Credit Economy

Will tens of millions of active credit cards out in circulation, there are plenty of choices for customers wanting to sign up for plastic. The credit card companies that can boast that they have the most general purpose major credit cards in circulation are Chase, Citi, Bank of America, Discover, and American Express. They are followed by Capital One, HSBC, GE, Target, and Wells Fargo. But in terms of which kinds of cards have the biggest piece of the pie, Visa outranks the rest, outpacing MasterCard by a huge margin.

Credit card issuers who use the Visa system and logo make up more than 60 percent of the market, while MasterCard’s logo is found on about half that many cards. American Express operates independently and snags about 10 percent of the overall market – meaning that about one out of every ten major credit cards carried around in the wallet are issued by Amex. Meanwhile JCB and Diners Club make up only a fraction of the world’s major credit card market.

In the USA, the competition between major credit card companies Visa and MasterCard is a little fiercer, with MasterCard claiming about 35 percent of the market and Visa winning the battle by having about 45 percent of the total cards in circulation. American Express is used by about 12 percent of those who carry a major credit card, and Discover cards pick up what’s left among the major credit cards with about 5-6 percent of the American market.

Of course hundreds of different credit card companies issue cards with the Visa or MasterCard logo, and the biggest market share in the USA credit card issuer industry is captured by Chase Bank, followed by Bank of American and Citi. All three of those major credit card companies enjoy over $100 billion in credit card business. Other big players who rake in at least $40 - $70 billion a year include American Express, Capital One, and Discover. Meanwhile in the market for prepaid credit cards, the top credit card issuers in the USA are H&R Block, MetaBank, and JPMorgan Chase.

While most of us grow weary of reading news about what Congress is voting on, the new credit card bill now under consideration may be worth paying attention to. Anyone who carries a credit card will be affected – hopefully in positive ways – by this latest effort toward government bank regulation to ensure that consumer credit card terms and practices are not taking undue advantage of cardholders.

Most legislators have vowed that in order for the credit card bill to pass and get approved with their vote, it will have to include some key components. For one thing they are pushing for more transparency regarding consumer credit card rules – which basically means that they want the new credit card bill to require plain English in plain sight, versus complex legal lingo buried in small print. They also want to make sure that credit card bill statements are sent out in a timely manner, something that has already started to happen under the new White House administration. Additionally legislators will push for tighter government bank regulation over interest rate hikes, so that the number and size of consumer credit card hikes is more reasonable and justified.

Americans are angry over the way they have been treated by card companies who have frequently added unwarranted charges to credit card bills while arbitrarily raising interest rates and fees and cutting lines of credit. In response to their upset voters the members of the House of Representatives and Senate – many of whom face upcoming elections and need votes to stay in office – is determined to pass a comprehensive credit card bill through Congress within the coming weeks.

To try to pacify lawmakers and appear to be proactive and cooperative about treating consumers fairly, banks have already started to do conspicuous things to make themselves look good – like introducing cards with built-in budgeting features. But they are still raising rates, so it looks like Congress needs to pass laws with teeth to stop the abuse by big banks of their consumer credit card customers.

The strip on the back of a credit card is a thin sliver of material that holds lots of important information about you and your credit card. Referred to as a “magstripe” or “magstrip” this thin film is full of tiny magnetic bits of iron – similar to those that store data on a computer disc or hard drive. When the card is swiped the data stored in those minute particles of magnetized iron are read, providing the merchant with the details necessary to run your credit card purchase.
 
Within the stripe or strip there are three different sets of information. Just as a music recording has several tracks that are mixed together to create the music CD, a credit card strip has three tracks of data, and each one stores characters that are encrypted in a secure code so that the information cannot be read by an unlawful hacker as the data is transferred electronically between the credit card merchant and your bank.
 
When the card is swiped into a credit card machine, the machine or terminal sends the data to your credit card company’s computer over a phone or Internet connection. Then the transaction or purchase being requested is compared to the information in your credit card account. If it shows that you have enough credit, the transaction is approved. If there is not enough, the transaction is denied and these answers are relayed back to the store or merchant.

Of course for all of this to happen the magnetic strip on the back of your card needs to be in good working order. If the strip has been damaged or badly scratched, then the card reader may have trouble deciphering the data – just as a scratched or damaged CD or DVD will not play properly. So to ensure that the card is in good shape it is recommended that you carry it in a clean wallet and also avoid storing the credit card near a magnet – because a strong magnet might accidentally rearrange the iron filings on the stripe and scramble the encrypted string of characters that are stored there.

In 2008 credit card fraud set a new record in the USA when it was announced that about a dozen members of a credit card fraud ring had been indicted on identity theft charges. The group had stolen millions of card numbers and other confidential information in what law enforcement spokespersons described as the biggest and most sophisticated credit card fraud and identity theft case in United States history. Despite the fact that the credit card fraud network only netted about 10 or 12 people, it involved a conspiracy that allegedly targeted such retailers as TJX Companies, BJs Wholesale Club, OfficeMax, Boston Market, and Barnes & Noble.

Credit card fraud is now blamed for about half of all financial fraud that is perpetrated worldwide, and the cost of identity theft and related credit card crimes is in the billions. The problem is especially rampant now that up to 90 percent of all credit card transactions involve an Internet connection – which makes them more vulnerable to computer hackers who can steal information quietly and then vanish into anonymity without a trace. But law enforcement officials admit that they are understaffed and outgunned in the identity theft battle – with very few qualified law enforcement personnel who have the kind of high-tech training necessary to fight credit card fraud and other white collar crimes.

Bank cards used in ATM machines, credit card numbers sent over the Internet, and paper copies of credit card transactions left behind at retail stores can all be misused by crooks who are determined to commit credit card fraud on unsuspecting cardholders. But if you suspect that someone is making unauthorized charges to your card or if you notice that your card has been lost, be sure to contact your credit card issuer immediately. There are many steps that can be taken to limit your exposure to theft and fraud, but the key to successfully protecting yourself is to act fast before thieves have a chance to take full advantage of your card account.

Although end of the year shopping and last minute sales usually inspires most Americans to rely on their credit cards and put their purchases on plastic, the end of 2009 is shaping up to be an exception to the rule. According to a recent feature in the Wall Street Journal, fewer shoppers are using their credit cards and it is mostly blamed on the fact that many have had their credit limits shrunk, their cards cancelled, or their interest rates and other fees increased.

As the article explained, about 28 percent of those who use make purchases this holiday season will use credit cards, but last year the figure was more than 31 percent. According to experts the buying and shopping habits of the average consumer have changed over the past year in the wake of the fallout from the economic recession. VISA and MasterCard have seen more than a 10 percent decline in card use, according to one industry report, and the lack of use of credit cards seems to be replaced with more use of ATM cards. People often use a debit or ATM card when they want the convenience of carrying plastic but the budgeting power of paying right away instead of carrying a balance and paying additional interest charges.

But there is one place where people in general still seem to prefer to use their credit cards. As shopping over the Internet increases in popularity, so does the use of traditional credit cards like American Express, VISA, and MasterCard. The experts say that is because shoppers usually have more protections if they are not happy with a purchase or get ripped off by a seller who does not complete the transaction or send the promised merchandise when they use their credit cards. If a credit card is stolen, for instance, the liability to the consumer is usually limited to about $50 for most situations. But if you lose an ATM bank card you run the risk of having your whole account wiped out. So although credit card use may be slower this year, there are still some compelling reasons to use credit cards wisely and responsibly when making those end of the year purchases – both online and offline.

The Federal Reserve recently imposed a new rule that prohibits banks from automatically enrolling customers in overdraft protection programs, because those programs typically charge high fees when consumers spend more than their credit card limit. Some charge almost $40, in fact, even when customers only go a few dollars over their spending ceiling.
"The final overdraft rules represent an important step forward in consumer protection," Fed Chairman Ben Bernanke told the media in a prepared statement. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Before the rule went into effect about three out of every four banks would automatically sign customers up for overdraft programs. But consumer advocacy groups said it was just another way for banks to make money off of their customers by not being transparent about their policies, procedures, and the terms of the credit card user agreement.

But Congress may want to get even stricter with banks, and the United States Senate is talking about giving bank industry regulators additional power to set overdraft fees at levels that are more prudent and reasonable. They also want more clear disclosure about such charges to ensure than consumers understand them before they incur charges. Congress may also limit the number of times a year that a bank can charge you for overdraft fees, and might force banks to sent customers an alert or notification if they are about to go over their limit.

Although they are taking bailout money and facing hard economic times, a recent study revealed that banks will make more than $38 billion this year just on overdraft and non-sufficient fund fees. That represents an increase in that kind of revenue of about 35 percent or more compared to just five years ago.

Home equity is a great asset, and gaining access to it through a home equity loan can be also be a wonderful financial resource. But when using home equity always follow one simple rule: never use home equity for anything other than home improvements or other projects or purchases that directly contribute value to your home. Otherwise you are only robbing yourself by undermining the worth of your most important financial asset.

Home equity loans – unless they were directly used for home improvements – were until 1998 essentially outlawed in Texas under provisions of the Homestead Act. That meant no borrowing against your equity to pay off credit card debts or finance a new car, fund college tuition, buy a vacation home, take a trip to Europe, or go out every night to favorite restaurants. Because of the law there were very few foreclosures in Texas. Then, about 15 years ago, the law was changed to allow people to use home equity loans any way they wanted – just as people typically do all over the USA. As soon as the provision was repealed, Texas got caught up in the real estate bubble frenzy and became one of the biggest foreclosure regions in the nation.

The lesson to be learned is that millions of Americans lose their homes because of risky home equity borrowing. Industry analysts point out that one of the main reasons for so many defaults and foreclosures is that homeowners have tapped all available equity and spent it to pay ordinary household expenses, credit card debts, and other obligations that deplete – rather than enhance – home value.

Perhaps if the USA took lessons from history and adopted mortgage guidelines similar to those of the original Texas Homestead Act – and made it impossible to tap and spend equity without using it for home improvements that boost equity – we could avoid a repeat our current tragic economic events. In the meantime, homeowners should take their own steps to avoid this kind of trouble by using their home equity – but only for home improvements. That way the equity builds more equity, your money works hard to create more money, and owning a home becomes a path to wealth instead of a financial burden.

Perhaps you know someone who is really expert at staying out of debt and who avoids using credit in any way, shape or form. Maybe you’re even one of those rare consumers who sticks to the principle of paying for everything you buy in cash and not buying anything that you cannot afford to pay for out of your pocket. If you are, congratulations for being such a smart and savvy money manager. But you should know that if you have never used a credit card or borrowed money from a bank and paid it back that you may be in worse shape than someone with terrible credit.

That’s because in this day and age – where we live in a debt culture based on excessive borrowing habits – people routinely base decisions on the track record of your credit history. If you don’t have any credit history because you have never needed to borrow money that may be a fantastic testament to your character and to your ability to make wise financial choices. But it also means you are a total mystery to those people who rely on credit history as a yardstick.

To them you are like a person who cannot explain where he or she has been for the past 10 or 20 years or what you have been doing with your life. You probably would not go out on a date with someone who could not answer those kinds of basic questions, you probably would be hesitant to rent to them, and you would likewise be reluctant to hire them to work for you. In the same way those who depend on credit scores to evaluate people will not want to enter into a relationship with someone who has no history. They would even prefer to hire someone who has lousy credit but has a good explanation for their credit problems. Maybe they were sick, went through a divorce, or were young and did not yet understand the importance of maintaining good credit. At least they have a track record, whereas if you have never owned a credit card or used a car loan or student loan you are like a ghost in terms of your financial history. You won’t be able to rent a car, may have trouble renting a house, and will probably not qualify for a mortgage.

To avoid that kind of ridiculous and paradoxical problem, talk to your banker about ways that you can establish credit – without compromising your principles or risking your money – so that you can have a stellar, A-plus credit rating. Once you create a documented paper trail of your excellent credit history it will help to verify and validate the fact that you are trustworthy, reliable, and always pay your bills on time – qualities that are really worth celebrating in this era of too many irresponsible financial habits.

In November 2009 CNN reported that some of the nation’s biggest credit card issuers – including major players like Capital One and American Express – are in the middle of a balancing act as they try to maintain profit margins in the midst of an ailing economy. As unemployment rises, so do defaults on credit cards. As a result many credit card companies are facing double-digit losses due to lackluster performance and unusually high risks. Those businesses that issue plastic are also under unusually tight scrutiny from government regulators, so some have been forced to reign in their aggressive tactics – which also cuts into revenues.

President Obama and members of Congress, for example, have promised to get tough on card companies that are guilty of gouging cardholders, charging excessive fees, or failing to inform customers about the terms of their credit card agreements. With the general public supportive of that kind of oversight and regulation and skeptical about the ethics and credibility of those in the financial industry, sweeping changes could happen. As a way to avoid regulatory legislation, most card companies are already being proactive about their policies – but that kind of prudence may also mean that they are less generous about extending credit to those who have less than stellar payment histories. That has already translated into lower lines of credit for millions of cardholders, but other developments are also having an adverse impact on those who rely on their credit cards.

One of the most controversial new measures to emerge is that some card companies are actively raising raise the interest rates that they charge for outstanding balances. During the first half of 2009, for instance, at least a dozen of the largest credit card companies raised their median annual percentage rate by two points or more.

The card companies call this tactic “repricing.” But to the average consumer it just means that while card companies are pulling back on lines of credit and curtailing or canceling their rewards programs, they are also charging considerably more interest. Meanwhile Citigroup has decided to charge annual fees to some cardholders that used to have free cards, and Bank of America is considering doing the same thing by charging up to $99 a year to some of its customers.

What all of these means to consumers is that now it is more important than ever to read and understand your credit card policies and statements. If your fees and rates are going up, shop around for a more affordable card. Plenty of them are out there, and while banks are raising card fees to try to bolster their own profits consumers need to also take drastic measures to protect their own incomes. Find a reasonable card company, start fresh with a new and more user-friendly credit card, and then ditch the greedy ones that are trying to ride out the recession by hitting you with excessive charges you should not have to pay.

Plenty of financial wizards and real estate gurus offer systems to help homeowners pay off their mortgages early – but you should be skeptical of any strategies that involve paying someone to set up the scheme. There are even bimonthly payment arrangements that you can create with the help of your mortgage company, for example, for a nominal fee – but doesn’t the idea of paying a fee defeat the whole purpose of trying to save money?

A better way to shortcut your interest payments and pay down principal in a quick manner is to do just exercise a little discipline, rely on the calendar and some basic logic, and set up your own twice-a-month payment plan. Don’t pay twice as much, however, because the idea is to pay the same amount you normally do – while sending in your monthly payment in two equal installments.

Here’s how it works:

By paying half of your payment every two weeks, you wind up paying a full extra month’s worth of mortgage payments each year. The result is a function of mathematics and how our 52-week, 12-month calendar operates. Another way to think about how this system works is to consider that any interest rate payment plan involves charging you interest for each day that you borrow the money. Pay off the debt early and you no longer owe interest. If you pay an extra month’s worth per year on a 30-year fixed rate mortgage loan, you’ll save a month a year, 12 months in 12 years, and about two and a half years over the life of the loan. Consider, for example, a loan with a monthly payment of $1,200. Over a period of 30 years your savings will add up to approximately $1,200 times 30 – or more than $35,000. Of course it will cost you an extra postage stamp per month, but you can eliminate that expense and hassle by just setting up an online payment account and paying your lender via the Internet.

As with any payment arrangement, check with your lender or study the fine print of your mortgage to make sure that paying this way is permissible. But chances are your lender will be more than happy to get 50 percent of your monthly payment two weeks ahead of time.