Why debit card fees are good for consumers

Transparency in financial services, for the most part, is an oxymoron. The less consumers understand about money and how to manage it, the more banks profit.  So, there is a huge incentive for bankers, brokers, financial advisors and the like to be misleading or hide behind a shroud of complexity.  This is no secret.  

Given that total transparency in the financial services industry, as demanded by vulnerable consumers and a progressive government, is unrealistic, one would think that even a taste of it by its proponents would engender excitement.  Apparently, that is not the case.  Recently, when banks, led by Bank of America, revealed that they planned to charge customers a $5 monthly fee to use their debit cards, public outrage ensued.  So much for moving toward that utopian, consumer-friendly market in which banks actually reveal their fees and choose not to be so conniving!  

The fact that banks are now canceling their $5 charge policies seems like a great win for consumers, but in my opinion, it is not for two reasons.  First, banks will go back to being less transparent and finding more insidious ways to make their profits.  The public outcry over the charge has actually validated, in a way, their notorious, clandestine activities.  Second and most importantly, customers are now less likely to join a credit union, a financial institution that focuses on what is best for its members, not for Wall Street.  Banks realized, although quite late, that if they proceeded with the charge, they would lose a lot of their deposits and business to credit unions. 

In conclusion, when I heard that banks were planning to implement this debit card charge, I rejoiced saying, “What a great opportunity to move consumers from banks to credit unions!”  It seems like this will not happen as I had hoped.  I doubt another pain point so excruciating and publically detested will surface any time soon and therefore promote the credit union cause.  Unfortunately, consumers have once again tricked themselves into believing that the banks have capitulated under pressure and have done the “right thing”.  The truth is that the banks will find another clever way to get their money, and it is much easier to do that when you are still their customer. 

Read ABC News article. 

What should I do now? You decide.

 

Six months have passed since my last post.  If this blog were a farm in the Old West, iconic tumble weeds that signify no man’s land would blow in the wind across barren fields. Unfortunately, my interest and will to continue in the fight against rogue banks have waned.  Likewise, the excitement and feedback from my supporters have equally diminished. My causes–to share my personal story, to take on the big banks, to educate consumers, and to change the financial system–are old news. So, what’s next?

Well, earlier this year, I worked on an outline for a book that would narrate my story, provide basic tips on how to manage personal credit, and describe the current industry and future trends. I got no further than the outline and a brief summary before I lost interest. I suppose it had something to do with Kickstarter, a popular crowd funding website, rejecting my project. Who can blame them, though?  The book I was hoping to fund would certainly be controversial and compromise the company’s relationships with none other than credit card companies. How could I be so naïve?

Since then, I have dithered on how to proceed. Should I shut down this blog? (If only TypePad didn’t charge a monthly fee!) Should I leave it online as an educational resource?  Should I publish a book? Should I disappear as if nothing happened?  How do I translate my efforts into a legacy that will help people time and time again?  These are the questions that gnaw at me. My biggest fear is to have labored in vain.      

I need your help. I have not made much progress in determining my next step, so I would love to hear what you think I should do at this point. Many of you have supported me and this blog, and I value with the highest regard your input. Thank you.

In math we trust: the analytical secrets of credit card companies

Introduction

I have a heightened sensibility when it comes to recognizing the use of data mining and analytics.  Having studied computer science in college, I am fairly knowledgeable of those disciplines. So it was no coincidence that I was able to draw attention to the ill-conceived data mining practices of American Express.  Ultimately, my public relations salvo against American Express was not about me being a victim; instead, it was about the credit card company understanding the need to change its algorithm.

I am not sure whether American Express made any adjustments as a result of my efforts and the ensuing public outrage—it said it did—but I do believe that all credit card companies learned a sobering lesson: Mathematical models built on dubious assumptions can and do backfire.  In fact, one of the reasons I think my story was so popular—and continues to be today—is that the current economic crisis occurred, in large part, due to our increased reliance on and faith in esoteric and erroneous mathematical models.

During the height of my notoriety, I received hundreds of e-mails from concerned consumers, asking me and giving me insider information about how these models and algorithms work.  I responded to each inquiry and often posted these responses in detail on my blog.  However, I have never delved into the mathematical concepts of data analysis with an emphasis on how a credit card company might use them. Well, not until now. 

My desire to explain some basic methodologies and models on this blog comes from the realization that we live in an increasingly data-driven society.  From internet searches to phone records, from credit card purchases to tax returns, companies have access to huge data sets which enable them to, in many cases, know us better than we know ourselves. The access to and interpretation of such data empowers companies beyond belief. This tremendous power should go neither unchecked nor overlooked, especially by the very consumers who are often the subjects of its manipulation. 

The next few posts will introduce you to the world of analytics.  They will give you confidence to challenge its applications and assumptions.  But most importantly, they will help you gain more control over your destiny, which is increasingly determined by the use of mathematical formulas.

Consumers sacrifice privacy for better technology, despite risks

Every now and then, the controversial topic of implanting microchips into human beings for various purposes comes up. I find the debate quite interesting.

Proponents argue that there are many benefits to the procedure. One proponent, PositiveID, a company based in Florida, specializes in implanting a small chip into a customer’s body that holds his or her health records. The benefit is not that obvious, but makes sense: If a customer is a victim of a serious car accident, for instance, and is unconscious or unable to provide critical information, paramedics have instant access to the victim’s important health records via the data chip. These records will facilitate urgent treatment.  Some say that such technology saves lives and should be, in some cases, mandatory. 

On the other hand, opponents argue that such an Orwellian procedure is the beginning of a slippery slope towards a society in which citizens are constantly monitored—and even manipulated by ill-intentioned forces. Many point to issues of security and privacy violation. Perhaps the most compelling objection to the idea, in my opinion, involves hypothetical scenarios in which health records are linked to credit scores. 

I think both arguments are rather silly, especially the former.  Why? Well, the great majority of us already have chips.  In other words, we may not have chips implanted in our arms or brains, but we certainly have chips in our pockets: they are called cell phones.  

Equally laughable is the alarm caused by a recent article published by The New York Times entitled “It’s Tracking Your Every Move and You May Not Even Know”.  The article, which has caused quite a stir, reveals just how cell phone companies store massive amounts of data about a customer’s location at any given time. While the average consumer can surmise that cell phone companies are able to store and use this data, no proof of these capabilities has been revealed in certain terms until now.  Still, it is not that shocking.  Perhaps the only shock is how much consumers depend on private companies to guard customer data and use it for “benign” purposes. 

Often, our faith in companies to do the right thing comes as a result of our dependency on their products.  I am sure that when cell phones, equipped with GPS features, were introduced to the market, consumers had major privacy and other legitimate concerns.  However, after billions of cell phones were sold and a few years passed, those concerns faded, weakened by what has become a necessary technology.  The same could happen with the nascent, implant debate mentioned earlier. 

In short, the amount of data stored by companies about customers goes way beyond location records obtained by cell phone usage or health records stored by chip implants.  This is just the tip of the iceberg, as it were.  And, most of us know it. The New York Times article focuses on Germany, not the United States where cell phone companies do not have to report what information they collect. Here in the United States, companies are probably more advanced. Regardless, consumers all over the world must understand that as technology advances, so too must the effort to protect individual privacy. It is the only solution in a highly technological world where “unplugging” is not an option. 

Read The New York Times article.

Georgia cities lead the nation in credit card debt

 

The reason for the founding of Georgia, the United States’ thirteenth and final original colony, is unclear.  Some say that the state was founded for and settled by debtors. However, the truth is that Georgia’s founder, James Oglethorpe, only proposed this idea.  After a charter for the colony was approved by King George II in 1732, there were already enough people to settle the southern territory without debtors.

Fast forward about 279 years to today.  One would think that Georgia was indeed founded as a debtors colony and that the state's current denizens share their forefathers’ inclination to assume too much debt. 

According to new research released by Experian, one of the major U.S. credit bureaus, three Georgia cities are among the top 25 U.S. cities where consumers carried the most debt on their credit cards in December 2010.  They are Atlanta, Augusta, and Savannah, the very site where Oglethorpe chose to begin his settlement.  Despite a decrease from the previous year, debt amounts still remain relatively high.  Atlanta’s average bank credit card debt is $4,690; August is $4,575; and Savannah is $4,570.

James Oglethorpe, moved by witnessing first-hand the atrocities of debtors prison in London, dreamed of starting an American colony that gave debtors a chance to start anew. It did not happen quite as he planned.  Nevertheless, now that Georgia cities lead the nation in credit card debt, it seems as if Oglethorpe’s dream did come true, but with an ironic twist.

Read the list of the 25 top cities with the most credit card debt at CNNmoney.com.

How we got car insurance pricing based on credit scores

How did we get to the point where car insurance pricing is related to your credit score?  The answer: Now that’s Progressive!

While reading “Marketing Mavens”, a book that analyzes innovative companies, I came across the Progressive case. Since it began selling auto insurance in 1937, Progressive has served the riskiest group of drivers and has enjoyed a respectable market share in its industry.  However, 22 years ago a major regulatory challenge forced it to reinvent itself. 

In 1989, Progressive’s core business was threatened by government regulation in California, a huge market for the company.  The regulation called for a 20 percent reduction in insurance rates, making it virtually impossible for Progressive to survive with drastically smaller profit margins.  As a result, Dave Pratt, the company’s general manager for direct marketing, devised a strategy that would forever change the insurance industry. 

In short, Pratt discovered a strong correlation between credit scores and driving records.  Author of “Marketing Mavens”, Noel Capon, describes the evolution of Progressive’s strategic epiphany: “When Progressive analyzed its customers closely, it found that although they were all relatively high risk, they were by no means all the same size, shape, and cost to serve.  In particular, Progressive discovered that although all high-risk drivers tended to get into accidents, high-risk customers with good credit ratings had fewer accidents than high-risk customers with poor credit ratings.” 

Consequently, Progressive implemented a new business model, charging lower premiums for drivers with high credit ratings and higher premiums for drivers with low credit ratings. By doing this, they were able to attract customers that filed less claims and therefore were cheaper to serve.  Such a pricing hierarchy allowed Progressive to experience tremendous growth rapidly without reducing profit margins.

So, in brief, that’s the story of how we ended up with credit scores determining car insurance premiums, not to mention the recent, pricey ad campaign featuring the ever ebullient Flo.

Why it’s hard to sue credit card companies

If you ask credit card holders what a mandatory arbitration clause is, chances are they have no clue. Yet, almost all of us have signed an agreement with such a self-defeating clause in it. 

A mandatory arbitration clause requires that any dispute raised by a customer go through arbitration before a civil lawsuit is filed.  In almost all cases, the arbitrators chosen to hear cases are not neutral; they are partial to the interests of the credit card companies.  Thus, many consumers unknowingly sign agreements that limit their constitutional right to the courts and forfeit any likelihood of a fair resolution. 

However, there are efforts to change the widespread use of such clauses in credit card agreements, employment agreements, franchise agreements, etc. For example, in 2007, the Arbitration Fairness Act (S. 1782, H.R. 3010) was introduced in Congress and called for several new measures, including a consumer’s ability to choose arbitration or the courts. Furthermore, a new movie entitled “Hot Coffee” is increasing the focus on America’s civil justice system. The documentary, which received rave reviews at this year’s Sundance Film Festival, explores the tragic stories of people negatively affected by a civil justice system “under heavy attack”. 

In short, when it comes to signing any agreement, especially a credit card agreement, make sure you read the fine print, because that’s probably where you’ll find a mandatory arbitration clause.   As I like to say, the big print giveth and the fine print taketh away.   

Additional Resources:

• Credit Card Arbitration: What it is, how it works (CreditCards.com)
• “Hot Coffee” official documentary web site (HotCoffeeTheMovie.com)

5 ways your bank spies on you

Today I received an e-mail message from a fan of this blog, informing me that I was mentioned in an MSN Money article.  I had no idea.  (It didn’t show up in my Google alerts.)  Naturally, I searched and found the mention. The article, entitled “5 ways your bank spies on you”, is a great read, so check it out.

Is charging interest on a loan immoral? A surprising historical perspective

The idea of charging interest for the use of money is ingrained in our culture, as American as apple pie and baseball.  Nowadays, hardly anyone questions the philosophy on which the practice is based.  Instead, we argue how much interest is too much.  If we were to go back in history a few hundred years, we would learn that the current wrangling over rates is somewhat surface and that there exists a more potent debate beneath.   

Around the 14^th century, religion had the most influence on thoughts regarding usury, which during those times meant charging any interest at all. The Catholic Church took a solid stance against it.  Numerous Biblical passages in both the Old Testament and New Testament condemn or restrict usury. Likewise, passages in the Quran are interpreted to condemn the practice. Chris Anderson’s bestselling book “Free”, which explores the topic briefly, highlights some examples of the Catholic Church's official condemnation:

Pope Clement V made the belief in the right to usury heresy in 1311, and abolished all secular legislation that allowed it.  Pope Sixtus V condemned the practice of charging interest as ‘detestable to God and man, damned by a sacred canons and contrary to Christian charity.  

Perhaps the most compelling description of the religious argument of the times is found in a Wikipedia entry regarding the subject:

… usury creates excessive profit and gain without “labor” which is deemed “work” in the Biblical context. Profits from usury are argued not to arise from any substantial labor or work but from mere avarice, greed, trickery and manipulation. In addition, usury is said to create a divide between people due to obsession with monetary gain. Most importantly, usury is the derivation of profit from biological time, which is linked to life, considered sacred, God-given and divine, leading to excessive worrying about money instead of God, thus subjugating a God-given sanctity of life to man-made artificial notions of material wealth.

Conversely, contemporary proponents had no moral objections to usury and thought that the service justified the cost.  Regarding the labor argument, they retorted that the labor induced when administering a loan constituted work and that charging interest was an optimal model to quantify and compensate that effort, especially over time.

Without delving deeper into the arguments—I hope my cursory introduction of two basic arguments is clear—I pose the question to you: Do you believe that charging interest for the use of money is immoral? Why or why not? What situations, if any, are acceptable?

Prepaid cards are the new axis of credit evil

 

A few weeks ago, I praised the launch of the Kardashian prepaid card.  Now, much to my chagrin, I am eating my words.  And the Kardashians are being sued for $75 million for withdrawing their endorsement of their “Kard”, which failed miserably and drew a wave of objections for its exorbitant fees. 

Despite the Kardashian debacle, prepaid cards are growing in popularity. According to the USA TODAY, “The total amount of branded prepaid cards is expected to exceed $440 billion by 2017, quadruple the estimated value in 2009, according to independent research commissioned by MasterCard.” Put another way, when the tween stars from the movie “Twilight” are used to sell financial services, something big is brewing.    

As if on cue, consumer activists and politicians have refocused their criticism from traditional credit cards to prepaid cards. Consequently, the relatively good image of prepaid cards is fading fast. No longer are they being touted as a safe or responsible alternative to unsecured credit cards, especially for consumers aiming to build credit. 

Opponents of prepaid cards highlight the excessive fees for features that are normally free with more mainstream products.  For example, there are fees to load the card, withdraw money, maintain an active account, and even cancel the card. Also, prepaid cards are not heavily regulated and do not fall under the Credit CARD Act. One of the most expensive cards (endorsed by popular radio host Tom Joyner) charges an $8.95 monthly fee to keep the account active.

On the other hand, proponents argue that having such cards are better and less expensive than using a check cashing business, a popular option for the unbanked.  Furthermore, they tout the flexibility of the cards to pay bills and make everyday transactions. 

In short, despite the recent spate of criticism and political cries for regulation, I still think the concept of a prepaid card is solid.  Moreover, there are good options on the market. In fact, Walmart offers a product with very low fees. As is the case with many credit products that thrive on misdirection and deceit, we must better educate all consumers, especially the most vulnerable ones, about the dangers of really bad products. Otherwise, the bloodsucking vampires will prevail.

Read more about this topic at USA TODAY.

Smartphones to replace credit cards in U.S. this year

 

Imagine a world without credit cards.  Instead of pulling out those pesty plastic cards, consumers make purchases simply by waving their smartphone near a receiver. 

For example, say you want a Coca-Cola from a high-tech vending machine.  You simply order what you want, take out your cell phone, and wave it to summon forth your refreshment. It’s almost as simple as waving a magic wand.

This is no futuristic scenario. In fact, it is reality in Japan and South Korea, two of the most technically advanced countries in the world.  The United States is behind, but not for long. 

This new technology called Near Field Communication (NFC) is coming this year.  It will make electronic payments effortless and those plastic cards relics of the past.  An expert familiar with NFC’s debut in the States says that smartphones that support NFC are just now hitting the market.  Likewise, thousands of merchants are installing receivers to accept this new payment form. 

So, what’s been the hold up?  In short, companies are working to establish a uniform platform and determine what merchant fees will be.  Despite these challenges, tremendous progress is being made. The tipping point is near. 

While there are certainly some advantages to NFC—efficiency seems to be the most touted—what do you think are the drawbacks? 

Read more at Inc. Technology.

Banks begin to extend consumer credit, target those with balances

 
Today all across the country thousands of consumers are receiving a flattering letter, a billet-doux of sorts, that makes them feel accepted and loved by their charming credit card company. The letter, which reeks of enthralling affectation characteristic of a no-good ex hoping to reconnect, informs them that their credit line has been increased, that because of their improved credit or on time payments they can now spend more money they don’t have. The exciting moment causes giddy consumers to forget how bad the relationship was just a few years ago. They begin to daydream about how they will spend this new money—perhaps a trip to Disney, a dinner for two, or simply bills. So begins the sad story of mass recidivism, the return to American overconsumption enabled by those god-awful credit cards.

My hunch just a few weeks ago served me right and was verified by The Wall Street Journal this week: For the first time since the Great Recession started in 2008, banks are beginning to make many more loans to consumers.  In general, this isn’t a bad thing, but the extension of credit to consumers who haven’t quite learned the lesson of good credit management will pick up old habits and overextend their obligations.  This is likely the case with those who carry balances.  These revolvers are the target of credit card companies looking to increase profits quickly. Thus, as revolvers spend more and creditors increase loans, we could see a return to the unhealthy credit card debt levels of early 2009.

Here are a few important statistics from The Wall Street Journal article:

- Bankcard loan originations increased 17% in the third quarter of 2010 as compared to the third quarter of 2009. 

- Bank of America CEO Brian Moynihan told analysts last month that industrywide, credit-card holders who carry balances "have actually started to borrow just a little bit more: not a lot, but 3% or 5%."

- At Discover, customers who revolve their credit-card balances increased their spending in September, October and November.

Read the entire article at The Wall Street Journal. 

U.S. credit card agreements unreadable to 4 out of 5 adults

If you’ve ever thought that credit card agreements are difficult to read, then you’re not alone. 

A recent study conducted by Credit.com confirms what we’ve all suspected: Credit card agreements are not written in the simplest language. In fact, evidence from the study supports the idea that agreements may be written to utterly confuse us all.

Read the interesting details of Credit.com’s detailed study, which concludes that the average credit card agreement is written at a 12^th grade reading level, “making them not understandable to four out of five adults.”

Credit card companies loosen the reins, raise credit lines

They’re back.  It seems as if credit card companies, perhaps longing for the halcyon days of windfall profits, are beginning to loosen the reins on certain customers. 

During the past few weeks, my wife and I have received letters from different creditors, informing us that in light of improved economic conditions and our good stewardship, our credit limits have been raised.

Have any of you received similar letters?

My fascination with microcredit and its potential to eradicate world poverty

Microcredit has consumed me. Since being introduced to the concept—or should I say movement—two years ago, I can’t get enough. 

Why my interest in microcredit better known as microfinance? 

First, I am fascinated by the proven idea that small loans—often as small as $40—given to the poor in primarily underdeveloped countries can help to alleviate extreme poverty.  These microloans provide seed capital to mostly poverty-stricken women who use the money to pursue an entrepreneurial endeavor like selling crops or homemade baskets. Profits from their businesses often result in more money for healthcare, education for children, and other benefits. Thus, living standards are improved considerably.  

Also, I believe in the power of entrepreneurship—more than anything else—as a means to attain self-sufficiency and prosperity.  The success of microfinance is due, in large part, to the great possibilities that entrepreneurship affords. 

Finally, just as fascinating are the impressive repayment rates of the millions of loans administered by microfinance intuitions (MFIs). Some funds have a delinquency rate as low as 1.5 percent.  (Read a previous post: “The world’s poorest more creditworthy than Americans”.)  The success of the industry has even sparked the interest of wealthy investors, looking for new asset classes with steady growth and low risk. 

For those who are equally captivated by the promise of microfinance or at least interested in learning more about this innovation, I suggest you read “Small Loans, Big Dreams” by Alex Counts, President and CEO of the Grameen Foundation.  Mr. Counts harmoniously narrates the parallel struggles and successes of borrowers in Bangladesh and Chicago, while interweaving the biography of microfinance pioneer and Nobel Prize winner, Muhammad Yunus. The book is a compelling and honest treatise on microfinance—its pitfalls and promise—but ultimately delivers newfound hope of eradicating world poverty through credit.  

One good reason you should walk away from your mortgage

One of the most common questions or requests for help that I receive goes something like this:  “Kevin, my home is severely underwater?  Should I walk away?  If so, how will a mortgage default affect my credit score?”

Many people who seek my advice on this matter aren’t in dire financial straits.  They neither have taken on too much debt nor have been reckless in their finances.  Contrarily, they have been reasonably good stewards, but worry that they are in a terrible deal, one that won’t get better anytime soon. 

I never answer this question directly, giving only information to help people make an informed decision.  Everyone’s situation and values are different.  However, new information published today strengthens the decision to walk away from a mortgage in cases where homes are underwater.

Almost two years ago, I wrote a prophetic article “Fair Isaac Corporation (FICO) increasingly irrelevant” in which I posited that banks would rely less on credit scores and more on other subjective factors to assess creditworthiness.  It appears that this prediction is a reality, as consultants have created new categories to help banks focus on potential customers who, based on a credit score alone, would be too risky. 

As reported today in The New York Times, these new categories (in order of most to least creditworthy) are “strategic defaulters”, “first-time defaulters”, and “sloppy payers”.  They help creditors distinguish between consumers who have the same or similar FICO scores.  

What does this mean? It means that those who walk away from a mortgage a.k.a. “strategic defaulters” have newfound hope of ascending from the depths of credit purgatory sooner than seven years. According to The New York Times article, strategic defaulters are those “whose credit scores were damaged because they walked away from a home when its value dropped below what was owed on the mortgage. These borrowers made a bad bet on real estate but may otherwise be prudent risks because they make a good living.”

So, in short, this new information will help people solve their moral conundrum of whether or not to walk away from their mortgage.  But, as I often say, this game is always changing. What seems like hope today could be horror tomorrow. Make sure you consider all the possibilities and consequences of such a crucial financial decision.

Wikileaks founder costs Bank of America nearly $4 billion, suddenly lands in jail

Am I the only one that finds it peculiar that Wikileaks founder, Julian Assange, landed in jail suddenly after issuing threats to at least two major U.S. banks?

In a recent interview with Forbes, Mr. Assange talked about the imminent release of bank documents, saying "It will give a true and representative insight into how banks behave at the executive level in a way that will stimulate investigations and reforms, I presume.” He later says that the disclosure “could take down a bank or two."

Whoah!  It doesn’t get any bolder than that. I can only imagine how my battle with American Express would have come out differently if I had said on CNN that what I plan to reveal could take down the bank. 

Anyway, the moment Mr. Assange threatened major banks, one of which is rumored to be Bank of America, he suddenly ended up in jail.  His indictment of Bank of America cost shareholders nearly $4 billion, as spooked investors jettisoned the stock.  The timing of Mr. Assange’s arrest is no coincidence.  I image elite bankers, the Illuminati, making personal calls to government officials and lawyers: “We’ve got to fix this—and fast!”

What do you think?

Read more about this at The Street.

How credit cards with no spending limits can hurt your credit score

A great article recently published by The New York Times investigates how credit cards with no limits can hurt your credit score.  I highly recommend that you read it.

Also, be sure to read this article: “There is no such thing as a credit card with no limit”. It will help you better understand how some of these cards actually work.

You gotta Levitt: S.E.C. chairman admits to not being able to read a prospectus

Would you be shocked if I told you that the Securities and Exchange Commission (S.E.C.) chairman cannot read a prospectus?  Well, as ridiculous as it sounds, that certainly was the case with former S.E.C. Chairman, Arthur Levitt.

Mr. Levitt, S.E.C. chairman during the Clinton years, admitted in his 2002 book “Take On the Street” that he had trouble understanding a prospectus when he was chairman.  In his semi-autobiographical book, he goes on to say how embarrassed he was about this gross incompetence. 

Think twice before you ‘Like’: Social media are credit card companies’ newest weapon

Better risk management: That was the biggest and hardest lesson learned by credit card companies during the credit crunch, which started in fall of 2008.  Ever since that frightening period—some call it 'The Great Recession’—consumers and businesses alike have experienced tighter risk management through closed accounts, reduced credit lines, higher interest rates, and more stringent guidelines for credit applicants. 

In an unprecedented effort to minimize their risk, credit card companies and banks have sought every possible resource at their disposal to capture and to store more information about customers—and that includes using social media. While many consumers understand that companies have access to their transaction histories and credit reports, most overlook the tremendous metadata available via social media companies like Facebook.  With the help of such new media, credit card companies have almost a 360 degree look at their customers. 

Just when you thought you knew something about mortgage securitizations

 

If you ever needed more proof of just how complicated the mortgage crisis is because of securitization, you’ve got it. Try to follow all of these transactions for one mortgage without getting a headache. It took one year to put together this flow chart.

View a higher resolution chart with an introduction at ZeroHedge.com.

Credit Card Max-and-Walk: Consumers Learn How to Game the Banks

I am mentioned today in an article published by the Huffington Post.  Possibly, my campaign, NewCreditRules.com, has empowered not only honorable consumers, but also the less scrupulous ones.

Read the article at HuffingtonPost.com.

Survey: Seniors too embarrassed to ask for help, a major cause of financial trouble

One of the biggest obstacles to achieving good financial health is the lack of communication.  Put another way, a great majority of Americans does not like to talk about money.  Crippled by feelings of shame and misguided optimism, Americans with financial problems often do nothing to improve their lot, hoping for a miracle.

We all know that the first step to overcoming a problem is admitting that there is a problem. As trite as the saying is, it is true, especially when it comes to extirpating bad financial habits.  Fewer and fewer adults are willing to take that difficult first step of acknowledgement.

As evinced in a recent survey, this is increasingly the case with retirees who find themselves in dire financial straits.  Members of the so-called Greatest Generation continue to increase their credit card debt with no intention of paying it off before they die.  They ignore the warning signs of financial disaster, blaming the faltering economy or simply giving up.

An insightful article released in USA Today provides fresh data about this trend and stresses the importance of communication when fixing problems of personal finance.

Kim Kardashian offers prepaid card for kids

 
I’m going against the grain on this one, but I’m convinced that I’m right: MasterCard’s move to use Kim Kardashian, the ultimate shopaholic with recherché tastes, as a spokesperson for its new prepaid card product is brilliant—at least from a marketing standpoint. She has tremendous influence with her audience of teens.  With that said, however, I am more interested in how this partnership exposes the hypocrisy of some consumer advocates.

Colleges should do more to protect students from credit card disaster

 

It’s like a trusted guardian selling off his teenager into slavery—financial slavery.  Universities and colleges have become salivating sellouts, taking millions of dollars from banks that wish to push credit cards on young and impressionable students.

Perhaps that was too harsh—I take it back—but there are similarities, if at best remote.  These lucrative deals are great for the colleges and banks, but put the financial future of students in peril, especially those who have no idea of how to manage their finances. 

Doctors push medical credit cards, spark investigations

Imagine this unsettling scene.  You lie in the emergency room of a hospital.  After being hit by a drunk driver, you are critically injured. Barely conscious and in tremendous pain, you find out that your insurance company will cover only some of the costs of your vital surgery.  Realizing the gap of coverage and your inability to pay for it, your doctor pulls out a credit card application and says, “Don’t worry. We offer this great medical credit card that is interest free.  Just sign here on the dotted line, and we’ll get you put back together in no time.” As you sign the agreement, your doctor smiles, elated that he gets some payment upfront and that he gets a kickback from the creditor.  

This scenario dramatizes a growing problem: doctors pushing medical credit cards. In fact, the number of complaints about doctors promoting medical credit cards has risen in recent months.  Some of the complaints are so outrageous that they have sparked the ire of New York Attorney General Andrew M. Cuomo, who recently announced an investigation into the health-care lending industry. Other state attorneys are pursuing rogue doctors who take advantage of patients, many of which are not fully aware of the credit card terms.

Loopholes of the Credit CARD Act

ABC News takes a look at some of the loopholes of the Credit CARD Act. Read more details in the written article.

The best fan letter ever

 

Today I received the following letter from a recent college graduate. After reading it, there was no doubt in my mind that every minute I devote to helping people, especially young adults, to maintain good credit is worth it. Thanks, Jillian, for the inspiration and encouragement to continue this blog.

Dear Mr. Kevin D. Johnson,

I haven't yet had the pleasure of meeting you so please let me introduce myself. My name is Jillian. I just wanted to say thank you for your website NewCreditRules.com.

I have yet to ever apply for a credit card for fear of losing the game to unwritten rules. As a first generation college student, I did not have the privilege of financial knowledge nor assistance from my family. I worked full-time to support myself and my collegiate career while avoiding credit cards like the plague. Now I'm a recent graduate embarking on the real world realizing what many already knew, credit was a 'necessary evil'. Banks and credit companies are very friendly in giving you limited information (key word: limited), but thanks to your website I'm able to start off on the right foot in the credit world with the knowledge and "know-how" to protect myself and my family.

It may seem odd, but just know that your efforts and actions are greatly appreciated.

Warm thanks,
-Jillian
"Credit Freshman"

Elizabeth Warren replies to my e-mail

I often hear people complain about the arrogance, self-importance, and off-putting nature of Harvard students, alumni, and professors.  This couldn’t be farther from the truth—well, at least my truth.  My experience has been the complete opposite of the nose-tilting stereotype. In fact, I have found these same people, especially professors, to be some of the most down-to-earth, engaging, and accessible people.

Who's right? The American Banker’s Association or The Standard & Poor’s/Experian Consumer Credit Default Index?

I am stumped.  Perhaps you can help me explain what seems like a contradiction. 

CNNMoney.com recently published the following headline: Credit card delinquencies fall to 8-year low.  This story is based on a report by the American Banker’s Association (ABA).  On the other hand, The New York Times published an article about how credit card default rates are still rising to record levels.  This story is based on a study completed by The Standard & Poor’s/Experian Consumer Credit Default Index. 

The ABA posits in the CNN article that “About 3.88% of bank credit card accounts were past due by 30 days or more in the first quarter of the year.”  However, The Standard & Poor’s/Experian Consumer Credit Default Index indicates, as reported by the New York Times that “In the three months through April the default rate on credit card loans had climbed to 9.14 percent, the highest since the index began to be calculated in 2004.” To be in default, an account must be at least six months behind, unless the lender has already written it off or the borrower has filed for bankruptcy.

Perhaps I am comparing apples to oranges. I can think of two reasons: 1) The ABA is looking at “bank credit card accounts”, perhaps a more restricted data set, and 2) the definitions of past due and in default differ.  But, do these reasons--and others unbeknown--adequately explain a difference of 5.26 percent?  Intuition tells me that the ABA number should be much higher, perhaps as much as double the 9.14 percentage.

I am sure that the key to resolving my confusion is a better understanding of each organization’s methodology in assessing the data.  However, the discrepancy just does not make much sense to me at all.  

What do you think?

I’m credit card debt free, finally

Crapulous. Yes. It’s a word, and it’s the first word that comes to mind when I think of our nation’s excessive, self-obliterating appetite for easy credit during these past few years. In many cases, we consumers are to blame for the economic implosion, not the big banks which cry in their defense “we simply supplied a demand.”

Before you accuse me of siding with the likes of Lloyd Blankfein or sounding self-righteous like President Jimmy Carter in his scathing “malaise” address to the nation on Jul. 15, 1979—about two months before I was born, by the way—hear me out. 

At some point, we consumers have to take matters into our own hands and become totally responsible for our financial welfare.  And I don’t mean that in a revolutionary, militia-like, or tea party way. It’s easier than that.  Simply put, we must rid ourselves of dependence on credit in all aspects of our lives. 

Marketing challenges hinder growth of credit unions

Everyone should be a member of a credit union instead of subjecting themselves to the often harmful whims of a commercial bank. If you are not a member of a credit union, you are giving away your hard-earned money. Do yourself a favor and join as soon as possible one of the 8,000 plus credit unions in this United States (46,000 around the world).  

I will not go into detail about the many benefits of joining a credit union.  (I have already talked about them in previous posts, one of which includes a hilarious video, by the way.)  However, I will say that, in general, credit unions have lower interest rates, provide better service, and care more about you as an individual.  In short, the relationship you will have with your credit union is similar to the relationship you have with your own mother.  Ultimately, she has your best interest at heart and so does the credit union.  

Naturally, you would think that disgruntled consumers would be leaving their banks in droves.  Not quite.  Membership of credit unions grew just 1.4 percent in 2009 and 1.6 percent the year before. Despite the fact that large commercial banks precipitated the financial crisis and continue to gouge their customers, credit unions have not been able to seize this golden marketing opportunity and significantly increase membership.  

Why the modest gains?  A recent The New York Times article explores some of the major challenges credit unions have in marketing themselves, starting with the misleading and sometimes fear-invoking term credit union.    

More articles on credit unions:

• Credit unions no longer a safe haven?
• The numbers don’t lie: a side-by-side comparison of credit unions and banks
• Two credit unions seized by the government
• I finally joined a credit union: Delta Community Credit Union
• Why you should join a credit union now
• Speaking engagement brings a pleasant surprise

Debt collectors resort to racist and terroristic threats

I have a family member who works in collections. She is pretty good at it, too. She tells me that given the economic downturn and new credit card laws, it has become increasingly difficult for her and her colleagues to meet their quotas. Collectors that do not meet their goals are fired.  Ironically, many of the ex-collectors themselves will end up in arrears and experience the same unyielding collection tactics they administered.   

I am not insinuating that you should have any sympathy for debt collectors. However, I am attempting to explain possibly why collectors are going to extreme measures to collect debts, even debts as small as a few hundred dollars. In the same way that debtors are under extreme pressure to pay their bills, collectors are under extreme pressure to collect debts.  

Below are two of the most outrageous cases of debt collectors resorting to appalling tactics that obviously violate the law—and both stories broke within the past two months. 

• Vulgar voicemails force debt collector to pay $1.5 million
• Verizon Wireless Bill Collector Allegedly Threatens to Blow Up Man's House

Credit card default rates still rising to record levels

The Standard & Poor’s/Experian Consumer Credit Default Index indicates that credit card default rates are still rising to record levels.  The default rate is now at 9.41 percent, the highest percentage recorded since the index began in 2004.

On a more positive note, as the unemployment numbers continue to improve, indices will begin to reflect an abatement of defaults.  In fact, some indices are already beginning to show the rate slowing down.  Naturally, there will be a lag in indicators as consumers get back to work and begin paying their bills.

Overall, the fact that default rates are so high does not bode well for a speedy economic recovery, which will be fueled, in large part, by a healthy and confident consumer. 

Read more about the newest statistics as reported by The New York Times.

Visa misleads customers. Compliance is not “courtesy”.

 

About a month ago I received a letter from Visa, informing me that it will be canceling my credit card account. As I normally do when I get such bad news from a creditor, I put down the letter and let my nerves cool for a few hours.  This was especially bad news because of two problems: 1) This account, opened in college, was the oldest account on my record. Thus, closing it will have a major effect on my credit score.  2) I will no longer have access to personal credit.  (I still have my American Express card open, but I have avoided using it altogether because of the company’s insidious policies.)

After cooling down, I realized that this can turn out to be a good thing.  More than ever, I will be forced to maintain positive cash flow, which I have.  So, I decided to pay the outstanding balance of $2,569.85 in full and to close the account on my own terms.  (I wanted to make sure that my credit report shows that I closed the account, not the creditor. Also, I looked forward to the added satisfaction of sticking it to Visa first.) 

Right before I paid off and closed the account, the customer service representative says, “As a courtesy, I will waive the $14.95 fee for expedited payment via the phone.” I almost had a fit. According to the new Credit CARD Act, companies can no longer charge such a convenience fee.  I stayed quiet, fuming smoke through my ears and nose.  I was not in the mood to inform the representative of the law. I was most eager to pay the account off, close it, hang up, and blog about the experience. 

In short, I share this because it shows the continued skulduggery of some credit card companies which have not learned their lesson.  The more things change, the more they stay same the same.

Chauffeur reveals banker secrets on my way to CNN interview

Today marked my third appearance on CNN.  During my segment, I talked about behavioral analytics and data mining, topics that continue to be popular in the news media.  The short discussion, which aired around 10:40 a.m., focused on how I was affected by consumer profiling and how I used that situation to become an influential consumer advocate.

It is always an exhilarating experience and great opportunity to appear live on international television, especially when you know that your message possibly will change millions of lives.  The newsroom, with its glaring lights, gigantic cameras, and Amazon-like chaos of wires, is an intimidating reminder of the gravity of the moment.

Despite all of this excitement and formality, the highlight of the morning was not the interview.  It was a conversation—or should I say passionate monologue—that occurred during my ride to the studio in my chauffeur’s Lincoln Continental.

Capital One the latest to report business debt to personal credit bureaus

Some people dread going to the dentist.  Others dread speaking in public. I dread getting my credit report. 

This fear exists not because I have bad credit, but because I know that as a business owner, I am vulnerable to the reprisals of credit card companies which, in response to the passage of the Credit CARD Act, have begun to take out their frustrations on small businesses.  Because credit cards issued to businesses are not covered under the new act, business owners are sitting ducks.

I checked my credit report a few days ago.  Everything was prefect except one thing:  One of my business creditors, Capital One, began reporting my business credit to all three personal credit bureaus in October 2009.  In other words, no longer are my personal debt and business debt separate.  My worst nightmare came true.

Garnishments on the rise as debtors struggle to pay debts

When in dire financial straits, the easiest thing to do is to disconnect the phone line, avoid opening the mail, or simply disappear altogether.  While it is the easiest thing to do, it is not the smartest thing to do, as more and more people are finding out the hard way. 

As reported recently by The New York Times, garnishments are on the rise.  Garnishment is a process by which creditors can secure a court order to seize part of the debtor’s paycheck or the funds in a bank account. The article states that, “… pay seizures are rising fast in some areas — up 121 percent in the Phoenix area since 2005, and 55 percent in the Atlanta area since 2004. In Cleveland, garnishments jumped 30 percent between 2008 and 2009 alone.”

One of the main reasons for the increase is debtors’ fear and unwillingness to communicate with their creditors, a tactic that will get a debtor on the fast track to garnishment. Avoiding creditors is the worst move you can make.

In short, if you are way behind on your bills or owe a major debt, be sure to make an attempt to resolve the issue quickly.  For example, when a friend of mine fell into financial hard times, he contacted his mortgage bank to request more favorable terms. As a result, his bank lowered his payment and forgave some of his loan.  Being proactive, you will come out better in the end, and you will have, at least, some peace of mind that a creditor is not waiting to raid your bank account.

 [ Read The New York Times article. ]

How I became a rock star for a day

Last week, I was a rock star—and it felt great.  But I wasn’t on a big stage with a lead guitar, playing sick licks for a gigantic crowd.  No, not at all.  I simply asked a question that was on everyone’s mind at a recent conference.

During a packed, small business conference hosted by the mayor of Savannah, Georgia, I directed the following question to Terri Denison, District Director for the Georgia Office of the U.S. Small Business Administration (SBA):

“During last week’s hearing on small business lending hosted by the House Financial Services Committee in Washington, D.C., a small business owner testified that millions of small business owners are frustrated for two main reasons: 1) Banks, especially community banks, are not experienced enough to evaluate properly good business plans and ideas 2) Banks refuse to lend because regulators have implemented increasingly difficult standards such as higher capital reserves.  Why can’t the SBA lend directly to businesses to circumvent these obstacles?”

Ms. Denison, who is a good friend of mine, answered the question artfully, outlying several of the same points that appeared in an article published by The New York Times a few hours later. Her answer, which didn’t assuage business owners starved for capital, didn’t matter.  I was a rock star as soon as I finished my question. 

During the conference breaks, many small business owners thanked me for asking such a great question.  They also shared that they are doing everything possible to survive this economic maelstrom. The credit crush has only made things so much worse.  

So, in a nutshell, that’s how I became a rock star for a day, singing the blues of small business owners all across the country.

[ Read The New York Times article. ]

Banning credit checks on job applicants the right thing to do

As more Americans suffer job losses and the inability to meet financial obligations, states are considering legislation that will prohibit employers from using credit checks to deny employment.  According to a recent report by the Associated Press, proponents of the idea argue that current restrictions make it increasingly difficult for qualified people to secure work. This year, 16 states from South Carolina to Oregon, have drafted legislation.

I support the move by many states to prohibit credit checks, especially during these difficult economic times.  With unemployment rates at record highs, the job market should be fair for everyone who is qualified to perform a job. And, it is no secret: Honest Americans find themselves in financial hardship not because of their own doing in many cases, but in part because of the credit card industry, which by lowering credit limits, has damaged millions of credit reports.  Denying people jobs because of poor credit is tantamount to kicking them while they are down.

Finally, the epidemic of bad credit is growing everyday as people make hard choices: Do I pay my credit card bills or feed my family? Do I restructure my mortgage and risk being denied the very job I need?  While the idea of what responsible means today has been redefined, the FICO score and credit rating standards have not.  (Read Fair Isaac Corporation (FICO) increasingly irrelevant.) Legislation to prohibit credit checks for employment is not only the right thing to do, but also a necessary action to curb soaring unemployment.

What related stories do you have? Have you been denied a job after a credit check?

Bitter sweet victory for consumers: The Credit CARD Act becomes law today

Today, consumers can celebrate a major victory: The Credit CARD Act becomes law, meaning increased consumer protection for credit cardholders. After a year of heightened consumer outrage against banks and legislative wrangling to craft a consumer-friendly bill, cardholders finally receive much needed relief and protection—the most sweeping in history.  However, the victory is more bitter than sweet. It is like winning the silver medal in an Olympic competition that you think you have won.

As evinced by credit card companies raising interest rates and changing terms to preempt the enactment of today’s new law, the victory will be short-lived.  In other words, consumers will end up paying more money through new fees and “legal” changes. If anything, this victory is one of principal more than one of net savings.     

Veteran bankers support strong regulation of banks, exhibit Frankenstein’s remorse

If you think the crusade for increased regulation of the financial industry is just populist fury—a battle between the haves and the have-nots—you are wrong. Contrarily, many of Wall Street’s veteran leaders are lobbying vociferously for more regulation of big banks, some of which they ran during their heyday. An article released today in The New York Times explores this irony.

Armed with what constitutes a compelling squadron of financial gurus, Paul A. Volcker, chairman of the Federal Reserve during the 80s, calls for very strong regulation.  Mr. Volcker believes that restricting proprietary trading of banks is the silver bullet.  In fact, some of Mr. Volcker‘s cohorts believe that this proposed solution to the financial crisis is shortsighted and that Congress should go as far as to reenact the Glass-Steagall Act.

Am I the only one that finds this odd?  What is the old guard’s motivation for supporting more regulation of an industry that in many ways, it helped to create?  Did it lose millions of dollars and therefore has become sour? I have no clear answer. 

But, I am reminded of Marry Shelly’s "Frankenstein".  Perhaps the old bankers feel responsible, at least in part, for helping to create a family of financial monsters, ugly giants composed of blended parts taken from different financial intermediaries—an investment bank here attached to a commercial bank there. In their quest to create the perfect, most profitable financial service corporation, everyone has suffered.  Like Frankenstein, they, too, have learned the price of pursing glory at all costs.

Credit card statements now required to show new payment data

When I read my Visa credit card statement this month, I noticed two major differences: 1) There was much more text and information on the main page. In fact, the convoluted format was threatening upon a cursory inspection. 2) More importantly, there was a table of new data, informing me of what I will end up paying if I make only the minimum payment. 

In the coming days, you will see changes to your credit card statements as well.  Several companies have already begun to comply with the Credit CARD Act, which becomes law on Feb. 22.  One of the mandates of the bill, for example, requires that credit card companies tell you what you will end up paying in total if you make only the minimum payment.  It is helpful information for all customers. (You can calculate your payments at our Interest & Payoff Calculator.)

I wonder, however, if this new information will change the payment behavior of cardholders.  Legislators and consumer activists tend to think so.  They fought hard to require that credit card companies provide this information, arguing that it will empower consumers and will help them avoid more debt. 

What impact, if any, do you think it will have on customers?  Will they be encouraged to pay more than their minimum payment? Or will they do continue as normal?

Expert on the global math elite inspired by this blog

About a couple of weeks ago, I was amused to find a jeering post written about me on a popular blog entitled “The Numerati”.  The post was written by Stephen Baker, the blog’s creator and a former senior writer covering technology for BusinessWeek.  Mr. Baker named the blog after his recently published book entitled “The Numerati”, which according to his website takes a “captivating look at how a global math elite is predicting and altering our behavior—at work, at the mall, and in bed.” I have not yet read the book, but it is on my reading list for this year. 

Anyhow, Mr. Baker’s Feb. 1 post, “Tracking the data trackers”, pokes fun by questioning the practicality of my advice to consumers to tape conversations with customer service representatives.  In the post, Mr. Baker comments that my “strategy is exhaustive”. Perhaps he is right. Sometimes tracking the data trackers requires such exhaustion. 

While my membership in the global math elite is debatable, I would guess that my obsessive-compulsive or “exhaustive” behavior of consuming and analyzing data is an attribute of the numerati.  With that said, I will take the feature and light-hearted criticism as a compliment. 

Read Mr. Baker’s post and tell me what you think.  Also, make sure you buy a copy of his book. 

Banks get another reason to stop lending

Banks now have another reason to stop lending: The Federal Reserve will pay banks a higher interest rate on their “excess reserves” or any money over their required minimum savings.    

The Fed enforces capital reserve requirements for its member banks and depository institutions to ensure that they can absorb a reasonable amount of loss. In other words, the Fed holds money for its members and pays interest on the amount that exceeds the minimum requirement.  After all, it is called the Federal Reserve Bank.  Currently, that interest rate is 0.25%.  The minimum amount of money required is determined by the capital ratio, a percentage of a bank's capital to its risk-weighted assets.

The calculation of this capital ratio has been a hot issue lately.  Many of the large banks that failed were tremendously overleveraged; put another way, they borrowed way too much money.  Based on testimony by an analyst at a recent FCIC (Financial Crisis Inquiry Commission) hearing, some banks were leveraged as high as 95 times.  A normal ratio is closer to 10 times and is much less risky.  Some congressional leaders and bankers believe that part of the solution to preventing another financial crisis is requiring that banks have higher reserve requirements. 

Study reveals consumers paying credit cards over mortgages. What this really means.

As soon as TransUnion released its research, news headlines announcing the results multiplied like foreclosures in Detroit. The first headline I saw read: “Consumers Paying Credit Card Over Mortgage”.  I was attracted to the story not because it was shocking, but because it confirmed what I already knew would happen.  Let me explain.  Imagine the following predicament:

Dubious subprime credit company, CompuCredit, in financial trouble

The bad news for its employees came on Jan. 28: CompuCredit announced that it was closing several call and collection centers around the country in order to cut costs.  Due to the recession, Atlanta-based CompuCredit, which specializes in credit card and car loans for consumers with bad credit, decided to layoff about 740 employees.  However, it will continue to operate centers in Nevada, Florida, and Minnesota. 

In addition to laying off several employees, CompuCredit released on the same day a press release announcing the following: “CompuCredit Holdings Corporation Announces ‘Modified Dutch Auction’ Tender Offer to Purchase up to $160,000,000 Aggregate Principal Amount of Its Outstanding 3.625% Convertible Senior Notes Due 2025 and 5.875% Convertible Senior Notes Due 2035”.  That has to be the most convoluted title that I have ever read in my life.  You have to have a finance degree to even get an idea of what it means. In a nutshell and explained at the most rudimentary level, CompuCredit is buying back some of its long-term debt at a discounted, auctioned off rate from its debt holders because its financial welfare and future are shaky at best. In short, CompuCredit, like some of its subprime customers, is experiencing financial straits.

Normally, this news would not be material for this blog.  (I would much rather write about the total demise of the company.)  But CompuCredit is of special importance because it was investigated and censured by the FTC (Federal Trade Commission) in part for reducing customers’ credit limits based on where they shop.  As a result, CompuCredit settled for $116 million and agreed to pay a $2.4 million penalty to the U.S. treasury in December 2008.  Similarly, in January 2009, American Express engaged in and admitted to the same insidious practices in 2009. However, it has not had to face any penalties.  In fact, American Express’ actions are what prompted the creation of this blog.  Even with the tremendous media attention given to American Express’ obvious abuses, the company has managed to escape public and political outrage relatively unscathed. 

Do we keep the Federal Reserve or get rid of it?

Since day one of the great recession, there has been much criticism of the Federal Reserve.  Led by vehement critics such as Republican Congressman Ron Paul of Texas, those who call for the abolition of the Fed claim that it does more harm than good. One expert economist, Dean Baker, says that the Fed “bears substantial responsibility for the current crisis”.

I disagree. While there are some structural changes and practices that I think the Fed can improve or discontinue, I would not support its entire annihilation. I suggest we change what is wrong and keep what is right. 

One of the things that the Fed got right was credit card reform.  Before any legislation was passed in the House or Senate, the Federal Reserve proposed and approved sweeping changes to curb the out-of-control abuse of credit card customers.  Do you remember?  In Dec. of 2008, the Fed announced that it received over 65,000 complaints from consumers about credit card companies, and as a result, decided to implement major changes. The Fed’s leadership in responding to the people gave the legislative process validation and needed momentum. 

The most important rule to staying out of debt

 

Few financial experts, if any, will include the following rule in their recommendations for staying out of debt: Make sure you have and keep health insurance. Not only do I recommend it, but I think it is most important.   

This realization came to mind yesterday as I rode in the ambulance with my younger sister, a victim of a hit and run here in Atlanta. As we headed to the hospital, the EMT asked for my sister’s health insurance information.  She gave it to him while I praised in relief, “Isn’t it a blessing to be able to say that!” The EMT agreed enthusiastically, “Yes!” As he made the final stroke on his digital tablet, he mentioned that recently he canceled his health insurance to save some money. Struck silent by the tremendous irony of an EMT canceling his health insurance, I listened intently.   He continued, saying that he luckily reinstated it two months before he came down with pneumonia.  Yes. He was lucky. My sister was lucky too: Despite the car being totaled, she only received a few minor bruises and was able to go home early in the morning. She slept well, knowing that her bills were covered.

Unfortunately, the great majority of people in my sister’s situation are not as lucky.  Medical bills are the leading cause of bankruptcy and high credit card debt in the United States.  According to a recent CNN article, “60 percent of people who go bankrupt are actually capsized by medical bills”. I must admit that I thought the majority of bankruptcies were caused by shopaholics who enjoy this country’s favorite past time: conspicuous consumption. That all changed when I started my blog a year ago. From day one, I received heartbreaking e-mails from everyday people who fell seriously ill and because of lack of health insurance had maxed out their credit cards. 

Here is a depressing excerpt from “Jessica’s” e-mail sent to me a year ago:

Great Scott! Massachusetts Senate upset could kill financial reform

Scott Brown’s astonishing upset in the Massachusetts Senate race has Democrats aghast, wondering how in the world did a Democratic bastion fall into the hands of the Republican Party. Now that the Democrats have lost their super majority in the Senate, several crucial bills are at stake.

As a result of the Democratic debacle, political pundits have focused on the likely and immediate demise of health care legislation, the controversial bill that pushed Brown to victory.  However, few pundits are discussing the possibility that financial reform could face a similar fate.