Why the new fee?

According to the article, the fee is in response to a part in the Dodd-Frank Financial Reform Bill that will limit the amount banks can charge businesses for transactions (“swipe fees”). Those fees have been capped at $.24 per transaction. They are currently $.44 per transaction. This change will supposedly cost banks $6 billion per year in lost revenue.

What’s funny (maybe funny is the wrong word) is this quote from Dick Durbin:

Sen. Dick Durbin (D-Ill.), who championed the legislative provision that led to the caps, said in a prepared statement: “After years of raking in excess profits off an unfair and anticompetitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It’s overt, unfair, and I hope their customers have the final say.”

Come on, Dick! Do you honestly think banks will just accept $6 billion in lost revenue? HARDLY! This is simply another case of how government involvement leads to unpleasant consequences (I was going to say “unplanned consequences” but I can’t see how new customer fees could be an unplanned consequence of new regulations).

This is a relatively small issue for me but one of the retailers I visit, Spec’s Liquor, has a two-tiered system for charging customers. Customers who pay with cash or debit card, receive a discount. Those who pay with credit card, do not. So, I’ll either have to pay with debit and incur a banking fee, pay with cash (I seldom carry cash), or use my credit card and forgo the discount.

I am happy to report that Christopher Dodd, Barney Frank, and Dick Durbin will be happy to reimburse you for your fees. Just send them the bill. (Unfortunately, that was a joke.)

Their nine reasons:

1. Financing your purchases doesn’t teach self control.

2. Financing your purchases means you aren’t sticking to your budget.

3. Credit card interest rates are expensive.

4. Credit card interest rates increase when you can’t pay off your balance in full.

5. A poor credit score can affect your insurance rates, being accepted for a job or the ability to finance meaningful purchases like a home.

6. Poor financial habits can jeopardize your relationships.

7. Financing purchases can lead to higher spending.

8. In a worst-case scenario, the habit of financing your purchases can lead to bankruptcy.

9. Avoiding financing can bring peace of mind.

I agree with all of the above. BUT…

A smart person can use credit to their advantage. If you have the option to pay cash or get 0% financing, check to see if you can get a discount for paying cash. If not, take the 0% offer. Then, put the cash in an interest-bearing account and set up automatic payments to pay off the purchase within the interest-free period. Sure, interest rates aren’t good right now but you will earn a little something.

Although mismanaging credit can hurt your credit score, managing credit properly (rather than not using it at all) can help it.

• Reasonable penalty fees. The new fee can’t be more than $25 unless you have been late within the last six payments, in which case it can be up to $35. I fail to see how this is going to motivate people not to be late.

• No more inactivity fees.

• No more multiple fees for the same transaction.

• Rate increases must be accompanied with an explanation.

• Rate increases must be evaluated every six months to see if a lower rate is appropriate.

I saw a commercial today for a company that made the claim that “debt settlement is YOUR RIGHT,” and that people can “drastically reduce” their balances. This kind of stuff gets on my last nerve. I think that people should have to dump most of their material possessions first and THEN the balance can be reduced to whatever acceptable level (this still bugs me but at least people wouldn’t be getting off too easily). Of course the glitch in my idea is that not all credit card purchases are for material goods.

Anyway, overall, I think these changes are okay. I never liked inactivity fees. Late fees are totally okay by me. If you don’t want a late fee then pay your bills on time. It’s not that hard to figure out.

I did see on Instapundit this morning that one of the consequences of the CARD Act is higher interest rates on credit cards. Let’s face it: banks are going to make their money one way or another.

• credit card debt around $15,000. Interest rates of 19% and higher.

• 401(k) balance of $16,000 from a former job. No other retirement savings.

• will not be able to contribute to his 401(k) until next year.

• he has an extra $1,000 per month that he could put towards paying down his credit card debt. (I’m not sure what he’s currently doing with the $1,000.)

Here’s what I told him to do:

1. DO NOT LIQUIDATE THE 401(K)! Why? Because nearly $5,000 would be lost to taxes and a penalty. Not only that, he’d be losing out on the future growth of his 401(k).

2. I would then commit to paying $1,500 (using the $1,000 mentioned above plus current credit card payment amounts) towards paying off the credit card bills. I did some quick math and found that he could have his credit card debt elimated by February of next year:

It’s amazing how quickly interest charges can come down as long as you pay a sizeable amount each month towards the balance.

3. Then, about that time his credit card bills are eliminated, he will be eligible for the 401(k). I would then contribute $1,375 per month to the 401(k), which is the current employee maximum allowed.

4. LEAVE THE CREDIT CARDS ALONE!

The main thing is to have a plan and stick to it.

Now before you say, “Damn! That’s a high APR,” read this:

Department Stores National Bank, which issues the card, charges a “minimum interest charge.” On my average daily balance of $3.41, that minimum charge worked out to “an actual annual percentage rate” of 703.80%. (Part of the impact of last year’s credit reform is that the issuer had to disclose that shocker on the statement, while also noting that the card’s normal APR is 24.5%.)

Did you see it? HER AVERAGE DAILY BALANCE WAS $3.41! She conveniently leaves out what the interest charge was, which couldn’t have been more than a few dollars. I’m not sure why she’s being charged interest if she’s not carrying a balance.

Besides that, what’s she doing opening a department store credit card during Christmas? Isn’t that one of things you’re not supposed to do?

Just curious. Read the rest of the article. There’s all kinds of good material there. Oh, and the name of her column is “Devil in the Details.” Hahaha…

Credit Card’s Newest Trick: 79.9 Percent Interest

Basically, this bank used to charge $256 per year in fees on a credit card with a $250 credit limit. The new credit card laws limit fees to 25% of the credit limit. So,…the bank is now charging a $75 annual fee and is jacking up the interest rate to 79.9% on a maximum credit line of $300.

There’s no way around it, 79.9% is an extremely high APR. I ran a few numbers with a spreadsheet assuming the following:

January 1, 2009 – Get the card and immediately charge $300.
February 25, 2009 (and every following month on the 25th) – Make payment of $20.

On the statement closing date of December 25, 2009, the card would still have a balance of $284 (and this doesn’t even include the $75 card fee!).

Now, if this person were able to afford to pay $30 per month, the ending balance would be $137.

All I can say is at least the credit line is capped at $300. At least people can’t go out and charge up several thousand dollar’s worth of stuff.

Also, since the card carries a higher APR and a smaller annual fee rather than the much larger annual fee, the interest charges can be avoided by not carrying a balance.

I’m just thankful I’m not in a predicament that would require me to pay off $300 over time.

Thanks, Beth for the link!

I took the information found in that chart and made another graphic showing just how much interest a person would pay over a 30-year mortgage depending on their credit score:

As you can see, the difference is significant. Just moving from the second highest to the highest FICO Score ranges saves you nearly $10,000 in interest over 30 years (even more if you factor in growth on the $27 per month payment difference). The difference from the lowest to the highest ranges, is nearly $100,000 in interest expense over 30 years (or nearly $200 per month)!

My advice to anyone looking to finance a purchase is to first GET A HANDLE ON YOUR FICO SCORE! The $16 spent to find out your score is an investment—especially if you have no idea what your FICO score is. The information provided to you by myFICO is easy to understand. They also show you areas that are hurting your score and things you can do to improve it.

Then take the time and effort to improve your score. Remember the two most important areas of your FICO score are:

• How timely you are with your payments, and

• How much you owe compared with your total available credit.

I would keep those in mind, along with the other items that go into calculating your credit score (found here) if a major purchase in your future.

Related:

My FICO Score is 794. What’s Your Credit Score?

The 2009 Personal Finance How-to Roundup

Bureaus Roll Out New Credit Score Formula for 2009

How Long Will It Take to Improve a FICO Score?

• Remember your credit card utilization rate, which is your total card balances compared to your total credit limits. To calculate this, divide your credit card balances by the total available credit. Money recommends trying to keep it at 10% but says this will be harder to accomplish with credit card companies slashing available credit and closing accounts.

• Keep your oldest cards in play. The length of your credit history plays a role in calculating your FICO Score so it’s a good idea to keep your oldest credit cards active. This could be something as simple as putting a monthly charge on your card and paying it off monthly.

One last thing, the article included a graphic that showed what goes into a FICO Score. They had a pretty graphic but I’ll break it down for you in percentages:

• 35% How timely you’ve been with payments.

• 30% How much you owe compared with your total available credit.

• 15% How long a credit history you have.

• 10% Whether you’ve recently taken on new credit/debt.

• 10% What mix of credit types you have.

As you can see, the first two are EXTREMELY important. DON’T BE LATE and DON’T CHARGE TOO MUCH!

Related:

My FICO Score is 794. What’s Your Credit Score?

The 2009 Personal Finance How-to Roundup

Bureaus Roll Out New Credit Score Formula for 2009

How Long Will It Take to Improve a FICO Score?

I then ran my wife’s number and found out it’s 802! GEEZ…

My wife has two accounts with balances, which helped her score. The only thing hurting her score was that she has 35 accounts. I’m going to look into this one. They don’t give much information on how to fix this one.

So, what’s your score?

I received a notice: “In order to make the account more profitable,” Chase is changing the minimum payments from 2% to 5%.

No mention is made about the promotional rates – I included a question to Chase about the minimum. Their response (paraphrased) was that the promotional rates were for rates only and did not include the amount of required payments. Yes, the minimum payments were changing effective with the August statement [no mention if August payment or ending date] and if minimums were not met, the account would be in default.

Continuing, they state they are doing me a favor by accelerating the payments and reducing the amount of interest I will pay in the long run. They then state if I cannot make the payments to contact their special account number to arrange payment at the higher interest rate, or close my credit line and the full amount would become due and immediately payable.

Just to be sure, I did some checking and sure enough, Chase is in fact raising minimum payments (see here).

As many of you know, this is a double-edged sword. As is mentioned above, the new minimum payment will bring the balance down much faster than before. On the other hand, the payment will go up significantly. For example, say you have a credit card with a $5,000 balance. At 2%, your minimum payment is $100. With the new 5% minimum, the payment would go up to $250—a 150% increase. This is significant for several reasons:

1. People who are paying minimums could be doing so because they can’t afford to pay any more than that. Increasing their payment by 150% is not going to help.

2. Not being able to pay the minimum payment will cause the account to lose it’s promotional rate and the interest rate will soar higher, but the minimum payment will stay the same.

So why would Chase do this? Because of the fact that they can’t just raise interest rates like they were able to do. So, instead of raising rates, they increased the minimum payment, hoping people with promotional interest rates would default and become subject to the higher interest rates.

The article I referenced above did mention that some people were able to keep their minimum payments the same by calling Chase’s Proactive Solutions department (1-800-404-6220). The downside is that they will close your account, which could affect your credit score.

Of course the best thing to do is pay off all credit cards. But, I realize that that’s not possible for lots of people.

So, have any of you experienced anything like this?