A spoof of the Credit CARD Act

Here is a comedic interpretation of the negative consequences of the Credit CARD Act. I thought it was pretty funny.

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. 

The shocking stats of credit card debt in America

Instead of reading the esoteric reports provided by the Federal Reserve or financial analysts, check out this user-friendly chart which is an excellent overview of credit card debt in America.  View the entire chart at CreditSesame.com.

 

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:

The numbers don’t lie: a side-by-side comparison of credit unions and banks

Simply put, credit unions are better than banks—assuming that you want to keep more of your money.  You’ve heard me say it, but I haven’t provided comprehensive, empirical data that proves it until now. 

This morning, I received a press release by the Georgia Credit Union Affiliates that highlights the major differences between credit unions and banks as reported in a recent comparison index.  For example, in Georgia, the average interest rate for credit cards in 2008 was 11.53 percent for credit unions, compared to 12.41 for banking institutions. Furthermore, a Georgia credit union member who finances a new $25,000 car through a 60-month loan will likely save almost $400 in interest the first years as compared to a bank. 

If you are a die-hard numbers person, read the cogent excerpts from the report below, proving that credit unions in Georgia are better options for consumers: 

How paying your bill early saves money

For credit card customers who carry a balance month-to-month—something I strongly discourage—there is a simple way to reduce finance charges: make payments earlier than the due date.

Here is how it works mathematically.  To calculate finance charges, most credit card companies use your Average Daily Balance (ADB), which is the total of the balance at the end of each day during a period divided by the number of days in the period.   For example, CapitalOne calculates its finance charges using your Average Daily Balance.  Here is what CapitalOne’s fine print says:

“Finance charge is calculated by multiplying the daily balance of each segment of your account (e.g., cash advance, purchase, special transfer, and special purchase) by the corresponding daily periodic rate(s) that has been previously disclosed to you.  At the end of each day during the billing period, we apply the daily periodic rate for each segment of your account to the daily balance of each segment.  Then at the end of the billing period, we add up the results of these daily calculations to arrive at your periodic finance charge for your account.”

There is more fine print and special cases, but I don’t want to put you to sleep.  In a nutshell, the higher your daily balance, the more you pay in finance charges.  Thus, it pays to reduce your balance whenever you can. 

For instance, let’s say your incoming balance for a billing cycle in April is $1,000.  For the first five days of the billing cycle, you make $400 worth of purchases ($250 on Apr. 2 and $150 on Apr. 3). Also, your Annual Percentage Rate (APR) is 15.9%, and therefore your Periodic Rate is 0.04356% (APR divided by 365 days).  Below is what your Average Daily Balance and finance charges computation would look like. 

DATE	PURCHASES	PAYMENTS	BALANCE	FINANCE CHARGE
Apr 01			$1,000	$0.44
Apr 02	$250		$1,250	$0.54
Apr 03	$150		$1,400	$0.61
Apr 04		$800	$600	$0.26
Apr 05			$600	$0.26

Total Daily Balances	$4,850
Number of Days	5
Average Daily Balance	$970
Total Finance Charges	$2.11

Now, let’s consider the entire 30-day billing cycle.  If you didn’t make any more transactions after Apr. 5 and waited to make your $800 payment on the due date May 1st, your average daily balance would be about $720 higher and would cost you about $10 more in finance charges.  Thus, your finance charges would be much more.  If you tend to make especially large transactions using a credit card, paying early will help you save a significant amount of money. One exception is if you pay within the grace period, a period of about 25 days during which no finance charges are applied.  

In short, it pays to pay early.  In fact, you can even devise a plan for paying a bill twice a month instead of once.  I often do just that, or after a large transaction, I’ll make a payment that same day for the amount I just charged.  And for those of you who are thinking about paying more than you owe: no, the companies will not pay you extra. 

The Credit Crisis Story: An educational, witty, and lighthearted visualization

[ View Part II of The Credit Crisis Story. ]

Everywhere I speak, I ask for people in the audience to raise their hands if they understand the esoteric reasons behind the current economic crisis.  I almost always get about one or two bold people to raise their hands no matter how large the crowd may be.  I imagine that even the few who raised their hands are not so sure and cannot explain the crisis in simple words because their hands go up with much timidity.  I suppose they are scared that I may ask them to explain it to the group.  Understanding this economic quagmire is one thing; explaining it is another.