Controversy surrounding credit card use by those under 21 has received attention as more and more Americans are haunted by bad credit. A recent study concluded that 9 out of 10 students attending college admitted to charging school expenses to their credit cards.  The trend remains as school costs continue to rise while teen and college employment remains on the decline.  College students once often fell victim to incentives used to entice them to sign up for cards.  While arguably a great way to build good credit, credit card possession came at too high a price for many young people who spent more than they could pay back on school expenses, cell phone bills, cars, dinners out, and other luxury items.  For many, this has resulted in severely damaged credit reports, low FICO scores, consequent inability to get home, auto, or business loans even after they’ve out of college, responsible, and ready.  Recently, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act was approved by the house to protect current young adults from this situation.    

 New regulations state that credit card issuers must now verify proof of income or otherwise require a co-signer before issuing a credit card to consumers under age 21, credit card issuers cannot send prescreened card offers to those under 21 unless they have consented to receive offers, card issuers cannot raise the credit limit on an account for persons under 21 with a co-signer without written permission from the co-signer and lastly, that Credit card issuers are prohibited from providing free items in exchange for applications when marketing to students on or near campus.  For many in their late 20’s, early 30’s, and even 40’s this regulation has come too late.  At this stage, financial counseling by a Credit CRM specialist is recommended.

Known as the “Double Check Policy,” The June 1^st adjustments state that lenders must do a second credit check immediately before the closing on a home.  Taking on an even medium sized debt prior to the the closing will raise red flags and delay a closing possibly even causing potential buyers to be denied.  If a borrower’s credit score drops by even a point, the new law states that loan terms must be reassessed, possibly causing the borrower to take on a higher interest rate.  In other words, If the income to debt ratio is too heavily modified, FICO score may be changed and different loan thresholds will be instated. 

The new law requires lenders to pull no less than two credit reports for each mortgage transaction and to perform additional verifications of borrowers’ occupancy plans for the property, social security numbers, and tax payer identification numbers.  Lenders will also check to see if any jobs have been lost or changed.  Any new credit accounts opened will be scrutinized.  Everything will be looked up right up to the day of the closing and considered in the final loan analysis.  Regulations also mandate a three-day waiting period for borrowers whose interest rates have changed by more than an eighth of a percentage point.

Not just good, but excellent credit is essential for getting a mortgage loan in today’s economy.  Before facing costly and inconvenient delays and even denials, seeing a financial counselor is a good precaution to take.  Resist the temptation to shop for large purchases before your closing and remember to communicate with your lender.  Pre-approval does not mean a borrower will be approved at closing.   With the “double check” policy, failing to disclose will no longer aid an unqualified buyer in obtaining a mortgage today.

Here’s one of the scenarios reported by irate bank customers:

Say you have $500 in your checking account on a day that your bank receives four debits against your account:

$5 latte
$220 groceries
$80 veterinarian
$565 auto insurance

Your total debits for the day total $870 against a balance of $500, overdrawing your account by $370.

If the bank debits the three small purchases totaling $305 (easily covered by your $500 balance) before it processes the larger $565 insurance debit, you would incur a single overdraft fee. However, if the bank debits the larger purchase first, causing your account to be overdrawn, it can charge an overdraft fee for each subsequent debit. At the end of the day, you’ll pay 4 overdraft fees instead of one! At $35 a pop, that’s a loss of $105.

Bank customers expect their accounts to be debited in the order purchases are received. Consumer credit repair experts, however, have found that many banks — 25% according to a 2006 FDIC survey — shuffle debits received in the same day to maximize overdraft fees, generating significant profit for banks.

In our example above, if the insurance transaction arrived at the bank early in the day and was processed before the other transactions occurred, most consumers would agree that, while onerous, the bank is within its rights to impose 4 overdraft penalties. However, when the three smaller purchases occur before the insurance debit arrives, consumers rightfully argue that they should only be charged a single overdraft fee. When banks processes debit transactions out of order to rack up fees — known as “high-to-low” check clearing – consumers are understandably outraged.

Wells Fargo bank was recently called to task for high-to-low check clearing by a California judge who called the practice “gouging and profiteering.” Wells Fargo was ordered to pay $203 million in restitution to customers who had been unfairly charged. While the U.S. District Court ruling applies only to Wells Fargo bank, it is considered an encouraging sign for similar suits in other states.

There are four primary components to any credit score; the scorecards, the characteristics, the variables and the weights.

Scorecards – The scorecards are actually scoring models but cannot stand alone as a freestanding credit scoring system.  All properly designed scorecards are built to evaluate the risk of a homogenous population.  Bankrupt consumers is one example.  “Consumers with thin credit reports” is another example.  There are many more examples of scorecards but FICO and other model developers don’t generally disclose the exact definitions.

The purpose of having multiple scorecards in a model is to optimize it’s performance for all different consumer credit file types.  If your credit score just had one scorecard then it would likely do well for one group of consumers and perform substandard for all others.  That’s not a good credit scoring system.  The better your developer is at defining a unique population, one that support it’s own scorecard, the better results from your credit score.  Currently the FICO scoring system has 10 scorecards (for older versions) and 12 (for FICO 08).  The following three components all reside within the scorecards.

Characteristics – A characteristic is simply a question the models asks your credit report.  So, for example, “how many inquiries do you have in the past 12 months?” or “what is your revolving utilization?” or “what is the oldest account on your file?”  Each scorecard has a different set of characteristics, but many of the same characteristics reside across multiple scorecards.

No model developer discloses all of their characteristics but we do know some of them and we do know that there are thousands of possible characteristics to choose from when building a model.  There’s actually software designed to think up characteristics.

Variables – If the characteristic is best described as a “question” then the variable is best described as “the answer.”  So, if the model asked you “how many inquiries do you have in the past 12 months” then the variable could be “none” or “one” or “15.”  That’s why it’s called a variable, because the answer to the question can vary.

Each of your answers is going to place you neatly into a bucket or bin or class, they’re all the same thing so don’t get confused by the term.  For example, here’s how inquiries COULD be bucketed, binned, or classed…THIS IS AN EXAMPLE.

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries

1 inquiry

2-5 inquiries

6-10 inquiries

>10 inquiries

The decision on how to break up those buckets is made by the model developer.  He or she is trying to come up with the best scenario, which yields the most predictive model.  This is an important step because you can’t simply choose how to break up your buckets based on common sense or anecdotal evidence.  It has to be based on science.  Just because you “think” 5 inquires is worse than 2 inquiries it doesn’t mean that it’s actually true.  In the example above, 2, 3, 4, and 5 inquires all mean the same thing, which is why they’re all in the same bucket.

This “bucketing” process is going to apply to almost every characteristic in your scoring model.  NOTE: Just because your bucket looks one way in one of the scorecards it doesn’t mean it’s going to look the same way in the others.  It could easily look like this in a different scorecard…

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries

1 inquiry

2-4 inquiries

5-8 inquiries

9-12 inquiries

>12 inquiries

Weights – Weights, or point values, is where your scoring model is most visible to lenders and consumers.  This is where your final score is going to start coming together.  The weight is the point value given to your variable.  So, if I used the above example here’s what it could look like…

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries = 50 points

1 inquiry = 45 points

2-4 inquiries = 40 points

5-8 inquiries = 20 points

9-12 inquiries = 5 points

>12 inquiries = 0 points

Just as it is with characteristics and variables, the point values will be different in different scorecards.  So, using my first example for inquiry bucketing your weights could look like this…(remember, this is the same characteristic just in a different scorecard)

Variable Buckets for “Number of Inquires in the Past 12 Months Characteristic”

0 inquiries = 60 points

1 inquiry = 55 points

2-5 inquiries = 50 points

6-10 inquiries = 20 points

>10 inquiries = 0 points

This is what confuses so many “credit expert pretenders’ because they generally want to assign a fixed point value to each item on a credit report.  When you look at these inquiry examples you quickly realize there is not a fixed value per inquiry.  The value or points you earn is based entirely on what bucket you fall into.  You don’t lose 5 points per inquiry.  That’s not how scoring works.

There ended the lesson!

The meaning of the credit card roulette that we’ll look at has to do with the management of several cards when there’s not enough money to pay all the bills.  Of course, roulette implies that you’re taking a gamble with your financial well-being, and gambling is only really fun when the possibility of gain outweighs the little you’ll lose in the process.  In most cases, games of credit card roulette are more like the Russian variety, where you could end up far worse off than where you began. Luckily you’re unlikely to actually die…which is an important thing to keep in mind.  Money isn’t everything.

One way to play credit card roulette is to decide which card account gets the payment this month.  That involves factoring in things like current interest rates and what they might become if a payment is missed, late payment fees, and credit line reductions across the board.  Things could go horribly wrong here and cost you far more.

Another way involves utilizing balance transfers to get lower rates on existing balances, and hopefully consolidating your debt into chunks that are easier to manage. It also feels good to pay off a balance, even if you’re really just shifting it.  The main things to keep in mind are that the new card needs to be at a significantly lower interest rate (preferably 0%, at least for a while) and that you’re approved for the full amount of the balance you want to transfer. Otherwise, you’ve just complicated matters by adding another card with its own set of minimum payments and late fees to worry about.  

But when things have gotten to this point, your best option is to contact a financial counselor. They’ll be able to help you make the best decisions for your financial well-being.

Credit cards can make life easier but at a price. Card holders who don’t pay the full balance amount off every month are subject to relatively high interest rates. Late payments elicit hefty fees, usually raise interest rates and can have a negative impact on your credit score. While new regulations put some strictures on card issuer practices, the bottom line is that credit costs.

Credit cards work somewhat like a loan. The card issuer pays providers for your purchases, then collects the money from you on a monthly statement. Because you are in effect “borrowing” the bank’s money to pay for your purchases, there’s a penalty — the interest charge — if you don’t reimburse the card issuer on time. While most consumers understand this, they are hazy about how credit cards affect their credit score.

Credit scores are a measure of your ability to pay your debts. Credit scoring agencies look at both available credit and your payment record. Closing a credit card account has the potential to lower your credit score slightly by decreasing your amount of available credit. The way credit scoring agencies look at it, the more unused credit you have available, the greater your ability to pay debts, which translates into a higher credit score. While decreasing your available credit by closing credit card accounts can affect your credit rating, failing to pay credit card debt on time will have a far more disastrous effect on your credit score.

Before willy-nilly closing credit card accounts, it can be helpful to discuss the potential impact on your credit score with a credit repair professional. A credit repair professional can evaluate your total financial picture and suggest the most effective ways to pay down and limit credit card debt while protecting your credit score. He may also be able to suggest measures you can take to build up your credit score.

Credit card fees.

• Those annoying inactivity fees that credit card issuers charged card holders who did not use their cards are no longer permitted. Also, consumers cannot be charged for failing to meet minimum charge amounts.
• Credit card issuers are prohibited from leveling late fees that are greater than the minimum monthly payment.

Credit card interest rates.

• When credit card issuers increase a card holder’s interest rate because of late payments, they must give the consumer an opportunity to earn back the previous rate. If a card holder pays his account on time for six consecutive months, his interest rate must be lowered to the previous rate.
• Starting February 2011, credit card issuers must review a consumer’s account every six months if their interest rate was increased for any reason after January 1, 2009. If the circumstances that caused the increased interest rate no longer apply, the card issuer must reduce the consumer’s interest rate. One flaw in the new law is that it does not specify the reduction amount.

Gift cards. 

• The new law protects the long-term value of gift cards. Gift cards, prepaid cards and gift certificates cannot expire within 5 years of activation, unless — and here’s the loophole – the terms and expiration are clearly disclosed before purchase.
• If consumers load additional funds onto a gift card, the 5-year expiration period is automatically extended by 5 years.

Credit repair professionals should make certain that their clients understand the latest credit card changes made under the Credit CARD Act.  Click here to access a Credit.com’s Consumer Guide explaining all of the CARD Act changes.

A good place to start is www.makinghomeaffordable.gov where they explain, “The Obama Administration’s Making Home Affordable Program includes opportunities to modify or refinance your mortgage to make your monthly payments more affordable. It also includes the Home Affordable Foreclosure Alternatives Program for homeowners who are interested in a short sale or deed-in-lieu of foreclosure.”  It informs you about potential scams to look out for, and gives you links for more information.

One of the links mentioned is The Homeowners HOPE Hotline, which is 888-995-HOPE (4673) or the internet equivalent, www.995hope.org.  They say, “The Homeowner’s HOPE™ Hotline is a counseling service provided by the Homeownership Preservation Foundation to work with you to find a solution to your problem. The sooner you call, the sooner you can regain your peace of mind. Remember, you’re not alone.

“We can provide counseling to you, free of charge, in 160 languages, 24 hours a day, 7 days a week, 365 days a year. Call the Homeowner’s HOPE Hotline at 888-995-HOPE™.”

Their Resources for Homeowners page has a video that explains the Home Affordable Program in simple terms.  A list of links gives you a number of choices to get more information. And at the top right of their menu bar is a selection of success stories.  Maybe you can be one of them.  The titles of the tales might sound familiar to many of you:

Job loss
Rising rates
Health crisis
Scammed
Circle of Despair
Falling Behind
Having to Move
Is Help Available?
Running out of options
Debt Problems
Giving Up
Last Resort

Don’t wait until it’s too late.  Help is available to make it possible to continue living in your home affordably while you sort out any other financial issues. The main thing to remember is that you are not alone, and that help is available and relief is possible. Doing your research will enable a financial counselor to help you with the rest.

One place to look for help in gathering your information is Yahoo’s Personal Finance Calculators. Start with the Banking and Budgeting worksheet to determine how much you are spending each month. Even filling in these amounts with any accuracy may take a month of paying attention and writing down what you spend as you spend it. But you can’t answer the questions until you know what’s being asked. You’ve got to start someplace!

You may be surprised how much of your cash is going toward cigarettes, coffees or smoothies, or other little luxuries that seem small but can add up. A great example is in this blog post entitled “Confession Time: How I Spent $2,350 a Year on my Starbucks Addiction”. However, your spending may point to the need for a planned budget for anything from clothing purchases or dining out, to an all-over reduction of spending in favor of debt reduction and savings. The options are infinite, but again, you have to know where the problem is before you can fix it.

Yahoo offers other calculators that could be of use for someone struggling with debt. There’s one called “Should I consolidate my personal debt?” and another that asks “How long will it take to pay off my credit cards?”. Even if you have a general idea, sometimes you may find that you’ve rounded off hundreds of dollars. They have calculators that cover all areas of one’s financial life, so take a moment to look at them and see if they can help you gather your details so you know exactly where you need help.

Last quarter, credit card companies mailed offers to 1 billion consumers, more than double the number of offers mailed during the same quarter last year, according to Mitel Comperemedia which tracks direct mail offers. The credit card industry is on track to mail out 3 to 4 billion credit offers this year, double last year’s two billion but far short of the  8 billion credit card offers sent out in 2006 and 2007.

Back then banks were practically handing out credit cards like candy at a 4th of July parade. Today things are different. New consumer protection laws enacted under the 2009 Card Accountability, Responsibility and Disclosure (CARD) Act are forcing banks to be more judicious in extending credit to consumers. Consumers applying for credit cards will have to meet higher standards than they did before the economic meltdown. Students must now be 21 to qualify for a credit card or be able to demonstrate their ability to meet monthly payments.

Credit card offers always read like you’ve been personally selected for a great honor. In congratulatory tones, they make it sound like you’ve won a sweepstakes prize, like they’re doing you a marvelous favor. Banks use low interest rates, bonus miles, bonus points and other gimmicks to lure customers into applying for credit cards. And while judiciously used credit can be a useful financial tool, consumers should remember that banks aren’t really offering you a credit card to help you out. They’re in it for the money.

Credit cards are a huge cash cow for banks, pulling in billions of dollars every year in fees and interest charges. U.S. consumer credit card debt now stands at $852.6 billion, an average $15,788 per household. At the rate banks are flooding mailboxes with credit card offers, those figures are sure to rise.