Credit Economy

At the end of 2008, bank charge-offs for credit card receivables is likely to increase substantially compared to prior years, forcing some financial institutions to consider alternative payment options to credit cards. According to Innovest Strategic Value Advisors, next year looks even worse with banks writing off nearly $96 Billion in 2009 - $23 Billion higher than the $73 Billion estimate for 2008.

This shift in transaction processing could translate into significant growth for a company like MyECheck which processes electronic payments directly from checking accounts. Check writing continues to be the preferred non-cash method of payment accounting for over $40 Trillion each year. A large part of this number involves check payments made by businesses and monthly consumer payments such as utilities, cable, groceries, etc.
 
While a growing number of banks may force customers to pay for items using an electronic payment system tied to their checking account, consumers may consider switching to companies which still allow them to charge freely on their credit cards. This isn't necessarily because they need the credit, but more to do with potential security issues and the fact that they have become accustomed to earning points with every transaction. Encryption technology needs to be flawless for consumers to risk having funds in their checking accounts exposed to potential fraud activity. If all banks adopt this approach, consumers will have little choice and MyECheck investors will be very happy.

Cab drivers already have it tough with rising gas prices. Now, places like Chicago require that they accept credit cards. While this is a convenient alternative for consumers, some taxi cab drivers have to pay up to 5% for each transaction. So on a quick $10 cab ride, $.50 goes directly toward processing a credit card transaction. This can really impact profitability with the costs of higher gas, car maintenance, association fees and consumers who don't tip. With most everyone looking to hold onto more of their money, tips are likely to be one of the first things on the list.

It’s also common for cabbies to broadcast credit card information over their radio, so that the transaction can be process with the dispatcher. Obviously, this increases the likelihood for someone to get hold of your credit card information. If a taxi driver refuses to accept a credit card in Chicago, they can risk having their license revoked if the incident is reported to the Department of Consumer Services. If you have the alternative to pay with cash, I'm sure your next cabbie would really appreciate it.

Other Resources:

• Fare fight over credit cards
  

Similar to the recent fall of Washington Mutual, Wachovia announced today that it's banking operations have been purchased by Citigroup. Wachovia had invested heavliy in "adjustable rate mortgages" which allowed borrowers to obtain loans at attractive introductory rates and defer higher interest payments until later years. Unfortunately, delinquencies have risen sharply in the past 6 to 12 months, causing Wachovia like similar bank casualties, to cover large amounts of debt obligations.

With two large banks being forced to sell, it got me thinking about whether or not cardholder rewards could still be redeemed. Both Wachovia and WaMu have credit card products that offer the ability to earn rewards. While most people are concerned about whether or not they will be able to use their credit card, they should also be thinking about cashing-in on their rewards before they are locked out or receive a notice that reward programs won't be honored by the new bank.  

I'm not trying to start a "run on the bank", but given the uncertainty of the market conditions, consumers must fight to hold onto whatever assets they have in the possession with these banks. According to a Wachovia spokesperson, "As we proceed, I'm sure somewhere down the road, Citigroup and Wachovia will look at what various rewards programs are in place. Today, nothing has changed for anyone." In my opinion, this isn't much of a vote of confidence that reward programs wouldn't be considered as part of the new debt that JP Morgan Chase or Citigroup is willing to absorb. Again, from the banks' perspective were talking points and not hard consumer greenbacks.  

Wachovia will continue to operate under the Wachovia name, while Citigroup has moved to the top of list as the largest U.S. bank.

With so much change going on in the financial markets, bank customers are bound to have a lot of questions. This may turn into quite a challenge for customer service departments. On Washington Mutual's website, they have posted a notice that customers are now dealing with JP Morgan Chase. Chase has posted a variety of responses to questions that WaMu customers might have, but I'm sure even Chase representatives can't answer the majority of the questions.

What appears to be public knowledge is listed below:

• Chase has purchased WaMu's branches, mortgages, credit card, loan and deposit businesses
• The FDIC had assumed management of the assets, prior to the purchase by JP Morgan Chase
• The Washington Mutal name will be phased out and replaced by Chase
• The private banking businesses are to be renamed JP Morgan
• The FDIC will gurantee deposits up to $100K per depositor
• Direct Deposit information, pin numbers, etc will remain unchanged
• Equity lines of credit will be frozen until Chase does its own official review of accounts
• WaMu stock has little to no value
• Chase will look to trim jobs that are considered redundant

Credit card and mortgage holders should continue to make their payments to Washington Mutual as they normally would. If there is any change, Chase will inform these account holders through mail. Any cash or assets that remain will go toward paying off creditors and transitioning the business to Chase.

While the way in which WaMu became part of Chase is unordinary, these have become unordinary times. Expect further apprehension over credit markets and additional annoucements of "fire sales" within the financial community.

On a positive note, JP Morgan Chase has close to $2 Trillion in assets, making it one of the largest banks in the world. They were also one of the big players who bet against the sub-prime lending trend. 

It's said that "History is the best indicator of the future" or so it goes. This type of analysis is at the heart of the value placed on your credit score whether or not a company should extend credit or services to you. A major reason for the Mortgage meltdown was caused by banks' lending to consumers who had little to no financial history.

From June through August, Discover reported that their profit declined by 11%. Some of the decline was offset by a increase in transaction volume from merchants and existing cardholders, however a growing number of consumers have begun to fall behind on payments. Economists attribute the rise in US gas prices, groceries, declining home values and unemployment as primary reasons why consumers have less cash to make their necessary payments. Discover's 30 day delinquency or default rate increased from 2.8% to 3.6% versus the same period in 2007.

The default rate percentage is a key indicator for Discover and other credit card issuers because it signals the general financial health of a company's customer base. Its likely that due to the continued increase in its cardholder default rate that Discover will raise its "lending" criteria for new cardholders (e.g. higher credit score, income range, etc.); hence, providing a more careful review of a cardholders financial history.

With the $700 Billion financial bailout plan in the works this week, lawmakers in the U.S. House of Representatives are also trying to pass legislation that would restrict credit card issuers from imposing suprise interest rate increases. The Credit Cardholders' Bill of Rights Act would require financial companies to give consumers 45 day notice on changes to their interest rate, as well as extend the billing statement date from a minimum of 14 days to 25 days.

On Tuesday, the legislation passed in the House, but still needs to go through the Senate. It could also get vetoed by the President; however this may be difficult given that consumer protection agencies support the Bill and consumers are looking to save where possible.

As you can imagine, credit card issuers are against the legislation because they argue that it will lead to higher interest rates for new accounts and limit the amount of credit available. The Fed estimates that U.S. consumers currently carry $900 Billion in credit card debt.

I agree that consumers should be given fair warning of changes in their credit card terms and conditions, but consumers also need to actively monitor their accounts. Most credit card companies will forgive fees for cardholders who miss a payment a time or two. While credit card fees and interest rates can become excessive if an account is not managed on a frequent basis, in large part it comes down to better personal financial managment. Consumers need to charge only what they can afford and make sure they review each and every credit card bill that they receive, regardless if it comes 14 days before the due date or 25 days.

Maybe its come to the point where credit card terms and conditions need to be spelled out like the nutritional facts on the back of a can of soup. Seriously.

Earlier this month, Illinois State Treasurer Alexi Giannoulias held a news conference at Illinois State University announcing legislation he plans to introduce in January to prohibit Credit Card Companies from offering free gifts when marketing credit cards on college campuses. He refers to this as the “Sandwich Loophole”, referring to when Credit Card marketers handed out free sandwich coupons at the University of Illinois – Chicago.

The new legislation will also prevent Universities, Foundations, and Alumni Associations from selling students’ names and personal information to credit card companies. Universities that enter into marketing agreements with credit card companies will be required to disclose those agreements and to offer financial education to all incoming students by the end of their first semester.

While Giannoulias certainly has good intentions, simply ending free gifts from credit card companies on campus probably won’t do much to cut down on credit card applications. Credit Card companies will still target college students online, at concerts, in magazines, etc. The fact that he is requiring financial education to be provided is admirable, however, he does fall short by stipulating that it only needs to be a 45-minute “symposium” about credit.

While our website focuses on providing consumers and business owners with their credit card options, we are often asked how someone can begin accepting credit cards online for their business.  Below are some tips and methods that we have researched to guide you with the ability to accept credit cards.

The ability to accept credit cards is almost a necessity in today’s business world and while checks are still accepted at many businesses, the trend, especially for the internet, is toward credit cards.  Unless you’re going to use a third party vendor to accept credit cards (you’ll pay an additional fee for these), you will need to establish a merchant account in order to be able to accept credit cards. This is where its best to start with the bank in which you have your business checking account. There are many merchant account providers out there, so you will want to try and find consumer reviews on each of them. Some of the major points of consideration are:  (1) Per transaction fees - typically a % of sale amount, (2) Monthly account fee and (3) Setup Charge.

When you use a third-party versus a bank, your transaction fees are typically higher because the third-party will handle most everything for you and send you a check each month. A notable example of a third-party would be PayPal.

Google Checkout has become a popular option because of the low transaction fee of 2%, brand equity of Google processing payments and the fact that Google provides great analytics with its advertising tool Google Adwords. If you will be utilizing Google Adwords to send traffic to your E-Store then Google will actually credit your transaction fees based on 10 times your Google Adwords spend. For example, if you spend $100 on Google Adwords, you will receive a transaction credit of $1,000 toward transaction fees incurred through Google Checkout. This means that you can save 2% of your normal operating fees just by using Google Adwords and Google Checkout.

However, if you’re accepting online payments, you won’t even need a business machine to make the transactions. Online payments can be processed automatically through a secured site and, in many cases; you can even take credit card orders by phone by submitting the credit card info online.

Other Resources:

• Accept Credit Cards through Charge.com
• Google Checkout
• Using Google Adwords with Google Checkout 

A client of mine recently faxed me a letter from a well known bank/credit card company explaining that a recent review of his credit history and score has resulted in the bank dramatically dropping his credit card limit to a measly $250.
 
Unless you are using a card with a small limit for purposes of building credit -- a $250 limit makes a card virtually worthless to many consumers. It also can have a devastating impact on your credit score.
 
Many Credit Card Companies / Banks are concerned about increasing credit card delinquencies. To protect themselves from future loses, they are reducing the credit card limits for those cardholders they feel are most likely to go delinquent in the future. They are targeting consumers whose FICO scores fall below a certain threshold or who have had recent derogatory items appear on their report.
 
For those consumers who have recently begun to rely on their available credit to help them through a tight spot, this may come as an unwelcome surprise.
 
What many consumers don't realize is that the biggest impact of this change may be to their credit score and their ability to obtain new financing.
 
When a bank reduces your credit limit, it effects your credit utilization rate, which is one of the factors that impacts your FICO score. When the amount you've borrowed stays the same but the amount of credit available to you decreases -- it appears that you're borrowing a larger percentage of what's available to you. In a sense, you look more "maxed-out". Your FICO score will drop as a result. Lower FICO scores lead to higher rates on other credit card accounts and potential difficulty obtaining new credit.

Other Resources:

• Card Limits 'to cut overspenders'
• Credit Scores Hit by Card Limits: Financial News
• Banks Trimming Limits for Many on Credit Cards

One June 1st, 2008, many of the mortgage lenders in the US began using Fannie Mae's new Desktop Underwriter Version 7.0. Doesn't sound very interesting or exciting, right?
 
Well, it helps to get a little background first.
 
Fannie Mae is one of two Government Sponsored Entities (GSE) responsible for the buying, packaging, and re-selling of most of the traditional and conforming loans in the country. As a result, they are able to dictate the guidelines necessary for a mortgage loan approval. To streamline the process, they had created a computer system referred to as Desktop Underwriter that can determine the approvability of a loan prior to an underwriter even seeing it. The underwriter's job is then limited to simply verifying the information that was entered into the computer system was accurate. If you tell the system you make $5,000 per month -- the underwriter will be looking for a pay stub to support that.

From time to time, as Fannie Mae updates and changes it's guidelines, it releases new versions of their Desktop Underwriter system. This most recent version came with some very significant changes that will result in making it more difficult for some borrowers to qualify for loans -- loans they may have qualified for one day earlier on May 31st, 2008.
 
While there were many changes, I'd like to highlight the "credit-related" changes:

    * Fannie Mae now requires a minimum FICO score of 580 with the exception of when non-traditional credit is being used.
    * Fannie Mae has extended the waiting period one must wait to purchase a new home after a foreclosure from 4 years to 5 years. When extenuating circumstances led to the foreclosure, Fannie Mae will require a 3 year waiting period versus the previous 2 year requirement.
    * Fannie Mae will no longer allow a borrower to have one or more 60, 90, 120, or 150 day more payment delinquencies present on their credit report
    * Fannie Mae will no longer take into account a tradeline where the borrower is simply an "authorized user" unless the lender has information available to prove that the owner of the tradeline is married to the borrower -- or they can prove the borrower is the sole payer on the account for the last 12 months.

Other Resources:

• Fannie Mae
• Bold Cuts Means Savings for Consumers
• Credit Reports