I should have a credit score of over 800 for the best rates, right?

Well, not necessarily.  FICO scores range from 300 to 850; most lenders have a minimum score required for loan or credit card approval, typically in the mid 600s to lower 700s right now.

Yes, it is true that the higher your score, the better your interest rate….up to a point.  As you can see on the interest rate chart on the FICO site, every 20 points can mean a lower rate on mortgages and every 40 points can be a lower rate on auto loans. 

However, after a certain point in the 700s, there is no better rate – you are already getting the best rate lenders are offering.  So a 770 is just as good as an 805 when it comes to interest rates.

Now some people just like the feeling of being able to say they have an 800 FICO score.  And some people feel they should have it just because they are good customers.  It doesn’t work that way, though.  So they’ll have to settle for a great interest rate and know that their chances of reaching 800 get better over time, with good credit building habits.  Click here to find some good habits to start today.

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So what's in it for you?  That remains to be seen as the House version has some differences and the negotiations are underway for final language in the bill.

Some key points that may be included are:

Retroactive Rate Hikes
Existing balances on credit card accounts have to stay at the same interest rate even if the rate on the card changes.  The new rate would only apply to balances from that point on.

Advance Notification
Changes from a 15 day notice to a required 45 day notice from the account issuer for significant interest rate, fee and finance charge increases.

Payment Allocation
Credit card companies usually take consumer payments and apply them to the lowest interest rate balance on the account.  This bill would have any payment in excess of the minimum due be applied to the highest rate balance first, then other balances in descending order of interest rate.

Promotional Rates
Any introductory interest rates must be offered for at least six months.

Due Dates
Credit card statements must be mailed 21 days before the bill is due, an increase from the current 14 days.  Holiday and weekend due dates must be extended to the following business day.

Over-the-Limit fees
If you charge above your credit limit, the issuer approves the transaction and adds on an “over-the-limit” fee.  This bill states that consumers must opt in for over-the-limit approval and associated fees.

Universal Default
Both versions of the bill eliminate this practice, which allows a card issuer to raise interest rates if you have late payments on other accounts with other companies or have other negative information on your credit report.

Penalty Periods
If you have a late payment and your interest rate goes up, the Senate bill states that you can reclaim the lower rate by paying your bill on time every month for 6 months.

Account Closings
The House bill requires a credit card issuer give you 30 days notice before it closes your account. 

Cards for Young Adults
The House bill wants no cards issued to un-emancipated minors under the age of 18 unless a parent is the account holder. It places limits on college students to just one credit card, sets credit limits to a percentage of the student’s income and requires parents to approve increases to credit limits on joint accounts.
The Senate bill wants to totally eliminate credit cards for people under the age of 21 unless an adult co-signs or they can show proof of income.

Gift Cards
The Senate bill states that gift cards cannot expire in less than five years. Retailers selling Visa, MasterCard, American Express or Discover-branded gift cards will be required to print information about dormancy fees directly on the cards.

WHEN WILL IT TAKE EFFECT?
The Senate bill is supposed to take effect nine months after passage; the House bill twelve months.  So even though there is a lot of attention to this legislation as it works its way through the process, it does not mean immediate relief for consumers who are faced with major account reductions, interest rate hikes, and closed accounts with notice after the fact.

ONE FINAL NOTE
Many of the items included in these bills have already been approved by the Fed and are scheduled to take effect in July 2010.  See the complete article from last December here.

Stay proactive with your credit monitoring, pay all your bills on time to help keep your good credit.  If a credit card gets closed or the credit limit reduced, call the company and ask if it can be reinstated.  Sometimes the automated process they use includes consumers that shouldn't be included and some people are actually getting their account reopened and/or their limits increased or restored.

Universal Default is a term for a practice used by the financial services industry.  This practice consists of a lender changing the terms of a loan from the original terms to default terms when that lender finds out that their customer has defaulted with another lender, even if that customer was not in default with the first lender.  Traditionally, the default terms and interest rates, sometimes up to 30%, apply to customers who have missed payments on their loan or account. 

This practice began in the mid-1990s with the increased deregulation of the credit card industry.  Now about half of all banks that issue credit cards include Universal Default terms in the fine print.  However, since the practice started, most credit card companies have not regularly enforced these terms.  Remember, these are not typical times and things are changing.

In 2007, Citibank became the first bank to voluntarily eliminate its universal default provisions with some other card issuers following suit.  However, the move did not give Citi the competitive edge it had hoped for and in the summer of 2008 the New York Times ran an article about the possibility of Citibank re-instating it. 

WHAT IT LOOKS LIKE
The Universal Default Language may not be easy to identify in all the small print of the credit card terms and is not usually given the “Universal Default” title.  It may appear as some version of this:
We may change the rates, fees and terms of your account at any time for any reason.  These reasons may be based on information in your credit report, such as your failure to make payments to another creditor when due, amounts owed or the number of credit inquiries….

WHAT TRIGGERS IT
SAME ACCOUNT: Late payments, bouncing a check sent in for your payment, or going over your credit limit can all trigger default terms on your credit card account as standard operating procedure in the financial industry.

WHAT TO DO
1) Make all payments for ALL your bills on time to reduce the risk of qualifying for the Universal Default.
2) Keep credit balances under half of the credit limit.  This has the added bonus of helping your scores.
3) Monitor your credit report regularly.  Make sure there are no errors which could trigger the Universal Default.
4) If your interest rates go up, call the credit card company to find out why and request that your previous rate be re-instated.  NOTE: This may not work as financial institutions are looking for revenue from all angles.
5) Pay off the higher interest rate accounts as soon as possible to help your budget.
6) Don’t close the accounts when they are paid off.  Order your Personal Credit Building Plan from us as part of your Credit Analysis to learn how to use your credit accounts as effective credit building tools.

The OTS summary states the following rules:

1) Interest Rate Changes – Companies must provide a 45 day advance notice before increasing interest rates.  They cannot increase a rate on existing balances until the consumer is more than 30 days delinquent on paying the credit card bill.  Credit card interest rates seem to be changing overnight and without warning; this is designed to require some notice and to reduce the penalties for a payment that is just a few days late.

2) Reasonable Time To Pay - Companies cannot treat a payment as late unless the consumer has a “reasonable amount of time to make the payment”, considered to be 21 days.  This should limit the occurance of a late fee on bills that are due almost immediately upon receipt of the statement.

3) Payment Allocation – The new rule requires credit card payments in excess of the minimum amount due to accounts with different annual percentage rates (APR) be allocated to the highest interest balance or proportionately to all balances.  Consumers generally have no choice as to which APR balances get paid down first, and most credit card companies apply payments to the low or zero interest rate balances first.

4) Double-cycle Billing – Also referred to as “two-cycle” billing, is now prohibited.  This means consumers cannot be charged finance charges based on balances associated with previous billing cycles.  Some companies figure in the previous month’s charges, even if the balance was paid in full.

5) High-fee Subprime Cards – Prohibits the charging of fees to open a credit card that consume the majority of the credit limit on the account.  Fees exceeding 25 percent of the available credit must be spread over no less than the first six months that the account is open.  They can still charge the fees, just not all at once in the first billing cycle.

SUMMARY
This is a topic that will be updated as more information is released and available.  It sounds like the government may get some good PR from it, but the delayed start date along with some of the soft language may not mean much to consumers today.  And we’ll need to wait and see how much, if any, enforcement will be forthcoming from the federal regulators.  Hopefully we’ll see more opportunities for consumer recourse with these regulations than we do with the Fair Credit Reporting Act. 

CREDIT CARD STATEMENTS
Look at your credit card statements every month to be sure all of the activity on the account is yours.  Unknown charges could be an indicator of fraudulent use and/or identity theft. 
- By contacting the credit card company to report fraudulent charges immediately, you should not be responsible for paying any of those charges.
- By catching identity theft early, you will minimize the amount of time and money spent trying to correct it later.  The chance of a fraudulent account going unpaid and to a collection agency is also reduced.  Collection accounts, whether legitimate or not, are a derogatory item against your score while they are listed on your credit reports.      
Errors do occur
- If there is a duplicate charge for the same item, it raises your account balance which makes your payment higher and also affects the second largest part of your credit score, the balance-to-credit-limit. 
- If your payment is not listed on the correct date, you may receive a late fee and it possibly could end up as a late payment on your credit report, negatively affecting the largest part of your score, your Payment History.
- If you were charged a fee in error, contact the company right away.  Request written confirmation of the correction and be sure to write down the date, time and name of the person you spoke with.

Changes to your account
Some credit card companies are raising interest rates, even on customers with a good payment history. 
- Contact your company and request a lower rate; emphasize your loyalty and timely payments.  You may have to talk to several people before getting to the one that can make a decision.  Keep a written record of the conversation and when they agree to a lower rate, request it in writing.

Some of these companies are lowering credit limits on long-standing accounts, often with no prior notice.
- A lower limit on an account with an existing balance can drastically change your balance-to-credit-limit, impacting your credit scores.

BANK STATEMENTS
Banks are among the many companies raising fees to increase their bottom line.  Check your statement to be sure you are not being charged for fees that you shouldn’t have.  A recent article in the Wall Street Journal highlighted the $25 monthly fee that was being charged on the “free” checking account.
- Contact your bank immediately to request the fees be removed and the charges reversed.  As always, get it in writing to protect yourself.
- Ask for an account review to be certain that you are receiving the best services available for your type of account usage.

BILLING STATEMENTS
Solicitations for products and services often look like legitimate bills that arrive in the mail.  And these companies are counting on most people being too busy to read all the fine print on the statement or too worried about having an unpaid bill to check into it further. 
- Don’t just pay a bill if you do not recognize it immediately.  Take the time to investigate the statement before sending a check.

This applies to business owners, too.  The Arizona Republic reports on a scam that is targeting businesses by sending a notice that corporations need to file their “Annual Minutes Disclosure Statement” along with a bill for $125.  None of this is legit, although it looks and sounds real.  And people send in their money thinking they need to do so to stay in compliance.
- Always read your billing statements, especially if you are a business owner.  Take the time to contact the actual government agency if you receive something you are not sure about; or contact the Better Business Bureau for verification.

You can grow and protect your good credit by following a Personal Financial Fitness Plan.  We can provide detailed information to help your credit rating with your Credit Analysis.  And keep reading those statements.

As personal budgets get tighter and the pursuit of savings and good deals becomes more important, people are often enticed by the checkout clerk’s offer to “save 10% (or 15 or 20%) on your total bill today by opening one of our charge cards; it’s easy to do and only takes a few minutes”. 

Sound familiar?  Most of us have heard those words before.  And there is the temptation to save some money and postpone the payments for a few weeks or a month to save your precious cash.

Here are some things to consider before you sign on the dotted line to save a few bucks.                  

1) Every time you authorize someone to check your credit, it shows on your credit report as a Hard Inquiry.  These Hard Inquiries will stay on your report for two years and can count from 1 to 12 points EACH against your credit score.  So if you have a marathon shopping day and apply at six different stores, you could potentially drop your score more than 70 points.

2) Just because you apply does not mean that you will get the credit card.  However, the Inquiry stays on your credit reports for two years whether you get the account or not.

3) Many retail credit cards have double-digit interest rates.  That $200 purchase you opened the account for to save 10% ($20) could end up with much more than $20 in interest payments if you pay the balance off over time.  Always read the fine print in the agreement before applying and know what you’re getting into.

4) If you are planning a major purchase in the next few months such as a home or auto loan or a mortgage refinance, keep in mind that most lenders look at your DTI, debt-to-income ratio.  Credit card accounts with balances will likely be included in your debt total.  Also, in addition to the hit your scores take from the Inquiry, opening new accounts usually causes a slight drop in scores for the first few months after the account is opened. 

So the interest rate on your future loan could be much higher due to a lower credit score.  This can add up to thousands of dollars over the life of the loan and would certainly wipe out any $20 or $30 savings from opening that new retail store credit card.

Be credit smart and shop wisely.  Order your personal Credit Analysis that includes strategies for increasing each of the five parts of your credit score.

One thing to be aware of is the “Universal Default Policy”; this clause is often found in the fine print of your credit card agreement.   This policy allows the credit card holder to increase a customer’s interest rate if there are late payments or other derogatory items on ANY of the customer’s accounts that are reported to the credit bureaus.  That’s right – not just the credit card with that company, but ANY other company that reports a late payment can trigger the much higher Universal Default interest rate.

Yes, companies you do business with are checking your credit regularly.  You can see who and how often when you check your own credit report by looking in the Soft Inquiry section, also listed as “Inquiries Shared Only With You”.

The best defense is to be proactive with an effective Credit Building Plan to keep your good credit rating.  Learn how you can have a positive impact on the five parts of your credit score.  The number one part of your credit score is payment history.  By paying all bills on time, every single time they are due, you are well on your way to building good credit and avoiding the Universal Default.

Examine all parts of your Financial Fitness plan and make a commitment to your financial future.   We are ready to provide the accurate and effective information when you need us.

1) CHANGE YOUR MIND

-Decide that you want to be debt free and have no credit card debt.  This includes major credit cards, retail store accounts and gasoline cards.  Be realistic and realize that this will take time and probably will not be easy.  Remind yourself of your long-range financial goals to keep motivated and on track.

-Credit cards are not money, they are convenience loans.  There is no federal limit to the interest rate that credit card companies can charge and many states do not have usury laws, meaning there is no state cap on the interest rate. Eight of the top ten credit card issuers have their charter in states with no usury laws.

-Credit cards are not free, they cost you money.  Many credit cards charge an annual fee; others require a minimum, monthly payment of less than 5% of the account balance.  This can lead to a longer period of time before the account is paid off and subsequently, more interest charges over that time.

2) CHANGE YOUR HABITS

-Do not carry your credit cards.  There will not be an emergency that requires you to have every single credit card with you in your wallet.  This also decreases your chances of being the victim of fraudulent credit card use or identity theft.

-Do not use a credit card for something you do not have the cash for at that moment.  A $500 impulse purchase can cost $625 or more when it finally gets paid off several months later.

-Pay all bills on time, every time.  Especially credit card accounts.  Many companies have included the “Universal Default Policy” in the fine print of their credit card agreement.   This allows them to increase a customer’s interest rate if there are late payments on ANY of the customer’s accounts that are reported to the credit bureaus.  Not just the credit card with their company, ANY other company that reports a late payment can trigger the much higher Universal Default interest rate.

3) MAKE A PLAN

-Stop using the credit cards you have so that you stop accumulating more debt.  If you do not have a budget, make one and stick to it.  Give yourself a certain amount of cash each week and hold yourself accountable to only spending that amount.  Remember your long-term goals are more important to your financial fitness plan than short-term impulses are.

-Contact your credit card companies and request a lower interest rate.  Some online research at sites such as bankrate.com will show what offers the major credit card companies are giving to new customers.  As an established, loyal customer, you can use this information to ask for at least that same rate on your existing accounts.

-Pay off your highest interest rate accounts first.  Pay more than the monthly minimum, even if it is only $5 more.  Do not close credit card accounts when they are paid off.  A major factor in FICO credit scores is the utilization ratio, which is account-balance-to-credit-limit.  Closing accounts decreases the available credit, which makes for a higher ratio and lower scores. 

4) FOLLOW YOUR PLAN

-Continue to use your budget and keep your spending under control.   Once you have eliminated credit card debt, establish your “Smart Fund”.  Start with a goal of at least $1000 in a savings account that can be used for emergencies or unexpected items such as a new car battery or plumbing repair.  Using the Smart Fund instead of a credit card saves money and keeps the credit card debt from returning.  Replenish your Smart Fund as soon as possible.

- Shred the “convenience checks” that credit card companies send to you.  Do not open any new credit card accounts; consumers with long established, good credit do not need more than 3 – 6 open, revolving accounts.

Becoming credit wise and learning how to use credit cards as credit building tools can lead to a better financial future, more money in your pocket and peace of mind.  Contact us today to get your personal Credit Building Plan.