The Credit Crunch Now Effecting Individual Credit Scores

As if steadily increasing foreclosure rates and falling home values weren't enough, the subprime mess has begun to spill over into other areas of the financial sector. Credit card issuers are now starting to get their risk exposure in check (which would otherwise be a good thing), but if issuers cut down credit limits substantially consumers could be effected in an unintended way.

FICO scores - individual credit score that gives lenders a rough estimate of how much of a risk you are - are based in part on your credit utilization rate. This means, if a credit card issuer cuts your available credit in half, that will have an effect on your utilization rate -- at FICO score as a whole. For example, say you have a credit card balance of $4,000 and credit line of $10,000, if Discover drops your credit line to $5,000. Assuming you have no other cards, your utilization ratio has rose from 40% to 80% overnight. Additionally, card issuers have begun to raise interest rates from bad to ugly. You already know this -- but, there's even more incentive now to pay down credit card debt. Unless you have some payday or auto title loans floating around, the credit card debt should be priority #1. There are few other investments that you can make a 29% return on your investment, and that doesn't even include fees that card issuers tack on each month.

It should be noted, that credit utilization accounts for about 30% of your FICO score. The most important factor in your credit score remains your payment history, which makes up 35%. The rest of your score is calculated by weighting your credit history (15%), types of credit (10%), and new credit (10%).

The Economy May Be in a Funk, but Banks Keep Offering Deals

With the economy tanking it makes sense to take free money from anywhere you can get it (provided there are limited strings attached). Below are some of the offers that I saw this week while surfing around. While most require some minimal hassle, if you are in the market for a new account anyways they might be worth your while.

E*Trade Savings $25 Bonus
Details: $1 minimum to open an account. Bonus will be deposited within 30 days of opening the account. Another plus, the 3.15% APY is one of the best out there.
Direct Link

INGDirect Savings $25 Bonus
Details: $1 minimum to open account, but if you want the $25 bonus you must fund the account with at least $250. ING was paying 3% APY as of 5/28/2008. (Full Disclosure: If you sign up for an account with one of the links below I receive $10). If one of the links doesn't work try the next. In none of them work for you, send me an email and I'll get you a fresh one.
Direct Link 1; Direct Link 2; Direct Link 3; Direct Link 4; Direct Link 5

American Express Nest Credit Card $50 Bonus
Details: You receive 5,000 bonus points after your first purchase (redeemable for $50). The card also gives you 1% back in points that are redeemable for cash and an additional 10,000 points (equal to $100) for any year you charge over $15,000 on the card. You also receive a financial planning kit that is supposed to help newlyweds budget. Plus, everyone will think that you're a newlywed as you throw down the AMEX (even if you're not).
Direct Link

Easy (and Free) Ways to Go Green

Today marks the beginning of a series that I hope I will be able to keep up with in the coming weeks. I hope to do a series of short posts about ways to clean up your finances and do a sort of spring cleaning if you will. I know I have fallen behind things, so maybe this will help me get back on track.

Everyone has at least one credit card that has some sort of reward, or is at least an affinity card of one type or another. For those of you who are somewhat environmentally conscious, but can't part with your SUV or other less than environmentally friendly habit - I stumbled across something yesterday that may be of interest. It seems that some credit card issuers are looking into so called "green" causes as a way to boost membership and profits. I have listed some of these cards and their benefits below.

GE Money Earth
This MasterCard directs 1% of your purchases to causes that reduce or avoid greenhouse gases and helps to offset your personal carbon footprint.
Direct Link

Working Assets Visa
This Visa donates 10 cents to organizations like the Ocean Conservancy or Global Fund for Children every time you make a purchase. You can view of full list of the organizations supported here.
Direct Link

Bank of America Brighter Planet
This Visa credit or check card returns 1 Worldpoint for every dollar you spend on purchased. Every 1,000 points can be redeemed to offset approximately 1 ton of emissions (the equivalent of taking a car off the road for 2,000 miles). Plus, now you can get 1,000 bonus points for signing up and 1,000 bonus points for signing up for paperless statements.
Direct Link

Salmon Nation Visa
Provided by ShoreBank Pacific, this Visa donates half the income it generates to "salmon nation". Salmon Nation is a collective in the region that is home to Pacific salmon spawning grounds.
Direct Link

Affinity Cards

These cards provide donations to the not for profit organizations that are represented on the face of each piece of plastic. If you run a Google search with "your favorite not for profit org" followed by "credit card'" chances are you will be able to track down a credit card that will finance some of their good work.

** Note: I didn't do an analysis of which one of these cards is best for YOU financially. Read the fine print for each offering. Remember, if you consistently carry a balance on your credit card you are better off finding a card that has a very low interest rate and donating some money to the charity of your choosing if you have funds left over at the end of the year.

*** Note: If you have a great card that you think should be added to the list, drop me an email and I will put it up on the website and give you credit for finding it.

Making Reward Credit Cards Work for You

I’ve been burned in the past by credit cards that offer a great deal initially only to scale back rewards or raise interest rate so that the products become less attractive. Fortunately, I don’t carry a balance and I pay my statement in full each month, so the later issue doesn’t affect me (note: if you carry a credit card balance you should worry about the interest rate you are being charged and not the 1-3% you are getting in cash back). However, I am admittedly a “reward whore” and try to reap as much cash back bonus from my credit cards that I can.

So the goal is three fold, 1) to get the greatest amount of rewards possible, 2) do so only holding a few cards and, 3) try to pick cards that won’t drop their rewards six months down the road. I attempt to hold only two credit cards at a time and not open and close accounts if I can avoid it (due to the adverse consequences it has on a credit report and the hassles associated with it).

Here are the cards that my wife and I currently hold and some others that I think are worthy additions if you are reconsidering the cards in your wallet or in the market for a new one. We try to have one card that we use for gas and one for other purchases, but there are other good cards out there that give rewards for gas, groceries and pharmacy purchases (Citi started this trend with their Dividend card and have since slashed rewards).

A GAS CARD

My current favorite is thea BP gas card that offers 5% cash back on purchases at BP locations nationwide. There is no cap to the amount of rewards you earn yearly, which is good considering the price of gas these days. If you don’t have many BP’s in your area do a Google search for the most popular station followed by credit card. In my experience most of the major companies offer similar products so it’s worth a look.

AN EVERYDAY CARD

Since the majority of reward cards offer either a) a higher cash back percentage on certain types of purchases or b) a lower cash back percentage that applies to all types of purchases – if you are looking to maximize your cash back its good to get a card that will give you more than 1% back without a cap on all other purchases.

If you have a brokerage account with them, or are looking to open one in the future the Fidelity Visa card if my current favorite. While the reward rate isn’t the highest that’s offered, I like the 1.5% cash back on all purchases with no ceiling. Every time that you accumulate 5,000 reward points (the equivalent of charging $5,000), you receive a $75 credit for your Fidelity brokerage account. (* Note: Fidelity also has a Visa card offering 2% cash back with no limit into a 529 plan for those of you who are looking to save for a child's college education).

OTHER OPTIONS

Credit card issuers are fighting tooth and nail over new clients so there are new products popping up every day. Some good resources to start your research are creditcards.com and bankrate.com. Here are some other cards that might be good fits if you are searching for a new one.

Chase Freedom Visa: This card gives you $50 when you make your first purchase. Additionally, you receive 3% cash back in your top three spending categories (ie: grocery, gas, etc.) which re-adjusts each month. All purchases that are not in your top three spending categories earn 1% cash back. An added bonus for this card is that you receive an extra $50 each time you earn $200 in rewards. (* Note: that the fine print for this card says that you can’t receive 3% cash back on warehouse and discount club purchases).

Blue Cash American Express: This card gives you up to 5% cash back on “everyday purchases” (including gas, groceries, and pharmacy purchases) as well as up to 1.5% cash back on other purchases with unlimited cash back rewards. However, this card is probably only particularly attractive if you charge a large volume on your credit card. [* for each calendar year, from $0-$6,500 you receive 1% cash back for “everyday purchases” and .5% on all other purchases, over $6,500 you receive 5% cash back on “everyday purchases” and 1.5% cash back on all other purchases).

The Nest American Express: This card is another that is potentially attractive if you charge a substantial amount on your credit cards. You receive 5,000 reward points when you make your first purchase (equal to $50). Then you receive 1 point for each dollar charged on the card (1%). If you charge $15,000 in a calendar year then you earn an extra 10,000 points (equal to $100 cash back), on top of the 1% you normally ear. The card is targeted toward newlyweds and couples who need a hand so new sign-ups also receive a binder and materials to help you plan a budget.

So do you have a favorite card that has stood the test of time? Let us know.

Image: szlea @ Flickr

When Using a Credit Card is Better Than Debit Cards

If you are traveling this 4th of July week (for those of you in the U.S.), chances you will be taking a credit card, debit card, or a few of both with you. There are a few reasons why traveling, credit cards are superior to debit cards:

1. Temporary Charge Authorization: When you make swipe your card at the pump or make other purchases with your debit card the merchant will make a temporary charge for $1, $20, or even $50. The company then charges your account for the amount in full when the transaction has been completed and cancels the initial transaction. The problem is that the initial transaction can take up to 48 hours to disappear from your account and may end up over drafting your account.
   
   
2. Car Rentals: Simply, many car rental companies won't let you rent a car with a debit card, although I think this is beginning to change.
   
   
3. Disputed Transactions: Some debit cards do not offer the purchase protections that credit cards do that allow you to run to Visa or Mastercard to take care of problems if the merchant won't. However, this fact has been widely publicized and as a result Visa and Mastercard have both make a marketing push to let people know that this is changing.

Links
Which to Use @ MarketWatch
Picture - Flickr Selvin

The Perils of Debit Cards

Americans use debit cards a lot. Use of debit cards has grown exponentially and the recent gains coincide nicely with the increased marketing they have received from credit and banking companies. Debit cards are a boon for these companies, they get processing fees still, overcharge fees (at my bank it is almost $40), and they don't have to float you money free for 30 days.

The products are great for people who tend to overspend with credit cards (provided they do not overdraw their checking when using a debit card) and are convenient. But, there are some things you should be aware of.

1. Know your liability policy, the "Zero Liability" that you see marketing generally applies only to cards branded with the Mastercard or Visa logo.
   
   
2. The Zero Liability doesn't apply if someone else uses your PIN.
   
   
3. Potential fraud or stolen cards need to be reported FAST. Debit cards are governed by different laws than credit cards.
   
   
4. It is generally harder to dispute purchases on debit cards than credit.

I don't want to sound the alarm too loud, but these are some things to consider when you visit your local retailer and put down the plastic.

Link
Read more about debit cards.

Identity Theft With That Tenderloin?

Visa came out last week saying that restaurants are the most common place for credit card theft to occur. The company, with a wealth of detailed data at it's disposal from millions of card holders, says nearly 40% of thefts happen at restaurants. The report also says that some companies are saving data from the cards that makes compromises by thiefs even easier. Unsurprisingly, the restaurant industry contests these figures... but I tend to believe the guys issuing the cards.

Link
Restaurants & Credit Card Theft

MBNA Sticks it to Consumers in the UK

I don't have hard data so I can't be assured of the accuracy of this story, but it's certainly not out of the realm of possibility... Credit card companies have always made a killing on people who are late or otherwise delinquent on their payments. Now there are reports that MBNA the huge American credit card issuer has been charging users who use their cards responsibly. British users who have a positive credit card balance from accidentally overpaying or paying twice in the same month have found they are being charged £10 if they don't reduce the positive balance. The policy has been spun - not surprisingly - as a measure to protect consumers against fraud. No word yet on if this policy will be transferred to United States card holders (luckily I don't use MBNA), but if I see anything about it I will let you know. Full story here.

Let your Credit Card protect you

Credit cards get a bad rap for lots of things - mostly for people unable to manage the responsibilities that accompany them. While it is often overshadowed, these companies can provide some valuable services to their clients. Case and point - if you have a CitiBank platinum credit card (you can see my post about this here, but I'm sure others offer this service as well) you
are covered for increased warranty protection. The extended warranties that Best Buy and others push on you are one of the worst investments possible. But, you can get double the coverage through many credit card providers simply by putting your purchase on their plastic. An article made the Consumerist today about a person who bought a new laptop and it broke outside the year warranty, luckily he put it on his American Express and was covered for an additional year. That is a hell of a deal since he probably received some sort of reward when he charged it in the first place.

Credit Cards: Best of the Best

If you are like me you get a handful of credit card offers in the mail daily with zero percent interest, low fees, cash back and other rewards. I don't typically mind this constant onslaught of offers most of the time, except they tend to send terrible deals. I'll pick out a few credit cards that I think are the best out there based on what type of user you are. I have put the in categories there based on how you use credit cards might use credit cards. (as usual I receive nothing for recommending any of these, I found them by searching bankrate.com, google.com, and creditcards.com the information was accurate as of 2/24/2007).

If you want the lowest interest rate because you carry a balance:
Brand: First National Bank (Visa)
APR: 9.99%
Intro APR: 1.5%, for 15 mo
Fee: None
Credit: "Good Credit"
Reward: 5% cash back on gas purchases for first 3 months, 3% cash back on gas after the intro period, 1% on all other purchases.

If you want cash back:
Brand: Citi Dividend Platinum Select Card (Mastercard)
APR: 13.74%
Intro APR: 13.74%
Fee: None
Credit: "Excellent"
Reward: 2% cash back on purchases at supermarkets, drug stores, gas stations, convenience stores, utilities, 1% everywhere else.

OR

Brand: Chase Freedom (Visa)
APR: 14.24%
Intro APR: 0% (12 mo.)
Fee: None
Credit: "Good Credit"
Reward: 3% cash back on purchases at grocery stores, gas stations, fast food, 1% everywhere else.


If you want miles:
Brand: Capital One No Hassle Miles (Visa)
APR: 13.9%
Intro APR: 13.9%
Fee: None
Credit: "Excellent"
Reward: 1.25 miles per dollar spent, redeemable on any airline, no blackouts, can fly holidays


If you have a mortgage:
Brand: Citi Home Rebate Platinum Select
APR: 12.24%
Intro APR: 12.24%
Fee: None
Credit: "Very Good"
Reward: Once a year the company will apply the rewards you receive against your mortgage. You receive 6% cash back on internet connection fees, telecom services, cable, satellite, pay tv & radio, utilities (12 mo), you receive 1% cash back on all other purchases.


If you are a trader:
Brand: ShareBuilder Platinum Rewards
APR: 14.24%
Intro APR: 0% (12 mo)
Fee: None
Credit: "Good"
Reward: 1% cash back directly into your ShareBuilder account which allows you to buy fractional shares of stock or commission free trades.

OR

Brand: E*Trade Rewards Platinum Visa
APR: 12.15%
Intro APR: 12.15%
Fee: None
Credit: "Excellent"
Reward: 1% cash back directly into your E*Trade account to invest or use for free trades.