The Mortgage Reports Blog

Credit Card Issuers And Consumer Advocacy Groups Take The Same Statistic And Find Totally Different Spin

Statistics can be used to help tell a story, but watching how two opposing groups report the same data can reveal even more.

In 2003, the Treasury Department urged credit-card issuers to increase their required minimum monthly payments.  We tracked this story in July and, to date, most (but not all) credit card issuers have agreed to change their minimum payment calculations.

Under the old formula, it was possible for a cardholder's monthly balance to increase even if the minimum payment was made, sort of like a negatively-amortizing home loan.

(Minimum Payment) = (2% of Principal Balance) + (Fees Accrued in Current Month)

The new formula makes it impossible for that to happen:

(Minimum Payment) = (Interest on Existing Balance) + (Fees Accrued in Current Month) + (1% of Principal Balance)

But, back to the point about statistics. 

Despite the Treasury's heavy hand in making this "recommendation", credit card issuers say that the impact of the new formula is negligible.  The American Bankers Association states that 75 percent of cardholders either pay off their debts in full, or pay more than the minimums each month; only 4 percent pay the minimum.

Consumer-advocacy groups, on the other hand, find that figure a farce.  They say that 45 percent credit card holders pay the minimum payment.

With a discrepancy that large, can either figure be trusted at all?

Source
Credit Cards Raise Minimums Due
Diya Gullapalli
The Wall Street Journal Online, December 17, 2005
http://online.wsj.com/article/SB113478254290725382.html

Would You Believe Where Capital One Makes Most Of Its Money?

Refer back to an earlier post, and you'll know why I often recommend my clients shred their Capital One cards. 

Then, I found this statement from MSN Money, quoting Bill Ryan (for the second time):

Bill Ryan, consumer finance analyst at New York-based Portales Partners, estimates that between 100% and 200% of Capital One's pretax earnings come from fees.

In other words, the company exists not to supply credit that can be paid back on time, but to supply credit that can't.

Summarized: Capital One earns more money from fees than from lending.  That should frighten all of us.

The Minimum Payment Due On Your Credit Card Is About To Double

In the 1990s, credit card companies dropped their minimum required monthly payment from 4% to 2%, boosting their own profitability.  Consumers responded -- predictably -- by spending more.

As new bankruptcy law rolls out this October, banks are under pressure from federal regulators to tighten their lending policies by reverting the minimum required monthly payment back to the 4% level

For the average consumer, this is a case of forced medicine. 

Many Americans live beyond their means, using bank-issued credit and only paying their minimums.  In doubling the payment, these consumers will be forced to make important lifestyle choices.  Some credit-strapped borrowers may fall over the edge and into bankruptcy court.

Ironically, the new bankruptcy law will make it much more difficult for consumers to wipe out existing debt using Chapter 7 or Chapter 13 filings.  Therefore, credit card holders should understand the impact higher minimum payments will have on their lives before the changes are made.

Higher minimum payments will do a lot of good for people on paper, but may cause problems in practice.  With many families currently living paycheck-to-paycheck, there could be be a massive default on credit cards in the coming months. 

In addition, Prime Rate continues to increase and that is the interest rate against which credit card payments are calculated.

Credit cards holders that are also homeowners should consider using home equity to repay credit card debt, thereby lowering their overall monthly payment.  Then, the next step is to meet with a financial professional who can help lay a road map to a string financial future.

It is never too late to start planning for a fresh start.

Before Transferring Your Credit Card Balances, What's In Your Wallet?

If after reading my last column about transferring credit card balances, you rushed to offload your high balance credit cards to your Capital One credit card, NOT SO FAST, MY FRIEND!

The biggest reason for transferring balances is to lower your Extent of Indebtedness, or balance-to-limit ratio.

This ratio is indicative of a stronger credit profile because the credit bureaus penalize credit card users for carrying high levels of debt relative to their credit limits.

But, what if your credit card company withholds your credit limit from the credit bureaus?

If your creditor chooses to not report your credit limit to the credit bureaus, the bureaus will typically use the highest reported balance in lieu of the actual limit.

So, if your credit limit is $25,000, but you've only used $5,000 in any given month, $5,000 will be the "limit" used to calculate Extent of Indebtedness.

In any given month, carrying a $5,000 balance will result in a 100% utilization. This can drop your credit score by as much as 50 points, depending on the rest of your credit profile.

According to myfico.com, a 50-point drop in FICO score can cost you an extra $336 monthly on a $300,000 mortgage. Over 30 years, this equates to $121,382 in extra interest charges.

Capital One -- as a matter of policy -- does not report its customers' credit limits to the credit bureaus because it "consider [limits] proprietary" information, and "because we do not think it would be appropriate to impact the individual's Fair Isaac score -- positively or negatively -- by reporting them."

Uh, huh.

Capital One's corporate policy may be costing you lots and lots of money each month. So, before you transfer your balances to other credit cards to lower your balance-to-limit ratio, be sure what's in your wallet.

(Image courtesy: Illini Report)