Tip of the Week: Get in the Habit of Checking Your Credit Report

The Fair Credit Reporting Act guarantees each person free access to a credit report from each of the three credit bureaus (Experian, Equifax, and TransUnion) every twelve months.  It is generally good practice to periodically check your credit report to make sure it is accurate and that there are no suspicious, fraudulent, or unauthorized activities.  In another month, we are hitting a four-month mark in the year 2010.  If you have not ordered a credit report yet, now is the perfect time to do so.

One option is to order all three reports at once so you can compare them.  Another plan would to be alternate every other year between spreading your credit reports throughout the year and requesting all three at once so you can get the best of both worlds.  And remember to get your credit history from AnnualCreditReport.com, because it is the only source authorized by the Federal Trade Commission to provide free credit reports to consumers.

Credit CARD Act of 2009 Kicks Off Today

Most of the much discussed and highly awaited Credit Card Accountability and Responsibility and Disclosure (CARD) Act of 2009 goes in effect today, 9 months since it was enacted.

80% of households in the US have credit cards, with only around half of them paying their balances in full every month.  Although the CARD Act mainly affects those who carry balances from month to month, credit card holders who pay their balances in full as well as prospective credit card holders may also notice some changes.  You will likely learn of some of them as you receive more information from your credit card company (as they are now required to provide), but to get you prepared for the upcoming changes and tell you what your credit card won’t, here are some highlights of what the Credit CARD Act will bring today: Continue reading

The Right Way to Get Your Credit Report

If you haven’t reviewed a copy of your credit report, perhaps now is the time.  The Fair Credit Reporting Act guarantees each person access to a free credit report from each of the three credit bureaus (Experian, Equifax, and TransUnion) every twelve months.  Make sure, however, that you get your credit history from AnnualCreditReport.com, because it is the only source authorized by the Federal Trade Commission to provide free credit reports to consumers.  The FTC has received numerous complaints from consumers who ordered their credit reports through FreeCreditReport.com, which is run by Experian and automatically signs consumers up with a trial membership.  In response, the new 2009 credit card legislation requires that credit reporting agencies clearly state that their services are not actually free.

Whether you decide to order the three reports at once or spread them throughout the year so that you can monitor your credit report every four months is entirely up to you.  My suggestion would be to switch between the two, so that you can compare your credit reports and also monitor your credit score/history frequently.  Different credit bureaus calculate your credit score differently.  You also want to check all three reports to make sure you recognize all the accounts listed and that all the information is correct.  Go to the FTC’s website if you want to dispute credit errors or suspect identity theft.

But why are credit scores and history even important?  Check back with Money Under Your Futon and find out.

Update on the Credit Card Legislation: Paying in Full Does Not Make You a Free Rider; It Makes You Profitable

Last Thursday we wrote about two possible and essentially opposing ways that credit card companies could respond to the new legislation and affect users who always pay their monthly credit card bills in full and on time: increasing annual fees and limiting rewards programs or buffing up rewards programs to encourage those consumers to use their credit cards more. In our view, the former would be a pity while the latter would benefit both credit card companies and us.

I thus find Sunday’s article in Michelle Singletary’s personal finance column in The Washington Post highly disturbing. On credit card companies’ threats to raise annual fees in response to the new credit card legislation, Singletary preaches,

I know many of you feel entitled to use a credit card without any cost because you diligently and responsibly pay off the bill before the due date. But did you ever stop to think what that is?

You probably never considered that the credit pushers made your access to “free” money possible by gouging the less fortunate with hideous penalty fees and wicked double-digit interest rates. Effectively, the most financially vulnerable consumers have subsidized the low interest rates and rewards programs that the more financially secure enjoy. . . .

That is how capitalism works. And at times it’s a selfish system.

This statement ignores an important system credit cards use to make money: interchange fees. These fees are charged by credit card companies to stores whenever a customer pays for a purchase by card. The interchange fee is usually made up of a flat fee plus a certain percentage of the purchase value, which varies according to the card company, the type of card (personal or business), the rewards program associated with the card, as well as the store, and generally ranges from 1 to 4%. In 2007, credit card companies earned $48 billion in interchange fees.

Credit card companies seek out lower risk customers (i.e., those who are most likely to pay their credit card bills in full and on time) not because high risk customers make it possible to include them, but because they are responsible for a big chunk of credit card profits. We pay our bills on time (i.e., credit card companies feel comfortable that they will get all of their money back, and know exactly when to expect it), and by paying off our monthly balance, we have the potential to earn credit cards companies 1-4% of our credit limit in interchange fees every month. Interest payments do not earn interchange fees. With this in mind, I really don’t think credit card issuers would want to lose low risk customers by raising annual fees and slimming down rewards programs. And if they do, I certainly will not celebrate that move as a victory over capitalism – it will only mark the day in which I (and many others) go back to shopping around for better credit card deals, as the new legislation does not stop the competition between credit cards, and compete they will.

New Legislation That Will Affect Your Wallet

I’ll be honest. I hadn’t been paying much attention to the new credit card legislation. I figured it wouldn’t actually affect me that much, since I always pay my credit card bill on time and in full (which everyone should do in the first place as paying 18% interest on credit card debt really is not the best use of your money).

The big piece of good news is that credit card companies are required to inform me of any major changes in my rewards programs. Besides that, what this new legislation means to us, never-late-full-balance-payers, is still unclear. The WSJ reasoned, along the lines of the threats coming from the credit card companies themselves, that rewards programs will have to be trimmed down to compensate for the loss in revenue due to the new legislation. Personally, I recently noticed that Discover raised the minimum amount of accumulated cash back that I can redeem for a check or credit from $20 to $50 (that is, my accumulated cash back will sit with them for longer until I can actually get a hold of it).

According to NY Times, however, the new bill might also lead credit card companies to focus more on their rewards programs to get people to spend more money. This also makes perfect business sense, since I am the best kind of customer. I help them collect revenue from vendors by spending money on my card and I am never behind in my monthly payments. Hopefully, they’ll keep that in mind when they think about their rewawrds program. The legislation will not kill competition between cards, and if my card’s rewards program goes dry, I could always take my spending elsewhere.