First, the bank earns the higher transaction fee forced on the retailer to pay.

The rules stipulate that you use the debit card as a credit transaction without using your PIN. If you use your debit card as a debit card with your PIN, it is an online transaction that is debited from your account right away. The bank charges a small fee per transaction. It is minimal.

However, if you use as a credit transaction, it goes through the Visa and MasterCard system as a credit purchase and is an off-line transaction. The bank can then charge interchange fees of say 1.79% (current national average) on the entire purchase. Say you charged $200. As a debit transaction, it might cost the retailer 10 cents. As a credit transaction, the retailer would be forced to pay $4 to the bank (assuming a 2% transaction fee). Therein lies the big difference.

Second, the bank makes big bucks in overdraft fees. The Center for Responsible Lending estimates that banks could earn as much as 38 billion dollars this year in overdraft fees. That is a big business. A large majority of those fees were generated by mistakes from debit cards. Thus, banks offer promotions to consumers that promote heavy use of debit cards. Personally, I think debit cards are a mistake waiting to happen. It is so easy to use that card without really knowing if the accounting on your bank is accurate. You might forget to write things down.

Also, if it is true that banks sometimes “order” when transactions are paid, then they can figure out which transactions to pay first to rack up the most fees. By the way, this was proven to happen in a special report by USA Today.

So, don’t be impressed that Chase is willing to pay out more than $3 million in winnings. They can afford to do so given the crazy amounts of money that they will make.

What about those of you that aren’t carrying a balance?  Do you close down the card?  Many listeners want to take that route.  For one, they don’t want to pay the fee.  There is also a feeling of getting back at the card company by not being a customer anymore.  If you are wanting to close a credit card because of the addition or increasing of a fee, I would think twice for the following reasons.

1)  By closing your card, you could adversely affect your credit score.  I certainly wouldn’t close down a high credit limit card.
2)  We live in a finance based society that looks at your credit score (right or wrong) as the ultimate grade of your financial responsibility.  It is always going to be important to keep your credit score as high as possible.  Potential employers look at credit scores as well as insurance companies use it to determine your insurance rates. A good score is important.
3)  It is the new cost of credit and one we are going to have to deal it with because of my first two points.

If you are wanting to close down those accounts, think twice.  If you weren’t carrying a balance, the credit card company will be happy to see you go.  You will end up more than likely hurting yourself.

I came across an article that told a pretty outrageous story about a guy who received his new credit card in the mail.  It was for a First Premiere MasterCard.  He looked at his new terms and conditions and it had an interest rate of 79% and no, that is not a misprint.  I decided that I would go online and check out this card.  I didn’t find a 79% interest rate.  I doubt that they advertize that one.  However, I found something much worse.

Now keep in mind that an interest rate represents the cost of holding debt.  If you add in fees and the interest rate, you would get the total cost of holding the card.  That would be the ultimate interest rate.

If you take out this card, you get charged these fees and interest rates:

9% interest rate

$29 one time account set up fee

$99 one time program fee

$48 annual fee

$7 monthly service fee

$25 if they decide to raise your credit limit

Your initial credit limit is $250.  When you receive your first bill, you would have a balance of $185.  If you kept the card for the full year, you would have paid $268 in fees plus interest of 9.9%.   If you say yes on the phone to the card, you are automatically on the hook for $185.  If you don’t pay it, you are eventually going to default and go into debt collections.  As long as you keep the card open because you might not be able to pay the $185, you will be charged $7 a month. 

Unfortunately, these cards are typically what people with low credit scores have to resort to in order to establish credit.  If you really figured out the total interest, it would easily surpass well over 100%.  That would be if there were any credit limit left over after the fees.  Do you think that we need some reform?  The politicians allow this type of thing to happen.

So it stands to reason that if an account is closed or a credit limit is decreased, your utilization ratio could increase. Let’s go back to the previous example. At this point you are using $10,000 of the $20,000 credit limit that has been given to you which makes your utilization ratio 50%. Let’s say that the credit card company decreases your credit limits by $5,000. Now you have $10,000 worth of debt and in total $15,000 of credit limit. Now your credit utilization ratio is 66%! OUCH!!

Of course, credit scoring is formula based and depending on what is on your credit report determines the positive or negative impact on your credit score. FICO just did a study to determine how the credit scores of consumers are affected when credit limits are reduced and accounts are closed. The results were a little surprising. They basically took consumer credit reports and ran hypothetical scenarios. The moderate scenario decreased credit lines up to 10%. The medium scenario decreased lines up to 25%. The severe scenario decreased credit limits up to 50%. Here were the results:

Moderate Scenario – 84% of those tested had no change in their credit score

Medium Scenario – 68% of those tested had no change in their credit score

Severe Scenario – 56% of those tested had no change in their credit score

Of course everyone’s credit report is unique. The effect of a closed account or a decrease in credit limits could or could not negatively effect your credit score based on the overall credit profile, the % reduction, and/or whether the reduction or closure causes the consumer to miss payments or take other actions.

Here is the bottom line of when you should and should not close an account. Obviously, a credit limit decrease is out of your control.

RULE OF THUMB

Only close a credit card account in the event that it allows you to keep a favorable interest rate. If by keeping it open your interest rate goes to 30%, then let them close it. Otherwise there is not any significant downside to keeping your credit card account open.

“There is a phenomenon happening in the United States of America,” said Orman. “It’s where people are getting seriously angry, so angry at their banks, their credit card companies. They feel like they are not being treated fairly when it comes to the interest rates they are paying. Guess what they’re doing: They are staging a debtors’ revolt. Oh yes, a debtors’ revolt.”

The debtors’ revolt started with Ann Minch, a 46-year-old woman in Red Bluff, Calif., who declared via YouTube that she would not pay off her credit card debt after Bank of America hiked her interest rate.

When you are on the radio or especially on TV, you have a certain amount of responsibility to monitor what you say. Suze Orman is getting on the same side of the table with the lady who is walking away from her debt because she is “revolting.”

So, let me get this straight. She is giving PR to a lady who is not paying her debt because that mean old credit card company raised her rates. Well, Ms. Minch, life just isn’t fair now is it? I am wondering if Ms. Minch read the Bank of America agreement prior to signing on the dotted line giving the credit card company the right to do whatever she wants to do?

Suze Orman is condoning this lady’s behavior of walking away from the debt as well as justifying it. Now to be fair, I am basing this on a 3:34 minute clip that I saw. I am hopeful that she was responsible enough to tell her viewers at some point that walking away from your debt is truly a bad idea at best. If she is going to run that segment, she should be saying it every 3 to 4 minutes. At any rate, I think that it is highly irresponsible to give PR to such an idea when she could be encouraging many people to walk away from their debt.

So, Suze what are you going to advise your followers when the consequences set in after they walk away from their debt? What are you going to tell them to do when they are dealing with debt collectors, possible law suits, and trashed credit scores?

This is the problem with this country. No one wants to take responsibility. Like it or not, you signed the bottom line on that credit card account. You bought the big screen television. Oh and…life isn’t always fair. However, you have to live up to your responsibilities and obligations. We all know the credit card industry is crooked. However, getting mad at them will do you no good. You granted them all of the power when you signed the bottom line which said in fine print that they could do these things to you.

If you want to get mad, revolt at the politicians. They are the ones truly responsible for this mess today.

Well, it was announced today that they were going to start charging annual credit card fees ranging anywhere from $29 to $99 a card. According to BofA spokesperson Betty Reiss, it would initially affect about 1% of the bank’s credit card customers. “We’re testing this to see what the feedback is. In terms of any plans going forward, we haven’t made any decisions yet,” said Reiss.

Ms. Reiss, what do you think you are going to hear? “Oh thank you Bank of America for charging me fees. Please charge me the highest fee.” Some of the things that come from the communications department of Bank of America simply amaze me. Here is some feedback Ms. Reiss – I think that it stinks you are sticking it to your customers with fees as high as $99 a year.

This gets even better. Who do you think is going to get charged the higher fees? According to the bank it is based on “risk and profitability.” Does that sound familiar? They are going to slap the higher fees on those that pay on time and don’t accrue any interest or those who are late every once in a while. It is the same old abusive credit card practices disguised in another way.

So let’s do the math on this one. They have approximately 80 million credit cards in circulation. Let’s say the fees average $50 per person. That is an extra $4 billion dollars a year in cash once they get through charging fees to everyone. You can’t convince me that BofA will just charge a portion of their customers. Of course, that is just the introduction of that fee. The new consumer abuse in the world of credit cards will shift from raising rates to introducing new fees.

Now, let’s add in the fact that they have already raised the interest rates on their credit card holders and then changed them from fixed to variable. So, when interest rates go up (which is really the only place they have to go), Bank of America credit card holders will also experience a similar rise in their interest rates on their credit card debt. As a result, Bank of America ranks in even more in interest.

As I have said from day one, Congress did the credit card industry a favor with this credit card act. This is only going to be more profitable for these card companies.

With banks catching all of this “outrage” from the politicians about abusing consumers before the credit card act goes into effect in February, Bank of America announced that they would freeze all interest rate hikes on credit cards prior to the new act going into effect.  Now, is Bank of America really doing something good for its customers?  Well, it is a brilliant public relations move for Bank of America.  However, my assumption is that BOA has already made all of the changes that they intended to make months ago.  Thus, they had nothing to lose but go ahead and make the friendly gesture.

Then there is Wells Fargo.  They just announced that they would stick it to their customers with rate hikes of 3%.  This is one of the greatest opportunities afforded the credit card companies by our politicians (you know the ones who are “outraged?”).  They are giving credit card companies the excuse to raise rates and then change the interest rates to variable rate cards.  Now the interest rate can go up every time the benchmark increases.  So they raise the base rate of the credit card and then allow it to go higher as the benchmark interest rate increase.  Guess where interest rates are going?  You guessed it!  The higher probabilities are that interest rates are going up.  As a result, credit card companies are going to make more money.

Don’t you just love it when the politicians step in and “reform” an industry? I still think that the credit card industry is going to get the better end of this deal.  Of course, that works out pretty nicely for the politicians – more political contributions!!

That is pretty impressive.

Well, just like everything in the debt solution business, it is an illusion. Here is the secret behind what they do for the hefty fee that is charged. The Fair Credit Act states that you can dispute any item on your credit repair that you deem to be incorrect and should not be on your credit report.

The questionable credit repair companies advise you to dispute everything on your credit report regardless of whether it is correct or not. In other words, if you have a bankruptcy on your credit report and know that it is legit, they advise you to basically lie to the credit reporting agencies and tell them that it should not be on your report. This is not against the law. However, it is highly unethical.

Why do they do this? Once the credit reporting agencies (TransUnion, Equifax, and Experian) receive the dispute, they then have 30 days to investigate the dispute. During the 30 days they contact the creditor and investigate. If the creditor doesn’t respond, then they have to remove the item.

Is it gone for good? Was the credit repair company successful? No, nothing unethical is that simple.

Eventually the creditor responds and the item goes back on the credit report. It was never permanently removed. It was only suppressed.

Now as far as the credit repair companies that are doing it right…you still don’t need them. Credit “improvement” and not repair (you credit score is not broken) is not rocket science. Unless you have extra money lying around to pay their fees and are completely uninterested in doing something that is easy, you can do it yourself for free.

In my book Deceptive Money, I take you on a step by step journey through the process. Anyone who has read the book agrees with my findings. This is something you can easily do for yourself effectively and ethically.

The politicians can meet all they want on this matter. It will make no difference for two reasons:

(1) Most credit card companies took care of the changes as soon as they could

Once the credit card companies knew they had a window, they acted fast. There are few companies that haven’t taken care of necessary changes and rate hikes before they can no longer raise rates at will (February 2010).

(2) Credit card companies are already making the necessary changes due to the credit card act

Credit card companies said that they wanted time to adjust their systems for the changes required by law. Thus, they started that process a long time ago. With all of their rate hikes out of the way and their systems ready to go, making these laws go into effect in December versus February 2010 makes no difference.

No, this is more wasted time by the politicians to make us think that they are acting in our best interest. The best quote of the day comes from the honorable politician Barney Frank.

Frank said at a press conference last week that he was “disappointed” in card firms, who he said had asked for a nine-month delay in implementing the rules, only to use that time to push through rate increases and other charges for customers.

Me too, Barney…I cannot believe that those credit card companies who have been abusing consumers under your watch for years would actually take advantage of the situation and raise rates. I can see why you are “disappointed.” However, I can understand your “disappointment.” After all, you and your other politicians have been ignoring all of those abusive credit card practices (while taking their campaign contributions) to the point that you probably just pretended it never happened at all (must have helped you sleep better at night). The audacity of those mean old card companies to tell you politicians that they needed those 9 months to set up new system when in fact, they took further advantage of consumers. Who could have seen that coming?

I hope your voters (you know, the ones that you talked down to in town hall meetings) aren’t as blind. If not, you might not get re-elected. What does a career politician do when they are not re-elected?

We were told by a friend who works in hospital insurance processing that we don’t need to worry about this other $1,000 or so owed, because hospitals “build this into their budget” and if it gets turned over to a debt collector, it is an in-house collector and nothing that can go on your credit report.  Is this true?

A:  Unfortunately, your friend is not correct on that one.  Debt solutions companies will tell you that you legally have the right to lower the amount that you owe in debt or you are legally entitled to have your interest rates cut in half.  In fact, there are all kinds of crazy myths floating around out there.  The reality is that if you incur a debt, you will always owe that debt no matter what.  Here are your rules of thumb when it comes to your “entitlements”:

1)  You are always liable for any outstanding debt that you owe.  That liability never goes away.

2)  You always run the risk of getting sued over a defaulted debt if you are within the statute of limitations period which is set by each state.  In Texas, a creditor or debt collector can file suit within the first 4 years of the first missed payment that caused the debt to go into default.  Always verify your statute of limitations period in the event there is a lawsuit filed.

3) Even though you can have a debt removed from your credit report after 7 1/2 years following the first missed payment, you still owe the debt.  

3)  When you owe money, you are not legally entitled to anything but a fair debt collection process. That is offered by the law.  If those rights are violated, a consumer should take legal action.

Unfortunately, there are no easy ways out.  However, there are effective ways to get out of debt.  Read the New York Times blurb about Deceptive Money.

http://www.nytimes.com/aponline/2009/08/28/business/AP-US-Bookshelf-Roundup.html