no longer charge new items. Although their inactivity is forced, they may end up paying an additional $36 per year.
  • Foreign transaction fees, which cardholders pay when a currency exchange takes place, are nothing new. But this year, more card issuers redefined "foreign" more broadly to include any transaction that at any point touched a foreign bank, even if the exchange took place in U.S. dollars. Likewise, the fee has inched upward with a majority of issuers charging 3 percent in 2009, compared with 2 percent in 2004.
  • Card issuers are also cashing in on cardholders' use of balance transfer offers and cash advances. Not only are the fees for these transactions rising, but many card issuers are implementing minimum charges and removing caps they once had in place to keep the costs from surpassing a certain level. For example, a card issuer may implement a 4 percent transaction fee on cash advances with a $20 minimum. If a cardholder borrows $100, the 4 percent transaction fee would be $4. However, because of the minimum rule, the cardholder would pay an additional $16.
An exercise of choice
Consumers have more control over some charges than others, such as the ability to use a card to avoid an inactivity fee, but they need to keep a close eye on credit card statements. "We are seeing a lot of changes in the agreements so it's something for people to be really aware of in the next three to six months," says Sarah Fouquart, a group manager with Troy, Mich.-based GreenPath Debt Solutions. Those who don't understand the changes should ask their issuers about them, Fouquart adds.

While many of the top credit card issuers are embracing these new fees, consumers might also look to smaller regional banks or credit unions to avoid paying some of these additional costs, suggests Frank. "Usually you'll find that these organizations care more about the relationship with the customer than making a quick profit on one product," Frank says.

New fees and charges are unlikely to disappear anytime soon, but consumers still have options. "There's no harm in shopping around a little bit," says Fouquart.

Improving a great credit score comes down to timing

By Jeremy M. Simon

Credit Score Report
Reporter Jeremy M. Simon
Jeremy M. Simon covers credit scoring and other issues as a staff reporter for

Ask a question.

'Credit Score Report' stories

Question for the expert

Dear Credit Score Report,
I have question about my FICO score (currently 768) and, in particular, how my "credit card utilization" is part of the score. My wife and I have three credit cards: a Chase Visa with a $45,000 limit, a Citibank MasterCard with a $10,000 limit and an American Express card. We use the MasterCard and American Express very little -- maybe $25-$50 per month combined. We use the Visa a lot, with charges of $7,000-$15,000 per month and highs of $30,000-$40,000 in a few months each year. The majority of charges are business-related and reimbursed immediately by my wife's company. We always pay the balance in full each month. I noticed on another Web site ( that my credit card utilization rate is graded as a "D," which I think, is bringing down my score. Please advise as to how to rectify this situation and bring my FICO score up. Thank you in advance. -- Salomon

Answer for the expert

Hey Salomon,
Your credit score of 768 suggests you are doing a lot of things right, including regularly paying your credit card bills in full. However, when it comes to your utilization ratio -- the total amount of debt you carry compared to your total available credit -- you appear to be a victim of bad timing.

Here's how: Credit card issuers send your account data to the credit bureaus, which in turn, apply credit scoring formulas to that data. When you request to see your credit score, the number you get reflects a snapshot of your credit report based on the most updated information in the credit bureau's records. That means the score that gets calculated is only as good as the most recent data that goes into it. Different credit card issuers report cardholder account information at different times -- some report each month, some once a quarter, others at other intervals. Therefore, depending on when you request it, your credit report might still include a $30,000 account balance, even if you have since paid that debt off.

Paying off credit card balances in full every month is an excellent credit habit, but doesn't mean that one's lender will report a zero balance to the credit bureaus.

-- Craig Watts
FICO spokesman

"Paying off credit card balances in full every month is an excellent credit habit, but doesn't mean that one's lender will report a zero balance to the credit bureaus," says Craig Watts, spokesman for FICO, the company whose credit scoring model bears its name.

That seems to be what's happening to you. According to Steve Katz, spokesman for credit bureau TransUnion, banks generally report a cardholder's account information to the bureaus about once every 30 days, but it can really vary. For example, Chase says it reports the current card balance on the 13th or 14th of every month. Citi, American Express and Wells Fargo each say it reports the account balances listed on cardholders' monthly statements. Bank of America says it reports account balances 30 to 45 days after payment is received.

These are self-imposed reporting deadlines for these issuers, and when the bureaus actually report can fluctuate for any number of reasons. Still, that timing can make a difference to your credit score. Here's an example of how this might work:

  • Say you have a balance of $30,000 on your Chase card on Dec. 13 or 14. (You've had only tiny balances on your other two cards for the past few months.)
  • According to Chase policy, that balance is reported to the credit bureaus.
  • You pay it off in full on Dec. 16.
  • You apply for a loan on Dec. 22.
  • The credit report that the lender sees will likely not show your balance as paid in full because the most recent information about that account was pulled on Dec. 13 or 14, when your balance was huge. That leaves you with a high utilization ratio.

"A high utilization rate is an indicator of risk, so it can have a negative impact on credit scores," says Rod Griffin, director of public education for credit bureau Experian. And since lenders use credit scores to decide whether to let consumers borrow money -- and at what interest rate -- a higher ratio can cost you real money.

How much money? That's hard to say, but a recent announcement from FICO said that a hypothetical person with a 780 credit score -- a bit higher than yours, but close enough -- could see their score plummet by 25 to 45 points for maxing out a credit card. A 45-point drop would still leave you with a very good score of 723, but it would leave you just one small mistake away from a credit score in the 600s. That drop could cost you hundreds each year the next time you apply for a car loan or a mortgage. It could even lead an issuer to reject your next credit card application. (For more details, check out our story about FICO's "damage points.")

You mentioned that you have a 768 FICO score. But you should know that Credit Karma provides TransUnion TransRisk scores. Those scores are generated using a different scoring model than the FICO score, which is better known and much more widely used by lenders than TransUnion's model. (They do share some similarities, however, including a scoring range of 300 to 850.) With your FICO score of 768, you should already qualify for the best rates from lenders. While that's obviously a good thing, it does mean that it'll be harder to raise your credit score since it's already very high. In Credit Karma's grading system, you probably had excellent scores in other categories, even though you had a poor grade for credit utilization.

But if you are still concerned about improving your credit utilization and FICO score, consider the following steps:

  • Make credit card payments more than once a month. By making card payments two or more times during a billing cycle, rather than just at month's end, you can keep your average balances lower and improve your utilization ratio. Credit Karma's chief executive and founder Ken Lin says that because a sudden change in payment behavior could raise fraud concerns at your bank, you should alert them ahead of time about your plans.
  • Spread your spending among several cards. While there may be a good reason for primarily using one of your credit cards -- such as keeping business expenses separate, earning rewards or airline miles, etc. -- consider spreading your charges across all your plastic. That way, if one account's terms get worse or the account suddenly gets closed, you will still have open and active accounts and lines of credit to use.
  • Request a higher credit limit. Consider calling your bank and asking them to increase your credit limit. But be warned: With lots of banks cutting limits and closing accounts, it's a tough time to get more credit. Some experts discourage consumers from contacting their bank right now unless absolutely necessary, since it can trigger an account review and leave you with worse terms.

If you follow these tips -- and continue paying your debt on time and in full every month, as you have been -- you'll continue to have a high credit score.

Good luck!

8 tricks to not rack up card debt during the holidays

By Sally Herigstad

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).

Ask a question.

To Her Credit archive

Question for the expert

Dear To Her Credit,
I've been trying hard this year to work down my credit card debt, and I'm proud of the progress I've made. If I keep this up, I'll be debt free by next summer.

I'm worried about the holidays coming up, though. Every year, my list of people to buy for gets longer. If we exchange gifts one year, we have to the next -- and it can never be something noticeably cheaper than last year's gift. I even buy gifts just to stash in the closet, just so I have something to pull out when people drop by with surprise presents.

How can I keep from maxing out my credit cards this year without feeling like a Scrooge? -- Tiana

Answer for the expert

Dear Tiana,
Oh, the ever-expanding Christmas gift list! I know how that goes -- a fun little gift one year given with the best of intentions leads to decades of gift exchanging that turns into anything but fun. It's madness.

I got the most delightful e-mail from a friend this year. She said, "Let's not exchange gifts this year." She noted that our kids are older (at ages 28 and 30, they won't cry if I don't send a toy), and we both have new daughters-in-law to shop for.

So we've called a truce. I won't send to her and her kids, and she won't send to mine.

The gift list isn't the only thing that expands year after year, however. Christmas card lists get longer and longer. Once you're in a card database, you'll probably get their cheery missive from now until you die -- or after. (I've been guilty of addressing a card to the long-deceased before. Fortunately my husband caught it before it was mailed.)

Here are some ways you can enjoy the season without racking up a lot of credit card debt:

  1. Try my friend's tactic of calling a truce. If that's too formal, casually mention to friends that you're cutting back this year so nobody has to feel guilty about not buying so much.
  2. Watch out for personal spending. Malls are dangerous, especially with all those sales going on. Am I the only person who comes home from "Christmas shopping" with things I happened to find for me?
  3. Shop online. It's easier to compare prices, and you'll be less tempted by store displays of things you don't need. And the shipping will probably be offset by the gas you don't use.
  4. Scale back the card list and save on printing and postage. Do you even know everyone on your list? It's OK to delete a few names every year. If you have more than 50 or 60 addresses on your list, you can probably cut back.
  5. Make a few homemade gifts. Food is always a hit, and you don't have to worry about it gathering dust!
  6. Shop locally. Get to know your local craftspeople. They probably have online sites, too. It's nice to give something your relatives across the country can't buy at their chain store.
  7. Get the most from your holiday lights and decorations. More isn't better. Stringing a few lights won't make a noticeable difference on your electric bill, but lights you can see from space will. Estimate your holiday lighting bill with this Energy Cost Calculator.
  8. Celebrate locally. The community production of "The Nutcracker" is not only cheaper, but it's more personal and you can actually see the actors. The parking will probably be free, and you might even know someone in the cast.

I'll still get plenty of shopping in for the most important people on my list. I actually enjoy gift shopping, which I think is done best with a friend and plenty of latte stops. It's the most fun before the crowds get too big or panic sets in, while you can still take time to admire the decorations and critique the Christmas music together.

Enjoy your friends and family this season -- preferably in front of a fire with a cup of homemade hot chocolate. Sometimes agreeing not to give so many gifts is the best gift of all.