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Credit Scores, Credit Cards

How Consumer Finance Works/How to Avoid Mistakes and Manage Your Accounts Well

Credit Scores, Credit Cards by The Silver Lake Editors
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The news about consumer credit information and identity theft keeps getting worse. · In March 2005, information broker LexisNexis admitted that ID thieves, using stolen passwords from legitimate customers, had stolen personal information on as many as 32,000 U.S. citizens form one of its databases. · That episode was preceded a few weeks earlier by a similar problem at another large data broker, ChoicePoint Inc. There, thieves—also impersonating legitimate businesses—stole personal financial data on as many as 145,000 people. · About the same time, Bank of America announced that it had “lost” personal financial information related to some 1.2 million federal government employees (including some members of congress) with BofA credit cards. These problems—and the concern that more announcements are coming—have caused some calls for greater government oversight of the consumer credit information industry. But will more government rules really accomplish anything? Silver Lake Publishing’s new book CREDIT SCORES, CREDIT CARDS: How Consumer Finance Works/How to Avoid Mistakes and Manage Your Accounts Well makes the case that consumers need to protect themselves from ID theft by knowing more about how the credit system works. “It’s easy to schedule hearings on Capital Hill where politicians can rant about security breaches. Especially when some of their own information has been stolen,” says Silver Lake editorial director James Walsh. “But we’ve got laws on the books that regulate how personal financial information is used by credit bureaus. The real problem is that consumers don’t pay enough attention to who’s got their information. In an economy that relies so much on consumer credit, that’s really bad.” There’s no way that a consumer can make sure his or her information in a credit bureau’s databases is absolutely secure. But the best method of prevention is to watch that information closely—and recongize errors or abuses as soon as possible. CREDIT SCORES, CREDIT CARDS give readers an eight-point process for making sure their information at the major credit bureaus is accurate and as secure as possible: 1) Get a copy of your credit report from each of the three major U.S. credit bureaus (Equifax, Experian and TransUnion). 2) Make a copy of each report. 3) Mark up each report, focusing first on any errors in your name, address or other contact information. 4) Next, review all credit accounts in the report. Make sure that they reflect the right names of lenders, the right account numbers, current balances and proper payment histories. 5) If you find errors on the credit accounts portion of a report, make copies of your own bills or statements that show the right information. (If you have to contact the credit card company or lender to get this information, do so.) Attach these support documents to the marked-up copy of the report. 6) Write a cover letter to each bureau’s consumer service office that explains the errors you’ve found on the report. If the errors involve credit accounts, copy the relevent card company or lender with a complete package (cover letter, report mark-up and support documents). 7) Send the main package and all copies by certified mail with return receipt, so you have proof of when you sent the information and that it was received. 8) Repeat the process at least once a year. The credit bureau must respond to your letter within 30 days. And it must either fix the errors or send you an explanation of why it does not. If it claims that its information is accurate, it must supply its own support documents that prove this. But the credit bureaus (called credit reporting agencies or CRAs in regulatory jargon) are only part of the consumer finance system. And none of the three major bureaus in the U.S. were implicated directly in the recent problems. CRAs and the companies that actually sell personal information are often connected in a complex web of corporate affiliations. For example, the LexisNexis database attacked by ID thieves was called Accurint—and was itself part of a company called Seisint, which LexisNexis had recently acquired. Likewise, ChoicePoint is a corporate sibling of the credit bureau Equifax. “The information that credit bureaus gather is rented and sold a variety of channels before it gets back to you in the form of credit card offers and mortgage refinance deals,” says Walsh. “The process works like a game of telephone, with your information morphing slightly as it’s passed from credit bureau to broker to direct-mail company. So problems shouldn’t be a surprize…and more are likely.” Security becomes an issue when a person’s financial information appears in so many databases that no one—the CRA collecting the data, the brokers acting as middlemen or the marketing companies that print credit card offers—has control of the data. “The best thing that an individual consumer can do is make sure his or her financial information appears in as few places as possible. Reduce the number of credit cards and other consumer finance accounts you have. Make sure that you tell the companies whose accounts you do keep not to share your information. And keep in contact with the credit bureaus at least once a year.” CREDIT SCORES, CREDIT CARDS explains that credit reporting agencies are not designed to serve consumers. They are designed to serve the companies (banks, credit card issuers, mortgage firms and vehicle lenders) that offer consumer credit. “You begin to understand the attitudes that CRAs take toward individual people when you see that basic truth,” says Walsh. “Their customer service is notoriously bad and their security is shaky because the whole system is built to serve the credit card companies and home equity lenders. It’s not built to serve you.” And he says that fee-based consumer protection services being developed by the CRAs don’t change much: “These services aren’t really necessary; and they don’t do as much as most people think to prevent ID theft. The important question is: Are you willing to manage your finances more carefully? No one but you can do that.” Still, many people will look for a government solution to identity theft. In early March, Federal Trade Commission Chairman Deborah Platt Majoras told the U.S. Senate that existing federal rules that require banks to take reasonable precautions to protect customer data should be extended to cover data brokers. And CRAs should also be required to notify consumers when their data has been exposed to identity thieves. “These are fine ideas. They’re already laws in some states. Applying them nationally may do some good,” says Walsh. “But real changes won’t take place until consumers understand that the consumer credit system is just as prone to problems as the Postal Service, a drive-through hamburger place or the coffee shop around the corner. Do you check the bag at the drive-through? Probably. You need to do the same for your credit.” CREDIT SCORES, CREDIT CARDS: How Consumer Finance Works/How to Avoid Mistakes and Manage Your Accounts Well by The Silver Lake Editors $11.95 288 pages 4½” x 7¾”/trade paperback ISBN: 1-56343-782-1
Silver Lake Publishing; July 2005
289 pages; ISBN 9781563438042
Read online, or download in secure PDF format
Title: Credit Scores, Credit Cards
Author: The Silver Lake Editors
You’ve found your dream house. The neighborhood is perfect. The schools are great. The kitchen has everything you want. You’ve negotiated a good price. You’ve signed reams of paperwork. And you open an escrow account. Then your mortgage broker calls. Remember the great interest rate she quoted you last week? You don’t qualify for it. She says there are some problems with your FICO score. Your interest rate is going to be higher by almost four percentage points. Suddenly, your monthly payments on a $200,000 loan jump from $1,150 to $1,620. That’s a 40 percent increase! Your eyes well up with tears as that dream house slips away—along with the nonrefundable deposit check you’d written. And it’s all because the mortgage lenders said your credit score was low. Buying a house is the single biggest purchase most consumers will ever make—and the vast majority of people buy that house on credit. But home buying isn’t the only time your credit is important. Your credit is a factor when you want to rent an apartment, buy a car, get braces for your children or take advantage of a “no interest for six months” offer on a big-screen TV. Sometimes, your credit history will even come into play when you apply for insurance or for a job. Credit history plays a vital role in your day-to-day life, making expenses like a home mortgage more—or less—expensive for you. And it’s practically impossible to rent a car without a credit card. It’s A Credit Economy A growing number of people purchase products and services on credit—either with credit cards or by taking out other types of consumer loans. Americans borrow to buy cars and trucks and put less money down when they buy homes, as home prices escalate in many parts of the country. But credit cards are the fastest growing form of consumer borrowing in the developed world. And they have the biggest impact on most consumers’ financial status. Credit cards are used on a regular basis by more than 73 percent of American households, up from 16 percent in the 1970s. Most Americans have at least one general-purpose credit card these days, and more often they have two or three. By general-purpose, we mean a credit card not issued by a specific store or retail chain; these cards include Visa, MasterCard, Discover or American Express cards that can be used almost anywhere. In 1999, American consumers charged about $1.2 trillion on their general-purpose credit cards. By 2003, that number had grown by about a third—to more than $1.5 trillion. Specifically, American Express saw a 13 percent increase in cardholder spending from 2003 to 2002. And that business was increasingly profitable. According to the company, American Express Bank (AEB) reported net income for 2003 of $102 million, up 27 percent from $80 million the year prior. Visa, the largest player in the general-purpose credit card market, generated around $3 trillion in card sales volume worldwide each year in the early 2000s. Even Diners Club, a relatively small player in the market, racked up gross sales volume of $31 billion in 2001. And then there are so-called “captive cards”—credit cards issued by department stores, gas stations and specialty retailers. They account for something like half again the amount charged to the general-purpose cousins. In theory, credit cards allow you to enjoy your purchases for as long as a month before you have to pay a dime—and it’s all interest-free. Or at least it would be interest-free, if people paid off their credit card balances in full each month. Most don’t. According to Fair, Isaac & Co., which tracks consumers’ credit histories, about 10 percent of Americans have credit card balances that exceed $10,000. On the other hand, nearly half of the population is much more conservative, carrying a balance of less than $1,000. (You’ll read a lot about Fair, Isaac & Co.—called by the acronym “FICO” by people in the credit and banking industries—through the course of this book.) Those balances generate a lot interest—money owed to the card companies by the card users. In some cases, the interest rates are as high as 23 percent. (However, the industry group Your Credit Card Companies notes that the average credit card interest rate was approximately 12.75 percent in 2003.) Of course, credit cards aren’t the only kind of credit consumers use. According to FICO, the average consumer today has 11 credit “obligations.” Of those, seven are likely to be credit cards; the other four are likely to be installment loans—including auto, home and student loans. If you add it all up, you find that 30 percent of Americans carry more than $10,000 of non-mortgage-related consumer debt. And credit cards are the biggest slice of that debt pie. The good news: Most people pay their bills on time. FICO notes that fewer than 40 percent of consumers have ever been reported as 30 or more days late on a payment, and only 20 percent have ever been 60 or more days past due. Credit Keeps Getting Easier Consumer credit is a sort of self-fulfilling prophecy. As more consumers use it, more merchants need to accept it. And, as more merchants accept it, more consumers use it. That’s why it seems as if everybody wants to offer you credit these days. If you shop at a department store and you pay with cash or by check, many employees have been trained to ask you to open up one of the store’s own charge accounts. Even relatively small businesses can offer a private-label credit card to their customers. That’s because credit card companies offer specialized programs through a variety of trade associations. For instance, members of SEMA (the Specialty Equipment Market Association) are all eligible to participate in CarCareONE, a private-label credit-card program from GE Retail Sales Finance. So, manufacturers, distributors, retailers and installers can offer their customers instant, on-the-spot credit, as well as 90-day “same-as-cash financing.” Why do they? According to SEMA, “Many companies find that consumers with CarCareONE credit cards will make larger purchases and are more loyal than customers without the card.” As the name suggests, CarCareONE credit cards are automobile-focused. But private-label programs extend far beyond the automotive world. Citi Commerce Services (CCS) helps all kinds of businesses develop customized retail credit card program. In fact, CCS has made it possible for retailers in a wide range of industries to offer a store-specific credit card. These industries include: • travel; • jewelry; • apparel; • catalog sales; • furniture; • automotive; • office products; • home improvement; • consumer electronics; and • computers. These are the credit programs for merchants. On the consumer side, credit card companies market their products even more aggressively. The best example of this: So-called “affinity” cards. These are general-purpose credit cards that are associated with a particular airline or auto maker or membership group. These cards—usually Visa or MasterCard, but with that fact downplayed—generate benefits based on how many dollars the holder spends. The benefits are specific to the group; such as frequent flier miles with an airline card, contributions with a political affinity card or discounts on car purchases with an auto maker card. There are the affinity cards that you can sign up for in order to get zero interest for several months on a major purchase—such as the Visa cards offered by Circuit City and other consumer electronics retailers in order to get you to spring for that $3,000 home entertainment system. There are traps and fine-print conditions to all of these benefits, as we’ll see later. But the fact remains that credit cards are a booming part of the economy. A Creeping Effect Credit has a steady, cumulative effect on the way people buy things. The car industry is a good example of this creeping influence. Through the 1960s, most Americans paid cash for their automobiles. If a person borrowed to buy a car, he or she would usually make a large down-payment (often half the purchase price) and take a one- or two-year secured loan through a local bank. In the 1970s, auto makers decided to finance the purchase of their products in a systematic way. They marketed two- and three-year loans which required smaller down payments. In the 1980s, car companies started leasing cars—which essentially eliminated the down payment and the whole idea of a car as a thing that someone would buy and keep for many years. It also made luxury cars more affordable to most consumers. At first, leases had two- to three-year terms. Traditional loans lengthened their standard terms to four or five years to compete. By the early 2000s, most Americans financed most of their new car purchases. Gone were the days of 24-month auto loans; five-year loans or leases had become standard—and six-year loans were increasingly common. So-called “luxury” vehicles—which included some trucks—had grown from less than 10 percent of the car market to more than 30 percent. This is the cumulative effect of consumer debt: Higher prices and levels of luxury and less outright ownership. Some consumer advocates criticize this process as making a permanent debtor class; but others defend it as bringing the life-style of the wealthy to a mass market. Whatever the sociological concerns, there’s no doubt that a credit economy requires an ordinary citizen to pay more attention to his or her ability to get credit.