Unpaid medical bills will carry less weight on FICO scores -- and late bills that get paid off won't count at all.
A change in the way credit scores are calculated means consumers may soon have an easier time getting a loan and could begin paying lower interest rates on their credit cards.
Fair Isaac, the company behind the widely used FICO credit scores, announced Thursday that it will no longer reduce a consumer’s score for late bill payments if those bills have been paid off.
It will also reduce the impact of unpaid medical bills on FICO scores. Under the new model, which will become available this fall, consumers with a median credit score would generally see their score rise by 25 points if their only major late payment is an unpaid medical debt.
“The new ruling looks great,” says Credit.com’s Gerri Detweiler. “These are changes consumers and consumer advocates have been hoping for for a long time. The one big warning is that these changes won’t happen over night.”
The changes comes after May report from the Consumer Financial Protection Bureau found that consumer credit scores are “overly penalized” for medical debt, which it said often does not accurately reflect their credit worthiness.
“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer’s credit score,” said CFPB director Richard Cordray in a statement at the time. “Given the role that credit scores play in consumers’ lives, it’s important that they predict the creditworthiness of a consumer as precisely as possible.”
That pushy salesperson won't tell you about a retail card's exorbitant interest rate or the potential damage to your credit score.
Look, we get it: When you’re living on a budget, every discount helps.
So it’s no wonder that you’re tempted when the salesperson at your favorite store asks, “Would you like to save an additional 15% by signing up for our credit card?” A study from earlier this year by CreditKarma found that one in five Americans said yes at least once over the previous two years.
Next time, though, think twice. A new analysis by CreditCards.com reveals just how much damage retail cards can do to your budget.
The average annual percentage rate on these cards, the study found, is a massive 23.23%, up from 21.22% in 2012. That compares to 15.03% on general-use cards today.
If you pay your bill off in full every month, you’ll never be affected by that subprime-like rate. But if you carry a balance, notes John Ulzheimer, a credit expert at CreditSesame.com, “whatever discount you got at the register will be eaten away really quickly, and you’ll end up paying more for the merchandise than you would have if you’d used a general-use card.”
CreditCards.com ran the math, and someone who charges a $1,000 TV and pays only the minimum would need 73 months to pay off the debt and incur $840 in interest charges over that time. With the average card, it’s 56 months and $396.
So much for that $150 discount. Instead of getting the TV for bargain rate of $850, you’d be paying $1,690.
The Really Long-Term Cost
There’s another downside to retail cards: They have the potential to cut down your credit score.
First off, a few points are shaved off every time you apply for new credit. Then there’s the fact that any new card will reduce the average length of your credit history, and this makes up 15% of your FICO score.
But the greatest impact these cards can have on your score is due to something called your utilization ratio, or how much of your available credit you’re using both on each card and across all your cards. A hefty 30% of your FICO score is based on your available credit. Problem is, store cards have very low limits, making it very easy to leverage these cards to the hilt.
If a store card is your only card, and it has a $750 credit limit and you’re using $500 of it, you’ve got a 66% utilization ratio, which could send your score south of the benchmark required to qualify for the best terms on loans. “And if you’ll end up with a higher interest rate on an auto loan and home loan, that $20 in savings [from the upfront discount] is not worth it” says Ulzheimer. You could end up paying thousands more over the life of a loan.
As an example, let’s say you were taking out a $200,000 on a 30-year fixed-rate mortgage. With a 760 FICO score (out of 850) you’d qualify for the lowest rate of 3.83%, according to FICO. If your score were 100 points lower, your rate would be 4.45%—and you’d pay an additional $25,662 over the life of the loan.
“Comparatively $500 on a total available credit limit of $20,000 is a 2.5% utilization, which is immaterial,” says Ulzheimer. It probably won’t affect your score.
Who Can Risk It
So if you’re someone who’s already got a stable of cards and is vigilant about paying them all off in full, adding a retail card is probably fine once in a while. But reserve it for those times when you’re making a really big purchase—like buying a mattress or closing out your wedding registry—when the discount will add up to real money.
Or, get a card from a retailer you really do purchase a lot from anyway, since you could benefit from ongoing perks. Of the 36 retailers that CreditCards.com surveyed, 22 offered low-rate introductory financing, instant rewards, or both. Several offered special deals available only to cardholders.
No matter what, definitely don’t open an account within a month of refinancing or applying for a mortgage.
Money 101: How do I improve my credit score?
Money 101: How do I pick a credit card?
Money 101: How do I get rid of credit card debt?
Federal Reserve meetings aren’t high on most people’s list of interesting things, but if you have a credit card and carry a balance, you should probably start paying attention to what America’s top money policymakers are talking about, because it’s going to affect your monthly bill.
During last week’s Federal Open Markets Committee meeting, analysts were listening closely to tease out a sense of when the central bank will raise interest rates — always an endeavor that’s one part math, one part reading tea leaves.
A rate hike might not come right away: CNN points out that Fed chair Janet Yellen wants to see higher wages along with lower unemployment. Although unemployment is ticking down, wages are stuck in a rut.
“There are no such signs evident yet, but we expect that to be the big story in the second half of this year,” Capital Economics chief U.S. economist Paul Ashworth tells CNN.
But a hike might come sooner than expected, CNBC argues, if either the labor market gets better faster or if Fed members get spooked about inflation. “I think pressure is really growing to do something in January,” Peter Boockvar, chief market analyst at the Lindsey Group, tells CNBC. .
Bottom line: It’ll probably happen sometime next year. This means you have, at maximum, maybe a year and a half before your credit card bills jump.
The reason why is because most of us these days have variable credit card interest rates, with our APRs tied to the prime rate. The prime rate is the Federal Funds rate plus 3%, and today, prime is a mere 3.25%. Then the card issuers tack on a percentage they determine, and we swipe away.
Banks dropped fixed interest rates en masse in advance of the CARD Act kicking in a few years ago because the law prohibits them from hiking fixed rates on existing balances except with a few exceptions. Banks wanted to be able to raise what they charge us when interest rates rise, so they switched over to variable rates.
After the Fed makes its move, rate increases will happen quickly. “Within a few months after the prime rate eventually starts going up, card holders will also likely see their APRs going up,” says John Ulzheimer, president of consumer education at CreditSesame.com.
Ulzheimer says it’s most likely issuers will adopt a straight pass-through of any hike in the prime rate; in other words, if the rate goes up by 0.5%, your APR will, too. And credit card companies aren’t required by law to give you a 45-day heads-up that a jump in your interest rate is coming.
Obviously, the bigger your balance, the more this will affect your monthly payment, so it’s a good idea to start chipping away at that debt now.
Millions of private financial records have already been exposed this year. Follow this simple plan to stay safe.
Updated: August 4, 2014
If you’ve eaten at a P.F. Chang’s restaurant anytime since last October, you could have been the victim of a data breach. According to the company, consumer credit and debit card information has been stolen from 33 restaurants in the U.S. (You can find a full list of the affected locations and dates of possible incidents here).
Today, CEO Rick Federico issued a formal statement apologizing to customers and assuring them that their data has been secure since the restaurant chain identified the breach in June. In light of that news, we’re resurfacing a post from earlier this summer, with advice on how to protect yourself in the event you think your personal data has been hacked.
At least 8.3 million private records have been put at risk in 250 separate data breaches revealed this year, says the nonprofit Identity Theft Resource Center. One upshot of the leaks (up 23% over 2013 through late April): greater awareness of the threat of identity theft. Follow this three-tiered plan to defend yourself.
1. Take Advantage of Free Tools
Visit annualcreditreport.com every four months to get a credit report from a different one of the three major reporting agencies, advises Ed Mierzwinski at advocacy organization U.S. PIRG. And sign up for any no-cost service your bank or credit card issuer has for notifying you of activity in your account.
2. Warn All Lenders
Afraid your data has already slipped out? Put a free 90-day fraud alert on all your credit reports by contacting Experian, TransUnion, or Equifax, says Paul Stephens of the nonprofit Privacy Rights Clearinghouse. That tells companies to use extra caution before issuing credit in your name. For confirmed identity-theft victims, alerts last seven years.
3. Lock Down Your Credit
For top security, freeze your credit, advises ID-theft consultant Robert Siciliano. Opening new lines of credit will require your password. Visit each of the big three bureaus online to launch it. Costs—up to $30 to place a freeze and $12 to lift it—vary by state.
- Is my data safe?
- What should I do if I have been a victim of a data breach?
- What should I do if I have been the victim of identity theft?
- How can I protect myself from ID theft?
- Do I need identity theft insurance?
What would you do if you suffered an emergency that's bigger than your safety net? These strategies can cushion the blow.
You’ve no doubt diligently socked away a chunk of cash for a rainy day. But chances are it isn’t enough to keep you from worrying about being swept under by a passing financial storm. In a MONEY survey of 1,000 Americans conducted earlier this year, 60% of respondents said they didn’t feel they had enough emergency savings.
They’re probably right to be concerned: A new survey by Bankrate.com found that the majority of Americans making $75,000-plus have less than six months of emergency savings on hand. Meanwhile, experts typically recommend having at least that much and often as much as 12 months’ worth—lofty goals even for those who are otherwise well-off.
While you’re in the process of bulking up your kitty, lessen your anxiety by figuring out how you’d quickly lay your hands on cash if the roof fell in, literally and figuratively. “The goal is to reduce long-term damage to your finances,” says Scottsdale financial planner Brian Frederick. Putting the bills on a credit card can be a reasonable option for those able to pay off their debt in a jiffy, but carrying a balance for longer gets pricey when you’re talking about a 15% interest rate. Instead, keep these five better options in the back of your mind:
1. Crack a CD
In hopes of discouraging customers from fleeing when rates rise, banks have been hiking penalties for tapping a CD before its maturity date—six months’ interest is now common on a one-year certificate, and six to 12 months’ is typical on a five-year. Even so, “the interest is so small these days that a six-month penalty is almost meaningless,” says Oradell, N.J., financial planner Eric Mancini. On a $100,000, five-year CD at 2%, you’d give up just $100.
2. Sell Some Securities
Ditching money-losing stocks is clearly a better move than borrowing, says Frederick, given that you can use losses to offset up to $3,000 of capital gains for this year and carry any overage into future years. Everything in your portfolio on the up and up? While you’ll pay a 15% capital gains tax on the profits from any security you’ve held for more than a year, it might make sense to pare back on winners if your allocation has gotten out of whack.
3. Take Out a 401(k) Loan
Most plans allow you to borrow half your vested amount, up to $50,000, with generous terms: no setup fees and a 4% to 5% interest rate, paid to yourself. Moreover, as long as you keep making contributions, you probably won’t sacrifice much growth. A five-year, $20,000 loan against a $250,000 401(k) would reduce your balance by just $9,000 after 20 years, assuming you continued to save $500 a month during the loan term. But should loan payments require you to pull back on contributions, your nest egg will take a hit (see the graphic). Another risk: If you leave your job for any reason before repaying, you must cough up the entire balance within 60 days, or else you’ll owe income taxes and a 10% penalty on the funds. “You can end up feeling stuck in your job,” says Edina, Minn., financial planner Kathleen Longo.
4. Tap the House
Whether or not you have a home-equity line of credit already, you’ll benefit from today’s low rates. The average on a new line is about 5%, but if your credit is nearly perfect, you can get closer to 3%, with no setup fee, Bankrate.com reports. Plus, interest payments are usually tax-deductible. The caveats: It may take a few weeks to open a new line. Also, HELOCs are variable rate, so your payments may rise if the Fed hikes interest rates. Finally, some banks charge a fee if you close the line early; look for one that doesn’t.
5. Borrow from a Stranger
Those who don’t have adequate home equity can still beat rates on credit cards and personal bank loans by nabbing a loan from a peer-lending site like LendingClub or Prosper. Rates on those sites can be less than 7%, plus an origination fee of 1% to 3%. Peer loans are a good option for those with sterling credit histories, says Steve Nicastro, investing editor at NerdWallet. Check what rate you’d get using the sites’ tools. Look good for you? After you fill out an online form, the sites will take a few days to verify your info, then send your loan out to prospective lenders. Most loans are funded within a week.
More on building a stronger safety net:
True frequent fliers can kick back at an airport lounge for free. Some high-end credit cards give you access too. For everyone else, that privilege comes at a high price.
When you fly several times a month, as Gabriella Ribeiro Truman does, finding a comfortable place to wait for a flight and grab a snack can make traveling a lot more enjoyable.
She used to have free access to co-owned American Airlines and US Airways lounges through her American Express card, but with that program over, she now pays $500 a year to be a member of American Airlines’ Admirals Club, which gets her access to private airport lounges around the world through the oneworld alliance. “It was worth it for me to pay for it,” says Truman, 39, a New Jersey-based travel marketing executive.
Travelers have a wide range of options when it comes to the airport clubs, whose lounges can offer some peace from often chaotic, warehouse-like airport terminals. Snacks and drinks are available for the taking, seating tends to be more comfortable, and there’s free Wi-Fi and lots of power outlets.
But whether it is worth it for the cost depends on how you are getting access and whether you are paying extra for it. Airport lounges are run by either airlines or a handful of private operators. While some are restricted to top-tier flyers, most allow travelers a variety of ways to get in.
- Membership through airlines or airline alliances: For instance, if you achieve gold status in the Star Alliance (which includes United Airlines, Air Canada, and Lufthansa ), you are permitted access to more than 1,000 lounges worldwide as long as you fly on a member airline. Otherwise, you will pay about $300 to $700 a year, plus initiation fees (air miles can be used).
- A day pass: Prices are typically about $50, but advance-purchase deals for some can cut that in half.
- Route-specific: Some travelers are given entry to an airline’s lounges along the route they are flying if they fly internationally on a first-class or business-class airline ticket or on certain transcontinental flights.
- Membership through cards: Fewer credit cards offer the perk now. Among those that still do: the American Express Platinum Card, through which you receive a complimentary membership to Delta’s Sky Club network when flying on that airline, and you can apply for a free membership in the independent Priority Pass lounge network (worth $399) as part of the card’s $450 annual fee. Also, Citi Executive/AAdvantage card holders get a membership worth $500 in American’s Admirals Club included as part of their $450 annual fee.
What You Get
At the estimated 2,000 lounges worldwide at more than 500 airports, services and amenities vary. One way to keep track is with a free app like LoungeBuddy, available for iPhone and Android, with data on nearly 1,800 lounges. Users can input their travel information and get ratings, lists of amenities, and photos for the lounges they can access.
For food, U.S. clubs will typically offer basic snacks like carrots, pretzels, and apples, with a bit more in the mornings like pastries and yogurt, according to Tyler Dikman, founder of LoungeBuddy, who says he has personally visited 600 to 800 lounges. Beer and wine will be free, but travelers usually have to pay extra for top-shelf liquor domestically. Nearly half of lounges will have showers, he adds.
In smaller airports, marketing executive Ribeiro Truman says she finds that many lounges resemble hotel bars—not much more than a separate seating area with some snacks.
But in larger airports, expect to find more, especially overseas.
At Cathay Pacific Airlines’ The Bridge Lounge in Hong Kong, for example, there is an enormous, elegantly decorated space divided into two wings, and spacious shower suites. Food includes fresh-baked bread, pizza, soups, and sandwiches on one side and a range of high-end hot and cold food for self-service on the other.
Access to that lounge is available to Emerald- and Sapphire-level members of the oneworld alliance, which includes American Airlines.
Private shower rooms, in particular, win wide praise from those who have used them. “It’s something you’ll find in a nice hotel,” Dikman says, who has enjoyed plush towels and fancy toiletries.
For the infrequent traveler or someone stuck waiting a long time for a connection, buying a day pass to a lounge could be a big benefit, particularly if you have work to do. Road warriors report that paying about $500 a year is money well spent to regroup when it is inconvenient to check into a hotel.
Sonita Lontoh, a Silicon Valley technology executive who flies regularly to Asia and Australia, prizes her lounge access. She says after being on a plane for 15 hours, having a place to decompress and take a shower is a real benefit.
On the other hand, Becky Pokora, 28, the Richmond, Va.-based writer of The Girl and Globe blog, says her credit card just discontinued free access to lounges and her 15 round trips a year do not warrant paying extra.
“The value proposition was different when there were lounges in nearly every U.S. airport participating in their program, but now I doubt I’ll be renewing the card when next year’s annual fee comes due,” she says.
One Minute Money: Simply paying bills on time is one way to help raise your credit score, explains Kristen Bellstrom.+ READ ARTICLE
American Express is facing off against the Justice Department today in a court battle that could shape the future of the credit card industry.
The suit, which concerns the fees merchants pay every time a customers uses plastic, is the culmination of a four-year war between federal authorities and the New York-based credit card giant. Its outcome won’t just affect the way American Express does business, but will likely impact consumers at the checkout counter as well.
Currently at stake is AmEx’s “take it or leave it” policy. Every time a customer pays with a credit card, the merchant must pay a processing fee, generally between 2% and 3% of the total purchase. American Express — which, according to the government, charges the highest merchant fees of any card network — forbids its merchant partners from offering customers incentives to use cards that are cheaper for the vender to accept.
The Department of Justice argues that the policy is anti-competitive because AmEx—which accounts for 26% of all money transacted through credit cards in the U.S.—is too important for most businesses to drop. It also claims customers, even those who use a different card, end up paying for AmEx’s higher rates because merchants compensate by increasing prices.
American Express, of course, disagrees. The company says it is too small to have an anti-competitive effect on the market. Court documents show that there were 53.6 million AmEx cards in circulation in 2013, compared to 178 million MasterCards and 254 million U.S.-issued Visa cards. It also argues these higher fees are necessary to provide merchants with services like fraud reduction programs, financing and marketing, and data analytics.
This is the latest battle in a four-year-old war over credit-card company business practices. In 2010, the Justice Department filed a lawsuit against MasterCard, Visa, and American Express for various merchant restrictions that the department found ultimately result in consumers paying more for their purchases. Visa and MasterCard quickly settled, later agreeing to a record-high $5.7 billion antitrust settlement with U.S. merchants over alleged fee fixing. But AmEx held out. In 2013, it reached a separate peace with merchants, allowing them for the first time to add a surcharge to AmEx purchases as long as they added the same charge to all credit-card transactions — the “take it or leave it” policy. But the settlement failed to satisfy the Justice Department, which now seeks to force AmEx into the same deal it cut with Visa and MasterCard.
For AmEx, the stakes are high. Merchant fees make up 65% of the company’s revenues, and it depends on high processing rates to offer its customers benefits like discounts and frequent-flyer miles. A loss would allow merchants to offer customers incentives for using a competitor’s card, and could cut into AmeEx’s profits by pushing the company to lower its merchant fees.
For consumers, a D.O.J. victory could potentially mean lower prices. Many businesses have historically priced in credit-card processing fees by raising the cost of their goods by 1% to 3%. Past settlements have allowed merchants to pass on these fees directly to credit card users, theoretically sparing cash and debit customers from having to share in the cost of accepting credit cards. However, many have questioned whether merchants are actually passing their savings onto consumers.
If American Express loses, merchants would be allowed to offer additional discounts to credit-card users with cards that charge lower fees. This won’t pacify those who say customers are paying the same prices as before plus new credit-card processing fees, but it does mean certain credit-card users might pay less than others.
Don’t expect AmEx to give up. The company may “need those rules in place to remain competitive with Visa and MasterCard,” Darren Bush, an antitrust law expert at University of Houston Law Center, told Bloomberg. “They’re willing to put more on the line.”
You can get as much as 5% back if you swipe it right.
If you’ll be spending part of this July 4th weekend in the car—whether that’s for a day trip to the beach or a 500-mile drive to visit the in-laws—be prepared to pay more at the pump this year than last. A gallon of regular gasoline sits at $3.70, according to the U.S. Energy Information Administration, or about 9% higher than in 2013.
Those in the know, however, will be able to get a discount that mitigates the price escalation. How, you ask? With a cash back rewards card that gives them some extra juice at the gas station.
The picks that follow can get you up to 5% back on your purchase at the pump. You’ll notice something about these selections: None of them are gas-station-branded cards. The ones below offer more flexibility and more money back.
If you want to get the most money back possible…
We at Money are pretty big fans of the class of credit cards that offer 5% cash back in rotating categories. Within the category, both the Chase Freedom and Discover It offer 5% at the pump from July to September on the first $1,500 spent. That means if you spend $250 a month on gas, you’ll end up saving almost $40.
If you’re planning a cross-country road trip, it might pay to sign up for both. The Freedom and It cards are fee-free, so there’s no downside to doubling up.
But if you’re only planning on getting one, go for the Chase Freedom, which offers a $100 sign-up bonus after you spend $500 in the first three months, says CreditCardForum.com’s Ben Woolsey.
If you’d rather have an all-purpose card…
Managing a number of credit cards for specific categories can be daunting for some consumers. If that’s you, check out solid cash back cards that offer good rewards throughout the year. BankAmericard Cash Rewards holders, for instance, earn 3% on the first $1,500 spent at gas stations the entire year without having to pay an annual fee. There’s also a $100 sign-up bonus once you spent $500 in the first three months.
Also consider Money’s Best Credit Card winner American Express Blue Cash Preferred. While this card comes with a $75 fee, you receive 3% back at gas stations in addition to a $150 sign-up bonus if you spend $1,000 in the first three months. Where it comes out ahead of the BankAmericard is if you’ll also use it at the supermarket, since the best feature of Blue Cash Preferred is the 6% cash back you get on the first $6,000 spent on groceries.