Credit Card Blog

Target, the popular discount store with the memorable logo, has been feeling the financial squeeze, and investors want to know how the company plans to reverse its bad fortune. 

With the tough economic times affecting millions of Americans, Target has watched its own profits drop sharply. Credit cards play a huge part in Target’s trouble. Fewer customers are applying for Target cards, since many families focus on one or two major credit cards rather than opening traditionally high-interest accounts with retailers. Those who do have Target cards are charging fewer purchases, especially among non-essentials. And a substantial percentage of cardholders have fallen behind or defaulted on their credit card payments altogether. In September, Target wrote off 10.1% of its debt as non-recoverable.

As bad debt increases, Target’s credit card profits decrease. They’ve already fallen by 65% compared to last year. Like other card issuers, Target took measures to lower its risk by tightening the terms of its credit cards. Still, the cards continue to be a problematic part of the business as more people simply can’t pay what they owe. Experts predict rough waters for another one to two years.

These troubles have resulted in a sharp drop in Target’s shares, down 50% from last year. Shareholders are understandably concerned and interested in what Target intends to do to regain its value.

CompuCredit, a sub-prime Visa credit card marketer, has ruffled the Federal Trade Commision’s feathers.

In a move that some card holders deem intrusive and downright offensive, CompuCredit kept track of its cardholders’ purchases and screened them for risky behavior. Cardholders who paid for certain goods and services with their credit cards were subject to lower credit limits.

What sorts of purchases did CompuCredit screen? Pool halls, massage parlors, and bars, for starters. They also cut credit limits on customers who made purchases from pawn shops, auto repair and tire retread stores, and direct marketing merchants. Worst of all, they also lowered limits on customers who sought marriage and personal counseling – a breach of confidential information.

CompuCredit is being accused of failing to adequately disclose this behavioral profiling and other hidden fees; abusing debt collection laws; and promising credit limits that were never given. Some cardholders were promised credit limits up to $3,250. However, half of this credit limit was withheld for the first 90 days – a fact that CompuCredit was allegedly deceptive about. The FTC filed a lawsuit against the company in June of 2008. You can read more details at the FTC’s web site.

You know the scene. You need to pick up a couple of small items from the convenience store, but you don’t have any cash on hand. That’s okay, because you’ve brought along your credit card. So you browse for the stuff you need, put it on the counter, and whip out your plastic – only to be directed to a sign that spells out a minimum purchase amount for credit card use.

According to Visa and MasterCard, merchants can’t do this. There are specific clauses in the merchant’s agreement that forbid minimum purchase amounts or surcharges for credit card use. American Express discourages these practices as well, though their written rules are more vague. So what should you do if a merchant is imposing these limits?

First, realize that merchants who take credit card payments are themselves required to pay some hefty processing fees for every transaction. Those fees add up and cut into the store’s profitability.

If a small shop owner takes credit cards, they usually set minimum purchase amounts to recoup the cost of those processing fees. If they were to accept credit card payments for tiny dollar amounts, they’d actually lose money on those transactions.

If that knowledge isn’t enough for you, experts recommend complaining to the bank that issued your credit card.

It happened to Ed Johnson, a 65-year old former pastor from Ocala, FL. He received a legitimate looking e-mail that claimed to be from United Parcel Service (UPS), regarding an undeliverable package. Johnson clicked on a link contained in the e-mail, only to receive a pop-up notice that his computer had been infected with a Trojan horse virus.

Johnson says he knew that a virus could destroy his data, but didn’t know that it could also harvest his personal information from his files. He didn’t immediately scan for and remove the virus – a costly mistake to the tune of $10,000 or more.

The virus grabbed Johnson’s online banking information and relayed it to the hackers who sent the fraudulent e-mail. Johnson was shocked when, several days later, he saw charges to five of his credit cards from stores he’d never been to.

Let’s all learn from Johnson’s mistake. Never click on e-mail links; you might get redirected to a web page containing a virus, or you might be sent to a login page that captures your information for identity thieves to use. Keep an active firewall and real-time virus scanner running, and remove any malicious software as soon as you detect it.

In a perfect financial world, every family would save for the holiday season throughout the year and have enough cash available come November and December to pay for their holiday purchases.  Since this is far from a perfect financial world, many of us come to rely on our credit cards to get us through the expense of the holiday months.

Walmart no longer offers Layaway programs (as of 2006), but an increasing number of stores have a layaway program that helps you pay for your holiday purchases without racking up hundreds of dollars (or more) in interest rates and finance charges paid over the next year… or two… or more.

Kmart, TJ Maxx, Burlington Coat Factory and Marshalls all have in-store Layaway programs.  Basically, you select the items you wish to buy and the store will place your items in storage.  Most charge a percentage of the total up front, and allow you to make payments weekly or bi-weekly until it’s paid in full.  Some will also require you to pay a $5 or $10 fee for the service – but when compared to a 10% or higher interest rate on a credit card (month after month until you pay off the balance) you can see how this would save you money.

If you don’t want to shop at these stores, try the online version of a layaway program: http://www.elayaway.com/

If the holidays cause you to overspend on your credit cards, try doing the bulk of your shopping now- in a store with a layaway program – and not only will you save money in interest fees – you’ll be forced to have the purchases paid for in full by the holiday in order to get them rather than allowing yourself to pay the minimum payment for months on end.  

While interest rates may be falling across the board, it seems many consumers aren’t noticing the interest break on their credit cards.  In fact, many are paying the same interest rate or higher than they were before.

How is that possible when most credit card interest rates are tied to the federal funds rate?  When the federal funds rate decreases, the credit card interest rates should fall along side it. 

This would happen if the bank that issued your credit card didn’t have a “floor”.  An invisible line that the credit card interest rate cannot drop below.  For most cards tied to the federal funds rate and that have a floor – that floor has already been reached which means the interest rate can’t drop any further.

Some of the countries biggest credit card issuers report having an interest rate “floor”, including:  Wells Fargo, HSBC, Discover, SunTrust and National City (on at least some of the cards they issue). 

Wachovia has a penalty interest rate for consumers who pay their credit card payment late twice in a row.  They have a floor for their penalty interest rates and cash advance rates, but the interest rate on purchases made on a Wachovia credit card do not have a floor. 

Credit card issuers reporting no interest rate “floor” include Bank of America, American Express and U.S. Bank.

Two issuers with an unknown policy for interest rate floors include Chase and Citigroup, as they don’t disclose whether they have this policy or not.

With a challenging economic climate business owners are currently facing, saving money on the things your business needs to buy can go a long way toward improving your bottom line.  Visa has introduced a program they call SavingsEdge, which is designed to help Visa business cardholders save money at business-related merchants like UPS, for example.   

Business owners can enroll in Visa SavingsEdge through a simple enrollment process, and each time you use your Visa Business credit or check card to pay for business items, the discounts are automatically calculated and posted as a credit on your next Visa Business card statement.

Chances are your business already has a Visa card eligible for SavingsEdge: Chase, Bank of America, PNC Bank, Wachovia and Wells Fargo are all signed up to offer this program to their Visa Business cardholders.  If your card isn’t part of the list, keep an eye out as additional merchants and financial institutions are joining throughout the rest of 2008 and into 2009. 

If you want to learn more, you can visit www.visasavingsedge.com.

In an effort to attract more customers, many credit card companies create rewards programs for their cardholders.  The trouble is, often times the rewards programs are so confusing or hard to redeem that cardholders don’t fully understand how to benefit from them – or the interest rates and annual fees for the rewards card cost more than the rewards you can earn.

If you are a fan of rewards programs, there are two cards with the American Express logo that might fulfill your need for an easy-to-use rewards program on cards with reasonable interest rates and no annual fees. Blue from American Express offers a reward point for every dollar spent on the card, and points are used to “buy” your rewards.  Simple.  There is no annual fee and the interest rates are extremely competitive.

The Blue Cash from American Express is for people who don’t want to deal with points and prefer the standard cash-back rewards card.  All of your purchases earn a percentage of cash back that gets applied to your credit card statement.  Blue Cash also offers no annual fee and competitive interest rates.

If you’ve given up on rewards programs because they’ve gotten too difficult or costly to use, take another look at Blue Cash and Blue from American Express.

With our economy on shaky ground, it’s easy to feel like many factors in life are beyond our control. The good news is that you do have some control over the three digits that define your credit-worthiness: your credit score. To make sure you qualify for the credit you need, take a look at your credit score. For prime loans and interest rates, it should be between 720 and 850 – and standards keep getting higher as more bad debt gets written off by card companies.

So how is this score determined? There are a few different methods, but most lenders look at the FICO model. Here’s the breakdown by percentage:

Payment History – 35%

Do you have a history of timely payments, or do you tend to fall behind? Either way, your payment history is recorded in your credit report and reflected in your credit score. To improve your rating, you’ll need to make all payments on time for at least a year.

Outstanding Debt – 30%

This is where the all important debt-to-credit ratio comes in. If you’ve charged up most of your available credit, it tells lenders that you might be a poor credit risk. On the other hand, if you keep your debt below 30% of your total available credit, you’ll improve your credit rating.

Established Credit – 15%

This factor is simply a measure of how long you’ve had credit. Lenders use it to determine how accurately your payment history represents you, since longer histories give them better insight into your credit-worthiness.

New Credit – 10%

This factor can be annoying. When you open a new credit account, your score will temporarily drop. Hard inquiries have the same effect. If you’ve maxed out several lines of credit and then applied for new ones, lenders will question your ability to manage your spending.

Credit Variety – 10%

For the best results, you’ll need to have installment credit (such as student loans and mortgages) as well as revolving credit (like credit cards) on your report.

How closely do you look at your credit card statements?  If you take a closer look, you may be surprised to discover an insurance program or two.  Many people agree to such insurance programs via telephone, and without really understanding what they’re agreeing to.  They often have 30 day free trials, after which you must remember to call and cancel or you’ll see the charge on your monthly statement.

A typical insurance option is the payment protector plan.  With this plan, you typically pay a certain amount per $100 of your balance – for example, you could pay 90 cents per $100 for the plan.  If you have a balance of $400, you would be charged $3.60.

What do the plans cover?  Depends on the card, but if you have life insurance or a disability plan- chances are you don’t need to pay extra for a credit card sponsored plan that has many limitations to what it will cover.  Also- if you are self employed, decline the insurance for sure, since you are automatically disqualified from almost every credit card sponsored insurance option!