Why the CFPB & Stay-at-Home Spouses Need to Go Back to the Drawing Board

stay at home spouseIf we’re talking about a common sense approach to finance – as is the motto of This That & the MBA – the Consumer Financial Protection Bureau’s proposed solution to the stay-at-home mom credit crisis certainly doesn’t qualify.  In fact, it might even create a rack of far more serious issues, such as a trend toward mediocre credit card terms and overall banking instability.

Do I have your attention yet?

Hopefully I do, even if you are a bit confused at this point.  A bit of background is obviously in order if you’re to fully understand the issue at hand, so here’s what you need to know.

Background

Back in October, a new rule originally set forth in the landmark Credit CARD Act of 2009 took effect, requiring credit card issuers to abandon the long-held practice of using household income to evaluate a credit card applicant’s ability to pay.  The rationale was that since applicants could list debts at the individual level, household income obscured underwriting efforts and made it possible for people to get high credit lines they couldn’t possibly afford.

For example, an applicant who lists $100k in annual income and only $10k in debts might seem like a great candidate, but what if all that income came from the applicant’s spouse and was already earmarked for other expenses?  That would paint an entirely different picture of the would-be customer, but the credit card issuer would have no way to tell.

That’s why legislators decided to change the rules.  However, the new individual-income system led to what CFPB Director Richard Cordray has called an “unintended consequence,” making it harder for stay-at-home spouses to access credit.  That’s no small matter either, considering that having an open line of credit in one’s own name is the most efficient way to build credit.  Your credit standing in turn affects not only your loan and credit card rates, but also your insurance premiums, housing situation, and transportation options.

In short, the inability for stay-at-home spouses to freely access credit throws off household dynamics in the short term and stands to increase the burden on divorcees and widows in the future.

A Problematic Solution

In response to the understandable outcry from consumer activists, the CFPB proposed basically repealing the aforementioned CARD Act rule by allowing people to list on credit card applications third-party income to which they have a reasonable expectation of access.  This proposal is open for public comment through June, so you should probably know why it’s a bad idea.

  • Third-party income would prevent accurate underwriting:

    As explained earlier, the off-balance use of shared income and personal debts makes it impossible for underwriters to determine how much a given applicant can attribute to monthly credit card payments.  The corresponding need for guesswork naturally creates a system in which some already overextended people get approved for accounts, while others who are truly more deserving do not.  What’s more, because banks can’t determine which people should get the absolute best terms, more applicants wind up getting approved for something average.

  • Banks would need to compensate for increased defaults:

    When people who can’t afford high credit lines get approved for them in increasing numbers, banks inevitably find themselves with more and more unpaid bills they can’t collect on.  That has a trickle-down effect, prompting new fees and putting downward pressure on rates and rewards.  It might even force banks to layoff some employees.

 

  • It would put added stress on the economy: 

    By now, we’re all keenly aware that when big banks suffer, so too does the overall economy.  It’s therefore in our best interest to avoid adopting new rules that would unnecessarily hamper the banking industry’s soundness and security.

A Preferable Approach

It would be one thing if the CFPB’s proposed course of action was the only one available, but there are indeed viable alternatives.  I, for one, suggest a two-part fix that would:  1) require card issuers to offer joint applications; and 2) eliminate income verification for secured credit cards.

Joint applications enable couples to apply for a shared account using their combined income and debt.  Since each party also lists their own Social Security Number, both people are able to build credit under their own names.  Many issuers already offer joint applications, but everyone must do so or else stay-at-home spouses will be at a disadvantage in terms of selection.

There is simply no need for income verification with secured credit cards since users are already required to place a refundable security deposit that acts as their credit line, preventing overspending and protecting issuers.  Eliminating that requirement would enable any stay-at-home spouse who has at least $200 (the standard minimum deposit) to open a card and independently build credit.

Together, those two steps would theoretically make everyone happy.  And considering how admirably the CFPB has conducted itself thus far, there’s probably a good chance its leaders will eventually wake up and smell the coffee.  But we’ll just have to wait and see.

Odysseas Papadimitriou is CEO of both the credit card comparison website Card Hub and the personal finance social network Wallet Hub.

Photo by: mike and steph boyle

The 3 Most Popular Types Of Credit Cards And Who They Are Designed For

best credit cardsThese days, one of the most popular topics in the personal finance industry is credit cards. They seem to be the center of discussion on blogs, financial T.V. shows and even in newspapers! This should come as no surprise knowing the the vast majority of consumers in the United States use credit cards and use them option. As this financial option has evolved, more and more different types of credit cards have become available to consumers. Today, we are going to go over the top 3 most popular types of credit cards, who they are designed for and, what has made them so popular. So, without further ado, here they are…

 #1 Most Popular – Balance Transfer Credit Cards

If you are looking for a credit card, chances are, you are looking for one that offers balance transfers. Balance transfer credit cards have really become a household name in the past few years. This is because these cards allow you to use them to pay off other, higher interest rate accounts at lower short and long term interest rates. Balance transfer credit cards also come with promotional interest rates in most cases. These are low, often times 0% short term interest rates that will last from the day you open the new card to the end of the promotional period. These cards are designed for consumers with good to excellent credit scores who have a debt to income ratio of less than 15% who would like to reduce interest rates or consolidate debts into 1 easy to manage account.

 #2 Most Popular – Secured Credit Cards

Another very popular type of credit card these days is the secured credit card. The reason this option is called “Secured” is because before consumers can use a new secured credit card, they will need to place a security deposit with the lender. In most cases, the security deposit will be refunded after 12 months. These credit cards are designed for consumers who have bad credit scores or little to no credit at all who would like to start improving their credit scores. Therefore, the security deposit is there to alleviate the lender of the added risk associated with loaning to consumers with poor credit scores. Secured credit cards are great for showing credit reporting agencies that you are a worthy borrower because they generally report to all 3 major reporting agencies every month. The key is, keeping your card in good standings!

#3 Most Popular – Cash Back Credit Cards

When it comes to cash back credit cards, the name really says it all. These are credit cards that offer consumers cash back on purchases that they make using it. In most cases, this will happen through a point system. Every time consumers use their cash back credit cards for qualifying purchases, they will be given points. As their points accumulate, these consumers will be able to redeem them for cash back rewards. With that said, it’s easy to see why cash back credit cards have become so popular…who doesn’t like cash back?

 About The Author – Joshua Rodriguez

This article was written by Joshua Rodriguez, proud owner and founder of CNA Finance and avid personal finance writer. Join the conversation about this article on Google+!

Photo by: taxcredits

Smart Way To Use Credit Cards

smart credit card optionsIn the right hands, a credit card can be extremely useful. Offering access to goods, extended borrowing terms, variable rates of interest and strong legal guarantees, there are plenty of reasons why people should use credit cards. The problem is, if you do not clear the balance as soon as possible and let interest accumulate, debt can build up – fast!

Credit habits

In February 2012, PricewaterhouseCoopers (PwC) published data on Britons’ personal indebtedness. The research revealed that the average family in the UK owed around £7,900 on overdrafts, unsecured loans and credit cards. Worryingly, the study found that 25% of young people aged between 25 and 34 paid for essentials such as food and fuel using credit in 2011.

As published in the Telegraph, PwC director, Simon Westcott, commented: “UK consumers are among the most indebted in the world, with the average UK household still saddled with nearly £8,000 of unsecured debt.”

The director continued: “Our credit confidence survey has shown that there is a growing reluctance to borrow in the future and a marked deterioration in confidence about meeting repayments, particularly among 18 to 24-year-olds.”

One positive finding of the PwC report is that reliance on credit cards has fallen in the UK. Between 2011 and 2012, credit card usage fell by around 5%. The average credit card balance is now approximately £1,000.

Mr Wescott explained: “Consumers discarded nearly one million cards in 2011, taking the number of credit cards in circulation down to levels not seen for almost a decade.”

Credit card usage may be in decline, but high-interest debts are continuing to cause problems for many borrowers in the UK – and taking out credit to pay off credit is often seen as the only solution. The trouble with this is that people who rely on credit tend to be among the most financially vulnerable in society. Borrowers on limited incomes who run up debts on credit cards, can quickly discover how difficult it can be to meet repayment terms. Charges, penalties and monthly interest keep adding to the balance, locking many people into long-term debt.

The smart way to use a credit card

1)      Pay off the balance as soon as you can

This may sound like an obvious tip, but many people can see credit cards as ‘free money’ and a bill that you don’t really need to worry about. Because you haven’t used cold hard cash to pay for a purchase, it can be difficult to have an emotional connection to what you’ve spent.

Credit cards are there for short term use – so don’t let interest build up on your purchases. Whether you’ve used the plastic to pay for a holiday or an emergency boiler repair, make sure you have the funds available to repay that bill as soon as possible. If it’s not readily available, set a budget in place so that you can afford to repay it.

Clearing debts in a shorter amount of time will also reduce the total amount you’ll have to repay as you won’t be adding additional charges to the bill every month.

2)      Balance transfers

If you qualify for a 0% APR rate credit card that you can transfer the balance of your current card to, then this could be a great way for you to repay what you owe and clear your credit card debt. Make sure you know how long the 0% APR rate lasts for and take advantage of this offer – ensuring you repay as much of the balance as possible. Just make sure you don’t continue to add purchases to your card!

Alternative solutions

If you can’t transfer the balance of a credit card to a lower rate card and are only making minimum repayments on your debts, then you could consolidate your debts into a Debt Management Plan or an IVA.

Both of these solutions are suitable for helping you clear unsecured debts, so if you have store cards, payday loans, catalogue accounts or overdrafts that you also want to clear alongside your credit card, you can.

What to Do When You Have No Credit History

Hi. I’m Christine and I’ve never had a credit card. <Hi, Christine.> I’ve also never had a loan in my name or done anything else that would give me “credit history.”

How in the name if 2013 did this happen?

I know. Everyone has had a credit card or a loan. But, since I was fortunate enough not to need student loans to pay for college and in my early twenties I avoided credit cards like they were the plague I made it to my mid-twenties with zero credit history. I was raised in a “don’t buy it if you don’t have money for it” kind of family. (With the exception of houses and sometimes cars.) I bought my first car cash from my dad for $1200 (my life’s savings at the time). I thought I was being smart. I was sure that avoiding credit cards and debt altogether was the best route to financial happiness.

But then I learned that you need credit history for more than buying things you don’t have money for.

Several years later I headed off to graduate school and insisted on living in this little crap hole of an apartment so I could pay all my own bills. It was great until I tried to have the utilities turned on and they ran a credit check. They said they could not turn on my gas because I had no credit history. I had to have my parents put the gas in their name. I was mortified. Fast forward another year or so to when I was living with my then boyfriend (now husband) and I needed to put the utilities in my name before he deployed (otherwise I would have had zero authority on the accounts while he was gone). They were happy to put them in my name…for a deposit of several hundred dollars. I couldn’t even be on the loan for our house because it would have sent our interest rate through the roof. So now here I am, in my mid-twenties, and still have NO credit history.

So what am I going to do about it? As I understand it, I have a few options.

1. Open a credit card with a co-signer.
This is an easy option since my husband has a good credit history. But I don’t like the idea of having to rely on someone else to build my credit history, even if it is my husband.

2. Take out a small loan with a co-signer.
Same benefits and drawbacks as above.

3. Get a “secured” credit card from a bank.
This is when you give the bank cash as “collateral” and the card’s limit generally equals the amount of cash you have given them to open the card. The best thing is that these cards exist for the purpose of building or improving credit so every payment is reported to the credit bureaus. The only catch is that even one missed/late payment could really hurt you.

So what am I going to do?

My plan is to go the secured credit card route. I’m very good about paying my bills on time and am very careful with my money. I plan on using it pay for gas, an expense I budget for anyway. That way I know I’ll use it regularly and have to make payments on it regularly.

Has anyone else experienced this problem? What did you do?

The UK Embraces Credit Cards

credit cardsThe amount we Brits spend on our credit cards is increasing. That’s according to new statistics released by the British Banking Association, who have revealed that £7.1 billion was spent on our cards during the month of October in this country – that’s an increase of over 5 per cent compared to the same month in the previous year.

Better At Handling Our Credit Cards?

The good news is that we’re getting much better at handling our plastic than ever before too – to go with increased use by British people, the amount of debt has gone down. Even though we borrowed £7.1 billion, we actually paid off £7.4 billion in the same time period, which would seem to suggest that we’re getting much better at budgeting and using our cards properly.

Will Becker, the CEO of credit card comparison site TotallyMoney.com, said: “It is great to see that the nation is embracing its plastic…given the free consumer protection credit cards offer and the rewards available, more people need to switch their spending from debit to credit cards.”

Credit cards are increasingly competitive with the benefits they’re offering too – along with cash back credit cards which reward consumers for spending money on their plastic; some cards offer things like air miles; charitable donations; and more. These benefits are just not available on purchases made using a debit card, so people are still spending more money on their credit cards to see the extra profits.

Along with Section 75 – a piece of legislation that protects consumers making purchases valued at over £100 using their credit cards – there’s increasing numbers of incentives for Brits to make more purchases using their plastic.

“It’s time people woke up to the wonders of credit cards and changed their spending habits,” adds Becker.

photo by: marsmet543

Tips that will make you flip! 5 Tips to a Good Credit Score

mastercard, discover card, picture of credit card, thisthatandthemba, this that and the mbaInterest rates are at all-time lows but does any of it really matter if you cannot secure the loan that you need?  Take an inventory of your accounts before you go out to secure the loan.  Here are 5 tips that you need to take notice of to ensure that you are credit worthy.

Do not close accounts that you do not use

This is a big no-no you do not want to close accounts that you have had open for a long time.  One of the factors in determining your credit score is the length of time the accounts have been open. Additionally, you may think that since the card has a zero balance it would be good to close it.  This philosophy while good in theory may not be a good idea because of credit utilization, which simply put is the ratio of balances owed to the credit limits on credit cards.  Good credit you would typically have lower credit utilization, if you start closing cards your utilization will go up if you have other cards that have balances.

Pay bills on time

Well this may seem obvious, but maintaining good habits of paying your bills on time will help you build credit worthiness.  Even if you are not able to pay the bill in full each month, continue making the minimum payments until you are able to pay down your balance.  Even one missed payment can knock off 20-100 points off your credit score.  If you have old accounts out there that are way past due it may be in your best interest to contact the lender to see if you can explore settlement.  Open unresolved accounts on your credit report are only hurting you.

Get serious about your balances

You need to take ownership of your situation.  If you have a credit card problem and you tend to spend a lot, admitting it is one of the first steps.  Great you have admitted you have a problem, it is not the end of the world.  You may need to seek professional help through a credit counselor to right the ship and get your finances in order.  If you feel you can get it under control yourself, even adding a few dollars to your minimum payments each month will start to move you in the right direction and move your score upwards.

You have more than one credit score

There are three credit reporting agencies that your bank or lender may pull the report from.  Do not work towards just improving your Experian score when you have no idea which one your lender pulls.  The point is you should be practicing good habits that have a positive impact on the score.  Each of the 3 agencies has a slightly different way of calculating the score.  One agency may penalize you for having no balance while the other may view it favorably.   Focusing on good habits and ensuring the accuracy of your credit report will help build good credit habits.

Paying in full each month doesn’t hide high balances on your credit report

Sure the misconception is that using your credit card is great as long as you pay it off each month.  Well if you are consistently charging and using a good deal of your credit limit it could actually be hurting you.  The credit report only uses the account balance at the time that the issuer supplies the credit data to the reporting agency.  This usually takes place after a statement is sent to you.  To the agency, it looks as though you have a high balance on your cards because it is not shown anywhere that the balance is paid in full each month.

Now that you have these tips in your arsenal go out there and secure that loan that you need!  Any other good tips that I missed?

PHOTO BY: Marsmet543