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August 18, 2009, 5:00 am

Credit card perks ups and downs – why business relationships have to be fair

by: The Financial Blogger    Category: Credit Rating & Credit Bureau

This is a guest post by Mr Credit Card from www.askmrcreditcard.com. He reviews credit cards (lots of them) and knows quite a bit about the industry. If you are looking for a new card, he has compiled a list of the best credit card deals and offers.

Just last week, Mike had this post about watch out rate shoppers. He mentioned how he hated it when rate shoppers called him “just for a rate”. What ends up happening at the end of the day though, is that rate shoppers get lousy service. But this is a typical pattern for those who only want to get free service, or just the cheapest price. Businesses hate them. The savvy ones learn to NOT compete on price but on other factors. The not so savvy ones get caught up in a wave of downward spiraling price competition that just drives the business to the ground.

In my space, credit card issuers have fallen for the low cost (in their case, teaser rates) game to attract new customers. They gave out deals that were really not profitable for themselves. Consumers were savvy enough to taken advantage of them. But when the sub-prime crisis blew up everything, credit card issuers began to cut back and hurt lots of innocent folks in the process.

In this post, I would to highlight some incredible deals card issuers were offering, how they were taken advantage of, and how they are hurting every one as they realize their folly.

Abuse of gas credit cards – Gas stations (or rather the oil companies) have always made use of gas credit cards to instill customer loyalty. If you go to any gas station, you will find brochures offering their both their gas cards and gas credit cards. Typically, most gas rewards cards pay anywhere from 3% to 5% rebates when you make gasoline purchases at their gas stations. So for example, a Shell Mastercard allows you to earn 5% rebates at shell stations.

Soon, credit card issuers began to offer their own version of their gas credit cards. Rather than allowing card holders to earn rebates at one particular station, they structured their cards to allow cardholders to earn rebates on gasoline purchases at ANY gas station. To make their cards more attractive, they allowed card holders to earn unlimited rebates.

This is when the trouble started. Those who cut coupons will understand the concept of coupon stacking. In credit card land, credit card stacking involves combining various reward cards to maximize the rewards that you can earn. Well, many business owners, salespeople (who drove a lot for their sales meeting) started getting credit cards that paid rebates on gasoline purchases. But more importantly, many of them used them exclusively for gas. This became a no win proposition for credit card issuers. At best, credit card issuers make 1.5% to 3% from merchants who accept credit cards. But when most cards do not charge annual fees, customer pay in full every month and you are paying 5% rebates on gasoline purchases, credit card issuers will lose money on these cards.

So what do they do? Well, they simply put caps on the amount that a card holder can charge before they stop earning rebates on gasoline.

0% Balance Transfer Abuse – When interest rates got to rock bottom in 2002, the era of easy money was to continue for the rest of the decade (at least till now). Credit card issuers also joined in the fun by offering the classic bait and switch tactic. They started offering 0% APR if you transfer your balance from another credit card over. Their rational was simple. Once a customer signed up, credit card issuers figured that they were more likely to stick around. Well, that did not turn out to be the case. Consumers began looking at the 0% offer as another method of financing. Here was what they did.

?Consumers used 0% deals in place of a home equity line of credit

?Consumer arbitraged 0% deals by borrowing at 0% and putting it in a high yield savings account

?Consumers used these 0% deals to finance large purchases

The 0% balance transfer credit card segment became so competitive that soon, every credit card company was giving away these deals for 12 months and waiving the balance transfer fee. But rather than stick to the card that they originally got, consumers simply jumped to the next 0% balance transfer deal when their introductory 0% period expired. They simply got a new card. Soon, credit card issuers realized that these deals were unprofitable for them because consumers did not stick around. They began to reintroduce balance transfer fees and reduced the length of introductory periods for 0% APR from 12 months to 6 months.

Soon, credit card issuers were fighting back. For example, there have lots of complaints that Chase has increased the minimum payment on their cards from 2% to 5%. Moves like that where your payment doubles can be crippling for folks who do not have room in their budget for emergencies.

Issuers heavily promoting student credit cards – But consumers have not just taken advantage of credit card issuers. Credit card issuers have also way heavily promoted their student credit cards at campuses. It is one thing to promote credit cards, but another to actually pay colleges for every card that is signed up, or pay (sponsor) clubs for promoting their cards at their booth! The majority of students don’t really know about money management.

Let’s think through this for the moment. If you are a new immigrant, or do not have a credit history, there is just no way that credit cards are going to issue you a regular unsecured credit card. More likely, you may have to start off with a secured credit card. But this rule does not seem to apply to college students who (mostly) have no history and very little income! Why are credit card issuers willing to issue cards to students who have no credit history? I guess they want to get them as customers when they are young and hopefully become customers for life? (not too sure if this is really sound?).

For this one, the latest credit card bill of rights has imposed limits on the amount of credit they can extend to college students.

Give credit lines too easily, now reducing Credit Lines – During the boom years of 2003 to 2007, credit card issuers were giving excessive credit lines to many folks. Then, when the financial crisis hit in 2008, all of a sudden, they began reducing credit lines across the board. While there are folks that should not have credit lines issued to them at all, the sudden disappearance of credit has a lot of collateral damage. It is one thing to tell someone in advance that you will be cutting their credit lines. But when you cut their lines close to their present balance, or even below their balance and charge an over-the-limit fee, that borders on being unethical.

The collateral damage in this case fell on folks with great credit!.

Give teaser rates, not increase their rates! – Many folks who have gotten low interest credit cards have seen their rates increase for no reason. Very often, rates have shot up to over 20%. This has the effect of doubling or even tripling minimum payments for card holders!

Moral of the story

Any relationship has to be 2-way – Any business relationship (or any relationship for that matter) has to be a win win for both parties for it to be sustainable. In all the previous examples, the relationship was lop sided. In many ways, you cannot blame consumers for taking advantage of deals being offered by credit card companies. Going forward, perhaps more credit cards will charge annual fees, or rewards will be cut back more. But I would not worry too much as a consumer. The credit card industry is still pretty competitive. There are still many good reward cards and programs around. Just remember when something is too good to be true, it usually is and does not last forever.

Just remember that when a business relationship is too one sided in your favor, eventually, it will come back to hurt you.

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May 9, 2009, 5:00 am

A New Type of Marketing Aroused In The Banking Industry; Beware!

by: The Financial Blogger    Category: Banks and You,Credit Rating & Credit Bureau

You have already seen 24 and 36 payments without any interest when buying furniture. Even better, you can pay next year and you don’t have to pay any interest. We now have the similar type of marketing with cars with 0% over 5 years (I bought my Mazda Tribute with a 0.4% interest rate over 6 years!). And now, I just saw a shocking mortgage offer: fixed term 5 years fro 2.99% on new condos.



To put everybody in perspective, in Canada, the best deal around for a 5 years fixed rate mortgage is 3.85% as of late April. You would probably not even be able to get it from your bank but from a mortgage broker. So if the best deal possible on a fixed mortgage is 3.85%, how come they can offer 2.99%???? And the answer is….

A powerful marketing system!

The mortgage business is changing drastically in Canada due to the very low rate, poor economy and the rise of cost of funds for banks. For the very first time, it seems that some banks saw what is coming and realized that a blue suit and a red tie was not enough to sell mortgages anymore. The business has changed; it’s not an oligopoly anymore as more and more new players are working in the same industry. What happens when an oligopoly breaks? Each company needs a solid marketing plan to take advantage of this new open market.

But this doesn’t tell how they can offer 2.99% on new properties?

They are simply playing with the numbers:

Choice #1: The bank is willing to drop to 3.85% for those mortgages in order to still make money. It makes a deal with the contractor that he pays back the difference on a 5 year term mortgage at 2.99% and 3.85%. The contractor takes it from his profit and sells his condos much faster.

Choice #2: We have the same situation with the bank. The difference is that the contractor slightly increases his price in order to cover most of the gap between 2.99% and 3.85%. So the client end-up financing a higher mortgage rate without knowing… This is exactly as he does when he buys furniture at 0% for 24 or 36 months. The interest rate lies within the product! When the contractor asks 212K instead of 207K, nobody really notices as it is always harder to compare prices for a new construction. He can always bring some “builder bullshit” such as “the condo was made with higher quality materials” ;-).

This is also why you will see this kind of offering on new construction and not in your branch for a regular purchase.

I think it is a smart way to present things. However, potential buyers must keep in mind that their mortgage rate will go much higher upon renewal. Therefore, they are better off calculating their budget with a 4.5% or 5% interest rate on their mortgage in order to not get caught off guard at renewal.

As I previously said: there are no free lunch in finance!

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April 14, 2009, 5:00 am

6 Easy Steps to Make money from Cash Reward Credit Cards or Point Rewards Credit Cards Part2

by: The Financial Blogger    Category: Credit Rating & Credit Bureau

pile-credit-cardsThis is a guest post from a contributor of The Credit Toolbox. This is a blog about understanding, improving and keeping a good credit record. They write an interesting series about how to make money from cash reward credit cards. I am featuring the second part here while the first part and third part are already live on The Credit Toolbox.

2- Use your credit card for your day-to-day spending

Woah! You must be thinking that I am completely crazy. After getting on the back of Dave Ramsey, I am telling you to use your credit card on a daily basis? Maybe I am good for the nut house after all ;-). However, there is a reason why I think your cash reward credit cards should be used everyday; to get more points and cash in your pockets!!

Don’t get me wrong, I am not telling to spend more (there are people spending on their credit cards thinking it’s a great deal because of promotions…), I am telling you to use it. What is the difference? I personally think that you should use your cash reward credit card for every single purchase your make in a day. From your daily coffee to your grocery and gas in your car.

The idea behind paying everything with your credit card is that you would have paid for food, gas and other daily spending anyway. However, if you pay with cash or with your debit card, you don’t get any points or rewards back.

Where is the catch?

The catch is that you have to pay your credit card bill completely by the end of each month. You should never leave an unpaid balance on your credit card as you are paying an awful lot of interest charges on it. As you can see, this technique is not for people who have already a balance on their credit cards or have problem managing their credit cards. This is a technique for people who are in control of their personal finance.

Here’s a real example:

Let say that we only consider only a few spending for this example:

– $500 per month for grocery

– $250 per month for gas

– $100 per month for your phone and cell phone bills

– $150 per month for restaurants

This gives a total of spending of $1,000 per month that you already pay anyway,right?

Well if you use the Discover® More(SM) Card – Wildlife Collection cash reward credit card, you will get $312 at the end of the year (it gives 5% on spending such as gasoline and restaurant (and other spending categories) and 1% on everything else). As you can see, you can save money on your day to day spending. It’s like having a free rebate on what you are already buying anyway 😉

Over a year of spending, I was able to get $400 in cash reward and my wife got almost the same. In order to get this free money, we simply used our cash reward credit card on every single purchase we made and pay off our credit car bill at the end of the month. Money was accumulating in our bank account and we never withdraw from it to make sure we have enough money to pay off your cash reward credit card at the end of the month.

So you must not use the cash reward credit card to finance unexpected events or goods you can’t pay at the end of the month. Remember step #1; you choose your cash reward credit card based on its program not on a low interest rate option. Therefore, the cash reward credit card must be paid at the end of the month… all the time!

Here are a few examples of great cash reward and points credit cards:

Discover® More Card(SM) - American Flag

Discover® Card
More® Card – American Flag

American DreamCard™ Platinum MasterCard®

MasterCard

American DreamCard™ Platinum

Discover® Open Road(SM) Card

Discover® Card
Discover® Open Road® Card

Iberiabank Visa® Platinum Rewards Card

IberiaBank Visa®
Platinum rewards card

Here is the complete 6 Easy Steps to Make Money From Cash Reward Credit Cards of Point Rewards Credit Cards (links will be updated as article goes live).

1- Select a card with cash rewards or a good point system that suits your needs

2- Use your credit card for your day-to-day spending

3- Keep another credit card for emergency

4- Do not withdraw money from your bank account anymore

5- Pay it completely at the end of the month

6- Enjoy rewards from your credit card

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image source: flickr

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March 24, 2009, 6:00 am

Creditworthy Credit Card Customers Getting Squeezed

by: The Financial Blogger    Category: Credit Rating & Credit Bureau

This is a great guest post from Steve. Steve Sildon is the Research Director for Credit Card Assist. Steve writes about a variety of news-related credit card topics, provides tips and advice on how to distinguish the best introductory 0 APR and balance transfer offers as well as analysis of various cash back and airline miles rewards programs.


Meredith Whitney has sounded the alarm on Wall Street about the next phase in the credit crisis and the news isn’t good for consumers. Whitney, a prominent banking analyst and Wall Street veteran recently left her post as the Managing Director of Oppenheimer & Co. to start her own firm, Meredith Whitney LLC, and she believes that the next shoe to drop in the ongoing credit saga will be credit cards.


Whitney estimates that roughly $5 trillion (yes, that’s trillion with a “t”) in available credit lines currently outstanding but that only $800 billion has been drawn upon that total available credit, even with the recession well into its second year. These credit lines are revolving though, and believe it or not, most of the outstanding credit is paid off and drawn down repeatedly, month over month. Credit cards, while much maligned, serve a critical role ineveryday commerce in the U.S. that is now being threatened.


Back in August of 2008, Whitney estimated that roughly $2 trillion dollars of available credit on credit cards would be “expunged” or squeezed out by the end of 2010. After observing draw downs by card issuers of nearly $500 billion in the fourth quarter of 2008 alone, Whitney is now revising her estimates to over $2 trillion in credit card line reductions in 2009 and an additional $2.7 trillion reduction in 2010. That’s a grand total of $4.7 trillion in total credit card lines being eliminated from the system entirely by year’s end in 2010 for a total contraction of nearly 60% in available credit, severely threatening any hope of near-term economic recovery.



Some experts contend that recalibrating the credit markets by getting rid of all of this credit is long overdue. Undeniably, card issuers have been over zealous in their estimates of credit-worthiness in the past 20 years. FICO scores, so heavily relied upon by lenders and card issuers, have turned out to be fairly unreliable in predicting the credit worthiness of consumers. With unemployment running well below 6% and the economy running at full steam, credit lines were extended with lax underwriting standards and far too much confidence. The simple fact is that giant credit lines were being extended to people who didn’t need them, couldn’t afford them, and had no business having them in the first place.


Card issuers have responded by pulling back significantly — for the vast majority of cardholders, slashing credit lines dramatically across the board. The problem, however, is that many of the most creditworthy borrowers are also having their credit lines slashed or even eliminated entirely. In this economic environment, limiting credit lines for “at-risk” borrowers will continue to rise and should be expected in a healthy lending environment. But cutting the credit lines of the most creditworthy customers who do have the means to borrow and do have the means to repay is a looming threat to the economic recovery that has to be dealt with to stave off the deepening recession.


As Whitney accurately describes it, the credit card has evolved into a “cash-flow management tool” for the American consumer over the past few decades. About half of all consumers are “revolvers” who don’t pay off their card balances in full, carrying a balance over from one month to the next, and 90% of all credit card holders in the U.S. revolve a balance at least once a year.


Whitney describes unused credit card balances as “what-if reserve” funds that U.S. consumers have come to rely upon considerably. “What if” I lose my job or “what if” my car needs a new transmission? Consumers have relied heavily on their unused credit lines as emergency reserve funds and many have leaned on them as one of the only remaining sources of liquidity. The truth is that contrary to popular belief most consumers in the U.S. haven’t maxed out their credit cards. In fact, at the end of 2008, the percentage of total credit being utilized was a mere 17% at the end of 2008. But overall, credit utilization is now spiking (due in part to sharply reduced available credit) and the economic environment has forced many credit card issuers, fearing rising defaults, into shutting down credit lines en masse.


The fact is that card issuers are making the problem much worse by cutting credit lines on people who have the ability to pay their bills. Whitney is worried about an even deeper downturn in our badly weakened economy brought on by cutting off the most creditworthy customers, badly worsening the already severe decline. “If credit is taken away from what otherwise is an able borrower, that borrower’s financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully…”


What can average consumers do to protect themselves from this particular crisis? As credit availability continues to get wrung out of the system, the average consumer must do everything possible to maintain existing credit card accounts by keeping their accounts active and, above, all, in good standing. Cardholders have to avoid giving their card issuers any reason at all to shutter or significantly alter their accounts. While that certainly doesn’t guarantee that you won’t be affected, it is one of the only things that creditworthy consumers can do to limit the fallout and avoid being victimized by the crisis.


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December 1, 2008, 6:00 am

I Remember The Bad Days

by: The Financial Blogger    Category: Credit Rating & Credit Bureau,Personal Finance,Uncategorized

While I read horror stories about people losing their jobs and bad economic times for several people due to the current crisis, it makes me remember of my own bad financial days. Since I am quiet about my problems in general, most people that know me ignore that I went through a bad timing. But you know what, at one point or another everybody does!



We gotta go

I was 19 and I had been living with my girlfriend (who is my wife today) for 2 years in my parents basement. It’s never easy to have two couple living in the same house, especially when one of them is growing up as adults and start affirming themselves.

I have always had a good relationship with my parents and I still have a really good one. However, during that specific period, let just say that my parent’s basement wasn’t the best place to live for us anymore. So we decided to move in Montreal so we can have our own place called home.

We didn’t have much money and I remember my dad saying:” What are you going to do? Max out your credit card and eat Kraft Dinner?” He didn’t want me to leave so he tried to scare me. Even though I knew he was right, I had to leave for several reasons and I decided to look for an apartment.

Credit cards are not to be used as an emergency fund

The only way I could pay my bills and eat was to withdraw money from my credit card on a monthly basis. Back then, I had 5 credit cards and I was flipping balance from one card to another so I can save a few bucks in interest and charges here and there. This is where I learn that withdrawing money from your credit card at a ATM machine triggers interest charges on the very same day!

We were not making enough to pay for everything and each month, we had to take more money out of our credit cards. After a while, those pieces of plastic started to be quite heavy in my wallet. We had to find a solution.

Work harder and use the snowball effect

The only way I could get around this situation was by working more in order to earn extra money. I decided to work 35 hours a week while I was doing my bachelor degree. I used to wake up a 2AM, go work, sleep from noon till 3PM and go at school at night.

I used all my extra money to pay off my credit cards. I attacked that highest interest credit card first in order to wave as much fees as fast as possible. Once the first credit card was paid off, I took that payment and add it to the second one. This is why we call it the snowball effect; as you pay your debts, your payment on the next one is getting bigger and bigger.

As you can see, I didn’t do any magic or anything special. I concentrated my effort in order to pay my debts as soon as possible and within 12 months, I was debt free.

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