Friday, May 9
Posted 11 a.m.

Rebate? Pay down credit cards!

A few weeks ago in our e-newsletters, we asked readers to tell us what they were going to do with their tax rebate money, and many, I'm happy to report, are paying down credit card debt. While there has been a lot of discussion about this "spending" not helping the economy, a reader named Katharine from Oswego, Ill., had a good explanation for how paying down credit card debt really will help the economy. Here's what she wrote to us:

I am planning on using the money we (husband and I -- no kids) get to pay off one credit card completely and use the rest to help accelerate another credit card balance's (early demise) payoff.

I don't think it matters what you do with the check -- except for feeding it to the dog or burying it in the yard for said dog to find. After all, even if you use it "wrongly" to pay off cc debt, you're pumping money into the micro-economy of that credit card company so they can turn around and lend it to someone else. All credit card transactions require humans to process them completely, whether they are manning a customer service desk or supervising those CS employees. Thus, your payment to ABC credit card company allows ABC to hire workers who will redirect their salaries into the economy.

I like that thinking -- because you know I'm always telling people to pay off their credit cards. If you can't pay off a card completely now, you might still try to find one with a lower interest rate, although as I've written recently, many of the card issuers are raising interest rates because of the credit crunch, regardless of the cardholder's creditworthiness.

Bankrate has introduced a new credit card search engine, which we think you'll find very useful. You can now search for cards by issuer, type of card (rewards, gas, etc.), and credit needed. Take it for a spin.

I'm flying up to the credit card capital of the world -- Wilmington, Del. -- this afternoon, not to beat on the doors of the card companies but to celebrate the birthdays of my nephew Greg, his 3-year-old son Henry, and the christening of his new daughter, Lucy. Even at family gatherings, though, everyone asks me about credit cards. Just like family, you can't live without them, so you need to learn to live with them. Have a great weekend!

Comments? Questions? E-mail plastic_rap@bankrate.com.

Wednesday, May 7
Posted 2 p.m.

Who pays for charitable donation?

I just read a press release about something called CharityChex, a credit card processing system that allows a payer to donate to a specific charity through a retailer at the point of sale. The customer also get a tax receipt right then too. The CEO of CharityChex, Scott Talbot, describes it this way:

"CharityChex combines charity and retail establishments together for the first time to create a win-win situation for customers and businesses who want to contribute to society in a simple, no hassle way."

CharityChex doesn't seem to be used by anyone yet, so I can't tell you who will pay the interchange fee for the transaction -- the cardholder or the merchant. The retailers, of course, are still waging their war against the credit card issuers like Visa and MasterCard for lower fees. In March, Rep. John Conyers, D-Mich., and Rep. Chris Cannon, R-Utah, introduced a bill that would force the card issuers to negotiate the fees with merchants.

The retailers say they have to pass these fees on to consumers ($350 annually per family, they say), and they infer they'll reduce prices if they get the card issuers to lower the interchange fees. As I've written previously, an agreement such as this was put in place in Australia a half-dozen years ago and -- guess what? -- prices haven't come down for the consumer.

Comments? Questions? E-mail plastic_rap@bankrate.com.

Wednesday, April 30
Posted 11 a.m.

Disclosure or real change: rant

I have a radical notion that people who are in deep financial debt due to credit cards never understood the terms and conditions of credit cards, and some may never have understood that credit card borrowing is a loan without a time limit to pay it back, whose interest rates can change at any time.

I shake my head when I read about all of these financial education efforts being made by banks, credit card issuers, brokerages, etc. There are a lot of organizations who are trying to educate people, but most consumers don't care. They don't know enough to care.

See, the problem isn't just financial education; it's education period. The letters I get from many readers complaining about how much credit card debt they're in or how they've been duped by the credit card issuers are barely readable. The people don't know how to express themselves. Half the time I can't figure out what the problem is from their description. How could they possibly understand the legalese that the credit card agreements are written in?

The Federal Reserve will be issuing a proposal shortly that will try to simplify various aspects of credit card agreements and terms. They hope to make disclosures clearer for the average consumer.

I first read about the Fed's effort a year ago and wrote about it in Plastic Rap. Now they're getting closer to offering a solution, or at least an improvement. Public hearings will be held this Friday in Washington.

Sandra Braunstein, director of the Division of Consumer and Community Affairs, testified April 17 before the House Financial Services Committee and outlined the changes that will be in the Fed's proposal. Among them are:

Advertisements of introductory rates would more clearly disclose the eventual higher rates and how soon they would be imposed;

Advertisements of "fixed" rates would be restricted to rates that are truly not subject to change, either for a clearly disclosed period or for the life of the plan;

A consumer would be sent notice 45 days before a penalty rate was imposed or the rate or a critical fee was increased for other reasons;

The periodic statement's "effective APR," another way of disclosing the total cost of credit, is the subject of two alternative proposals. Under one proposal, the effective APR could be revised to make it simpler for creditors to compute and potentially easier for consumers to understand. Alternatively, if continued consumer testing, public comments and the Board's analysis indicate that the effective APR does not offer a meaningful consumer benefit, then it could be eliminated, as the statute authorizes.

Her further comments highlighted the differences between consumer groups and the credit card industry regarding the proposed changes. Consumer groups say the proposal is mainly aimed at better disclosure and doesn't solve any of the greatest complaints about credit card practices. For example, consumers say the Fed's proposal does nothing to bar the practice of allocating payments to the lowest-interest balance first when there are different rates (say, for purchases and cash advances).

Nor does it address "double-cycle billing," a practice that has long been vilified by consumer groups. (Braunstein describes double-cycle billing like this: "Under the less typical two-cycle method, the finance charge is computed beginning on the date of the transaction, even if that date falls in the prior billing cycle.") She said the Fed did not comment on this practice because few card issuers use this method any longer.

Another area that isn't addressed is the practice of raising an interest rate and applying it to the entire balance, not just new purchases going forward.

The industry, of course, says that these changes will harm consumers by raising credit costs or reducing credit availability, according to Braunstein's testimony.

So what I take away is that this is the best the credit card industry can do for us. Except they're all raising interest rates for all kinds of cardholders because credit is tight, they lent too much money to high-risk consumers (because they could make the most money on them in fees and penalties), and these consumers are defaulting.

Perhaps what will happen is that we'll revert to the '80s, when you had to "qualify" for a credit card. If your creditworthiness wasn't up to snuff, you wouldn't get a card. The industry created this situation with their "risk-based pricing," which means they charge higher interest rates to their less-qualified customers. And the American consumer, who wants everything, fell for it.

Don't spend the tax rebate on that fancy HDTV because they keep showing it to you on your low-def TV that's paid for. Pay down your credit cards.

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