How the Sub-Prime Crisis Changed the Credit Card Game

Before the so-called “subprime loan crisis,” credit was easy and the percentage of loss in bank’s credit card divisions was compensated for by increases in market share. With banks taking multi-billion dollar losses as a result of fallout from that crisis, this is no longer the case. Instead, banks are doing everything they can to squeeze every ounce of profit and prevent taking on any additional risk in their credit card divisions. In other words, if you think credit card companies were sneaky before, you ain’t seen nothing yet.

This has resulted in several significant changes in offers for credit, particularly in offers for promotional credit rates on credit cards. The first of these changes is that most banks have significantly increased their up front balance transfer fees on promotional rate offers.

Prior to the crisis, it was not uncommon to see balance transfer offers with no up front fee. More commonly, the fee would be 3% with a maximum of $75 or $99. Now, not only is there usually no maximum on that 3% fee, but some banks have started to charge a 5% up front balance transfer fee with no maximum, resulting in actual interest rates almost as high as regular rates on credit cards!

The second change is that before the crisis, it would be common for accounts in good standing to offer 0%-2% interest promotional rate offers, including low interest “life of the loan” offers. The strategy of the credit card companies was to increase market share of debt, knowing that a certain percentage of borrowers would forget their promotional rate was ending, and therefore start paying regular interest for at least a month or two, or maybe more. Now, it is all but unheard of for people to get 0% offers on existing credit card accounts, and “life of the loan” offers, while still being offered are often at rates above those offered for home lines of credit.

It still is common for people to get 0% offers for opening new accounts, but frequently these offers are deceptive, because the balance transfer fee is – you guessed it – 3% up front with no maximum.

One strategy some have found effective is to cancel unused credit card accounts, and then apply for new ones. While it can get you better offers, it might also affect your credit rating, so beware if you are looking to buy a house, refinance, or finance a large item.

The third significant change is that credit card companies are doing their best to unhinge low interest “life of the loan” deals they made in the past. This is how they do it: Let’s say you owe $10,000 on a 1.9% promotional rate for the life of the loan. You will almost certainly be inundated by offers on that account for 0% interest loans for a short period of time, say three to six months.

The reason for this is sneaky, cleaver, and obvious. The bank hopes that you will take advantage on that 0% loan, and not pay it off before its due date. If you do pay it off completely before the revert rate, fine. If you fail to pay it off before the rate reverts to the regular rate of the card, you will find yourself in a classic credit card company trap: Because credit card accounts allocate all payments to pay lower interest balances before higher interest ones, all your payments above actual finance charges will go to pay off that low “life of the loan” 1.9% balance, leaving your regular rate balance earning high interest, perhaps as much as 18% or more for the credit card company.

In order to pay off that new balance costing you 18%, you would have to pay off the entire 1.9% balance in full. As I said, its one of the classic credit card company dirty tricks.

Frequently, banks make these offers not only with 0% interest, but without any balance transfer fees whatever. While these kinds of offers can be utilized effectively – if you know what you are doing and know how to plan effectively – one mistake, one lapse of attention that results in your not paying the complete balance of the 0% loan before it reverts will trap your balance at the high regular interest rate of the card until you pay off the low interest life of the loan balance.

In summary, read all promotional offers carefully, and do the math to make sure you really want it before taking advantage of it. And before doing any really tricky maneuvers, plan it out carefully – hopefully as a result of a long term strategy – before opening yourself to be slammed by yet another credit card company dirty trick.

7 Tips For Credit Card Management

The invention of credit cards was a giant leap forward for humans. People around the world use their credit cards for all kinds of purchases and payments. The credit cards give the people, the freedom of purchasing what they want, without having to depend on their bank balance. Credit cards are used by all kinds of people in cities and towns across the world. It is a fact that a credit card can be a boon as well as a bane at the same time.

At times, people do not know how to effectively manage their credit cards. This is why, their credit score is severely affected and they find it hard to acquire financial assistance from banks and other lenders. In order to make sure that your credit score is not affected, you need to effectively manage your cards. You need to be careful about making payments and using the card for any purchase.

When you make your credit card payments on time, your credit score improves and you can obtain higher amount of credit. On the other hand, if you fail to make the payments on time, your credit score is negatively affected and you may not get any further credit from financial institutions. Here are a few important tips which will help you in effectively managing your credit cards:

1. Plan your purchases – Before purchasing or buying any product, determine if it is necessary to buy it. You must make a list of your priorities and stick to that so that you can arrange for the money needed to pay your credit card bills. At any point of time, make sure that you do not purchase something too expensive as it will make you cross your monthly budget or the credit limit on your card.

An effective way of way of planning your purchases is to make a shopping list. At the beginning of the month, try to make a list of things you need to buy with the card and stick to that list as much as possible.

2. Always check your statements – Check your statements on a monthly basis as the statements will help you understand your spending pattern. Based on your observation, you can try to avoid unnecessary purchases. Also, checking the statements will help you in knowing the minimum payment due for a particular month, so that you can make that payment on time and avoid extra charges or fees.

You can easily check your statements online, and you can also use your smartphones to keep a track on your card usage. Mobile alerts can be very helpful in ensuring that you do not end up paying more than what you are supposed to, when you use your credit card for any transaction.

3. Try to make full payment – Try to make full payments, whenever possible. When you pay your credit cards in full and within the due date, you do not have to pay any interest on the billed amount. Besides, paying the credit card balances in full will help in improving your credit score. Even if you are not able to pay your credit card balances in full, you should always make sure that you pay the minimum amount due, within the due date.

Apart from saving a substantial amount of money on interest, you will also be able to improve your credit score and increase your chances of obtaining more credit in the future.

4. Keep a track of supplementary cards – At times, you might forget the fact that you have provided supplementary cards to your family members and these cards are linked to your credit card account. The way these cards are used can have an impact on your credit card account. Hence, you should keep a track on them and also ensure that the transactions completed with them are paid for within the payment due date.

Besides, you also need to keep a track of these cards so that you can ensure that the credit limit of your card is not exceeded. If it is exceeded, you will end up paying an over limit fee and other hefty charges.

5. Look out for promotional offers – Why pay more when you can get the same product by paying less? Be a little smart when using your plastic money and make sure that you utilize the variety of offers and promotions provided by the card issuers from time to time. These promotions can provide you with access to discounts, deals and privileges across different segments such as dining, travel, shopping and so on.

You can not only save money through these promotional offers but you can also enjoy a variety of other exclusive privileges which will enhance your experience of using a credit card. Make sure that you always visit a website where you can find information about such promotions so that you can take full advantage of them.

6. Make multiple payments in a month – Do not just limit yourself to making a single payment within the payment due date every month. Instead, try to make multiple payments even if you pay small amounts. It has been observed that the credit card issuers and the credit bureau tend to send payment reports more than once every month, if there is a lot of payment activity in an account.

When you make multiple payments you make sure that the lot of positive information about your credit card usage is being sent to the credit bureau and in the process your credit score will get a big boost. For example, if the minimum payment due for the month is S$1500, do make a payment of S$1500 and apart from that also make other amounts in the same month.

7. Avoid cash advances – You will be provided with the feature of withdrawing cash with your credit card but you should avoid utilizing this feature. When you withdraw cash with your card, you will be charged a cash advance fee and you will also not get any interest free period to make the payment.

Cash advances will increase your minimum payment due and the overall balance of your card and will make it difficult to pay off the balance in full. It can also have a very negative effect on your credit score and so it is important that you try to avoid cash advances as much as possible.

How the Credit Card Companies Are Taking Your Credit Away

Did you know that the credit card companies are now reviewing credit lines and if your income is down, they can reduce your credit. You may think you are secure, but then get a letter in the mail telling you that the amount of credit available to you has been reduced. Or if you apply for another credit card, the bank will look at all of your cards, and your call may trigger this credit card reduction.

I know because this just happened to me with the Bank of America, which has recently acquired Countrywide, the largest holder of mortgages in the U.S. — and why it was on the verge of collapsing before being acquired. What happened is that I have a no-interest loan that is about to readjust in July after 5 years. And in today’s economy, it is virtually impossible to get refinancing for most loans. So one loan broker who couldn’t get me a new loan helpfully referred me to Countrywide’s department that is handling loan modifications, where you might be able to get an extension of the current interest rate.

As the woman who answered explained, basically, you need to provide a couple of months of bank statements, your tax returns for the last year, a list of month to month bills and expenses, and then your information will be reviewed on a case by case basis. At the end of the call, she helpfully explained that I might apply for a Bank of America rewards card that might help me with the payments, since it was a no-interest promotion for 6 months. And she could refer me to a credit card specialist who could give me an instant approval for the card.

Fine, I said, since it sounded like a great way to get some extra credit at no interest while my business picked up. But what she didn’t tell me is that the credit card specialist would be reviewing all of my Bank of America cards, and besides approving this promotional card, the specialist could reduce the credit available through these other cards. The upshot was that after granting me $5000 on the new card, she reduced a $30,000 credit limit on another card down to $15,000, and then reduced or eliminated the credit available on two other cards which a bank manager had signed me up for. So the net result was that I suddenly lost about $22,000 in credit by responding to an offer to help me.

When I protested that this wasn’t right — luring a long-time customer in to accept what seems like a better offer only to end up in a worse credit position, her explanation was that even if I didn’t call, the bank does periodic reviews and they might have reduced my credit anyway. Or maybe not.

In any case, the incident served as another warning about how not only banks but credit card companies are cutting down on the funds available to consumers today. Is this a good way to stimulate the economy by making it harder for people to have funds to make purchases, start businesses, or make investments, which is what is needed to provide that stimulus? I don’t think so.

So just be warned. You may think you have a certain amount of credit available to you. But it may turn out to be less than you think.