This shift away from job-cutting could be a sign that the nation’s 8.9 percent unemployment rate — the highest in 25 years — may be starting to level out, reports the Baltimore Business Journal (“Survey: More Employers Trimming, Freezing Salaries,” June 1, 2009).

The percentage of employers that have cut or frozen employee salaries has nearly doubled since the first month of 2009, from 27 to 52 percent, according to the most recent employer survey conducted by outplacement consultancy firm Challenger, Gray & Christmas.

Largely in response to a weakened economy, 86 percent of the companies surveyed in May said they reduced costs by freezing or cutting salaries, which represents a small decline from the 92 percent of companies who indicated in January that they’d implemented similar cost-cutting measures.

To cut costs, employers have also shortened employee work hours, imposed furloughs, eliminated tuition reimbursement programs, and made temporary layoffs.

John Challenger, CEO of Challenger, Gray & Christmas, suggests that temporary layoffs are a better cost-cutting solution for employers in the long-run than permanently eliminating positions.

“It is a lot easier to restore compensation and benefits,” he said, “than it is to rehire and retrain workers when the economy improves.”

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For four years, Sherrye Mance and Tiffany Morris allegedly defrauded customers seeking the credit repair services of three of their companies. The women, who operated the three unincorporated businesses Financial Services Unlimited, Service Unlimited Inc., and Credit Counseling Service, have reportedly started running a new credit repair operation under the name “Fresh Start Credit Service.”

In a lawsuit, the Arkansas attorney general has accused Mance and Morris — who collectively owe their victims $127,565 — of charging customers for “services purported to improve a customer’s credit history, credit record, and credit ratings,” although these services were likely never “actually performed.”

Mance and Morris have, so far, refused to respond to the lawsuit, missed their court hearing, and failed to respond to a court injunction. Meanwhile, the Arkansas attorney general’s office has already started receiving complaints from California residents about the defendants’ new company.

Arkansas Attorney General Dustin McDaniel believes the two women still live nearby — Mance in a neighboring Arkansas county and Morris in Mississippi. McDaniel says he is exploring all legal options that would force the women to pay the penalty fees and repay the 139 affected customers.

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Under the Fair Debt Collection Practices Act, which protects consumers against abusive collections tactics by debt collectors, Manuel and Luz Fausto were awarded $100,000 for actual damages and $400,000 in punitive damages, granted by a jury for “malicious and reckless disregard of the couple’s rights.”

The award stems from a dispute over the couple’s Wells Fargo charge card debt they thought they had paid off in the late 1990s, said the Faustos’ lawyer, David Humphreys of Humphreys Wallace Humphreys, P.C.

During the mid-1990s, the couple realized that their credit card balance was continuing to rise even though they were making payments on their account, but a local Wells Fargo branch denied their request to have the account frozen.

To resolve the situation, the Faustos went to a local debt settlement company that promised to negotiate a payoff of the credit card balance. The couple thought the account had been paid off in the late 1990s, after they made two money order payments.

Then in 2006, the couple was contacted by Credigy with a demand to pay $17,000. Even after a cease-and-desist notice was sent to a Brazilian affiliate of Credigy, the debt collection company still made over 90 threatening calls and sent innumerable letters to the Faustos’ home.

Debt collection attorney Manny Newburger says the jury award in this case is one of the largest given to a consumer under the FDCPA, noting that usually “there is little or no evidence of actual damages presented by the consumer.” In this particular case, however, the Faustos were able to document the harassing nature of Credigy’s practices, including the company’s baseless threats, having recorded the last phone call from the collector.

Newburger believes that the verdict in the Fausto case was based largely on state legislation and doesn’t think that the size of the award will motivate more consumers to sue debt collection agencies in the future.

“I think this verdict is indicative of what this jury thought of this particular case,” Newburger said, “but not of anything else.”

Correction: May 8, 2009

This post has been revised to reflect the following correction: The original post mistakenly referred to the $500,000 jury verdict as the largest award conferred upon a consumer under the Fair Debt Collection Practices Act. In fact, the $500,000 decision is among the largest FDCPA findings on behalf of a consumer, but not the singular largest.

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The March figure surpasses the 11 percent unemployment rate the state reached during the early 1980’s recession, says Patti Roberts, spokeswoman for the state’s Employment Development Department. The March unemployment rate approaches the 11.7 percent unemployment rate the state had in January 1941.

While last month’s unemployment rate for the state was significantly higher than the national figure of 8.5 percent for March, California had the 4th highest rate of unemployment in the country, perhaps due to the decline in real estate.

“California’s higher rate of job loss is primarily the result of greater exposure to the housing downturn,” said Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy in Palo Alto.

Forecasters Vary on Outlook

The unemployment rate is grim and many Californians have been affected by job losses, “But on the other hand things are not really as bad as you might think,” said Chris Thornberg of Beacon Economics, a California real estate and economic forecasting firm.

Thornberg believes that these job losses can be attributed to the slump in consumer spending over the last year, and sees spending starting to stabilize in the near future along with the job market.

But Jerry Nickelsburg, an economist with the UCLA Anderson Forecast, believes that in all likelihood, the job market will continue to get worse before it gets better. He predicts California’s jobless rate will reach a high of 12 percent before it begins to decline sometime in 2010.

“Unemployment will likely creep up through the end of the year,” Nickelsburg said, “because employers will want to see that the increase in demand is strong before they hire.”

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“In the previous two decades, our credit scores have become more important over time,” said personal finances expert Liz Pulliam Weston (“Rules Have Changed for Consumer Credit,” Chicago Tribune, April 19, 2009). “Then in the past year, it’s suddenly become critical.”

She warns that if consumers don’t pay attention to these recent credit developments they could make some costly mistakes that could negatively affect their personal finances.

1. Credit Scores

The overhauled credit markets have polarized the world of credit scores: now there’s good credit and bad credit and relatively little in between. Consumers with good credit have seen little to no effect on their financial lives, while consumers with less than stellar credit are increasingly facing higher interest rates, more stringent loan terms, and disqualification from all types of loans — home, auto, student, etc.

The Recommendation: Don’t take on any more debt and start paying off your existing debt.

2. Credit Benchmarks

The qualifications for good credit and bad credit have also shifted. About a year ago a 700 to a 720 FICO credit score — the most widely used credit score formula — was considered acceptable for most consumer loans, and a 620 FICO score was considered subprime and subject to less favorable terms. Today, consumers need a 740 to a 760 credit score to get the most consumer-friendly loan and credit card terms, and consumers with a 660 to 680 score are considered subprime.

The Recommendation: Pull your credit report to see if there are any unforeseen blips or mistakes that could have dinged your score. You can get a free copy of your credit report from each of the major reporting bureaus once a year at annualcreditreport.com. For a free estimate of your credit score, you can use some of the new credit simulators at Bankrate.com, Quizzle.com, or Credit.com to get an idea of where you stand, but if you’re considering taking out any new loan you may want to use a site like MyFICO.com to pull your actual credit score and see where you really fall on the new scale.

3. Credit Limits

Consumers with lower credit scores are having their credit limits slashed by credit card companies, which can severely throw off your credit utilization ratio — the ratio of your available credit to how much you’ve borrowed — and consequently, lower your credit score.

The Recommendation: Consumers with good credit scores, 750 and above, can try negotiating with their creditors to reinstate lines of credit, if need be. Creditors are more willing to accommodate consumers with good credit since they are harder to come by in this recession.

4. Card Cancellations

In addition to lowering limits, credit card companies are shutting down lines of credit due to low use, which may be one of the few credit changes to hurt consumers with good credit.

The Recommendation: Make sure to occasionally use the cards that you keep in the “back of your wallet” — charging some purchases at least a few times a year — and promptly pay off the balances on these cards in full.

5. FICO Score Formula Changes

One of the three major credit reporting bureaus, TransUnion, has begun using Fair Isaac’s new FICO score formula, which places more emphasis on your credit utilization and ignores overdue balances of less than $100. It’s unknown when or if the other credit bureaus, Equifax and Experian, will follow suit.

The Recommendation: Keep balances to below 30 percent of your available credit, and if possible, try to bring your credit utilization down to 10 percent to get better interest rates and more favorable borrowing terms on consumer loans.

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Approximately 22 million cardholders — all of them consumers who have kept up on their credit card payments, have paid their bills on time, and have maintained their credit — have had their accounts closed or credit limits cut, according to a recent report by Fair Isaac, the creator of the FICO credit score.

Typically, lenders have targeted those with poor credit but as the economy has continued to unravel, lenders have changed their definition of risk, says Josh Lauer, a professor at the University of New Hampshire who is writing a book on credit reporting.

Consumers who have high credit scores tend to use their credit cards less and carry low balances, says Fair Isaac’s Careen Foster, which may be why they’re now being targeted by lenders.

And consumers who pay their bills on time aren’t a very profitable demographic for lenders since these consumers tend to pay few credit card fees, adds John Ulzheimer, president of consumer education for Credit.com. Even though these cardholders are less likely to default, lenders must still set aside reserves in case consumers stop making payments on their loans.

When credit card companies close a consumer’s accounts or reduce a consumer’s credit limit, it can increase the proportion of available credit a consumer is using and bring down his or her credit score, making it harder to qualify for any type of loan in the future, especially for a consumer who already has bad credit.

The good news for those who have been responsible with their credit is that, according to the Fair Isaac report, card companies’ recent credit line reductions have had very little impact on these consumers’ credit scores, perhaps because these consumers have had their credit limits cut by only 5 percent.

Bank analyst Meredith Whitney estimates that by 2010 banks will have slashed another $2.7 trillion of available credit on consumer cards. With lenders continuing to tighten their credit standards, Ulzheimer says cardholders, even those with good credit, can’t afford to be complacent about their credit scores.

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Introduced by Sen. Sheldon Whitehouse, D-R.I., and Sen. Richard J. Durbin, D-Ill., H.R. 627 would protect consumers from credit card companies’ predatory lending practices by limiting their exorbitant interest rate increases.

“The standard credit card agreement gives the lender the power to bleed their customer through evolving and ever more crafty tricks and traps,” Sen. Whitehouse said in a Senate hearing last week (“Debating a Ceiling On Credit Card Fees,” The Washington Post, March 25, 2009). “Under this business model, the lender focuses on squeezing out as much revenue as possible in penalty rates and fees, pushing the customer closer and closer to the edge of bankruptcy.”

The proposed legislation would apply to those companies that raise card rates higher than 15 percent plus the current yield of a 30-year treasury bond, which is currently set at 18.5 percent.

Federal Reserve regulations set to go into effect in 2010 that will target predatory lending practices by credit card issuers would be expanded under the new Credit Cardholders’ Bill of Rights:

• Prevent credit card companies from arbitrarily increasing interest rates on existing card balances

• End the practice of “double cycle” billing that currently allows creditors to charge interest on debt that consumers have already paid on time

• Prohibit lenders from advertising “fixed” rates unless the rates aren’t subject to change, or unless the fixed-rate period is clearly disclosed to the consumer

• Forbid lenders from applying cardholder payments to higher interest rate debts last

• Force creditors to accept payments made the following business day when the bills’ due date is a Sunday or a holiday

• Require creditors to offer more reasonable cut-off times for on-time mailed payments

While banking industry advocates admit that some card issuers have engaged in harmful practices , they say the industry as a whole has not overstepped its bounds and that cardholders issuers could be hurt rather than helped by the new legislation.

If the bill passes, “the market response would simply be to restrict credit, raise interest rates and fees or both,” said Kenneth Clayton, senior vice president and general counsel of the American Bankers Association’s Card Policy Council, in a letter to the Senate subcommittee. “This would significantly hurt tens of millions of Americans at the very time they can least afford it.”

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By the end of 2008, almost 6 percent of all credit card accounts were at least 30 days late, the highest percentage of delinquent accounts the Federal Reserve has recorded since it began tracking credit card defaults in 1991.

These defaults are forcing card issuers to incur significant expenses both at the time of collection on delinquent accounts and later when the companies have to write off these accounts due to non-payment. To recover a portion of their projected losses before they occur, these companies are choosing to pass the buck to at-risk cardholders through higher fees and penalties.

Consumers may not see relief for penalty rates or for late or missed payments until 2010 when new Federal regulations go into effect that will alter the way credit card companies do business, The Washington Post reports (“Accelerating Debt,” March 22, 2009).

Currently, credit card issuers are getting away with charging an average late-payment penalty rate of almost 27 percent, according to a 2008 survey by advocacy group Consumer Action, and may end up collecting as much as $21 billion from cardholders as a result of these higher penalty fees, estimates Robert Hammer, chairman of the consulting firm R.K. Hammer.

Elevated fees “are a recognition of risk going up,” Hammer says. Financial institutions “are not going to watch their costs go up and take no action.”

Fees Double For Some

Earlier this year, American Express raised its late fees from $29 to $39 for corporate cardholders who were 45 days late on their payments, USA Today reports.

Wells Fargo customers who withdraw funds from their credit cards inside the bank branch have seen their fees double from $10 to $20, and likewise those who withdraw credit card funds from the Wells Fargo ATM have seen their fees double from $5 to $10.

In January, JPMorgan Chase levied a $10-a-month fee on about 400,000 cardholders who had carried a high balance for more than two years and who had made little effort to pay it off. Minimum payment requirements for these customers jumped from 2 percent of their account balance to 5 percent, forcing cardholders to pay more than double what they owe on their accounts each month.

“[Card issuers] have been very much damaged by this economic downturn and tightening of credit and all the losses that their banks have faced,” said Bill Hardekopf, chief executive of LowCards.com, a credit card review site. “If you as a consumer do anything to increase your risk, you will probably very quickly be hit.”

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Over the last year as unemployment has risen and credit has tightened, consumers have had fewer options to draw on to pay off their debts. Gone are the days consumers could tap into their home’s equity or their retirement savings or take out a consolidation loan, and credit card companies are looking to get paid before things get worse.

“Knowing that the sources of funding have dried up, having someone pay the balance in full isn’t a viable strategy,” said Tim Smith, an executive at Firstsource, one of the country’s largest debt collection agencies.

Collectors Hope to Minimize Looming Defaults

Credit card lenders are expecting to write off some $395 billion in defaulted loans over the next five years, according to projections from The Nilson Report, an industry publication. By comparison, lenders have written off approximately $275 billion in bad loans over the last five years.

Now, companies that formerly could expect payment in full are accepting pennies to dimes on the dollar to settle debts.

“You can’t squeeze blood out of a turnip,” said Don Siler, the chief marketing officer at MRS Associates, a collections company that works with some of the largest credit card companies. “The big settlements just aren’t there anymore.”

To help customers repay their outstanding credit card debts, banks are waiving late fees, lowering interest charges, and reducing loan balances — last year alone, Bank of America reduced the loan balances of as many as 700,000 of its customers.

American Express and Chase Card Services are taking similar actions as more customers fall behind on their bills, The Times reports, and lenders are giving debt collectors more leeway when dealing with debtors who are in financial distress.

Consumers Have Extended Repayment, Settlement Options

Debt collectors are increasingly giving delinquent borrowers extended repayment plans that allows debtors to repay their debt in 12 months instead of the usual six, so that lenders can avoid writing off a debt completely.

Before the economic downturn, Paul Hunziker, chairman of Capital Management Services, said that his firm put only about 25 percent of all borrowers into these long-term repayment plans; now, that number has grown to about 50 percent.

In the most serious credit card delinquency cases, banks are offering to forgive 20 to 70 percent of a consumer’s credit card debt, but such deals could result in a 70- to 130-point drop in a borrower’s credit score that could last for up to seven years.

Troubled borrowers also have the option of negotiating directly with their credit card company to settle their debt, or hiring a debt settlement company to negotiate on their behalf.

Robert Manning, author of “Credit Card Nation” and a longtime critic of the credit card industry, said, “Consumers have never been in a better position to negotiate a partial payment.”

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Consumer credit counselors say these consumers are not only unwilling to discuss their credit card debt with strangers, they’ll even go to lengths to hide it from their spouse or partner.

“We see people telling us they had the credit card bill sent to a parent’s house, a post office box, or e-mailed instead of going to their homes,” says Michael McAuliffe, president of Family Credit Management, a Chicago-based nonprofit consumer credit counseling agency.

Some people seem even to want to hide their debt from themselves. In over their heads in credit card debt, some consumers will walk into credit counseling centers with bags of unopened credit card bills.

“Some consumers just don’t want to face it,” says McAuliffe.

The CreditCards.com poll, which presented the same 12 topics to a representative sample of 1,000 people, found that financial issues — credit card debt, salary, and housing costs — overwhelmingly dominated the group of topics the respondents were least willing to discuss:

1.	Credit Card Debt	80%
2.	Love Life	78%
3.	Salary	77%
4.	Mortgage / Rent Payment	69%
5.	Health	58%
6.	Death of a Loved One	49%
7.	Weight	47%
8.	Religious Views	37%
9.	Political Views	36%
10.	Age	26%
11.	Gas Prices	13%
12.	Weather	8%

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