The Federal Reserve reported last week that revolving credit — which is made up almost entirely of consumer credit card debt — fell by $8.6 billion in April, an annualized rate of 11 percent (“Fed: Credit Card, All Consumer Spending Declines,” CreditCards.com, June 5, 2009).

This is the seventh straight month of declines in revolving credit since October 2008 and the longest pullback in revolving credit balances on record since the Federal Reserve began reporting on consumer credit in 1968.

“The trend is certainly toward having less revolving consumer credit outstanding,” said Cynthia Ullrich, senior director at Fitch Ratings in New York.

Overall consumer debt, which also includes nonrevolving debt like auto loans and student loans,, dropped by a total of $15.7 billion in April, for an annualized rate of 7.4 percent — the second largest contraction in consumer debt in history (“Consumer Debt Plunges by $15.7 Billion in April,” MarketWatch, June 5, 2009).

Consumer debt has decreased by $43 billion in just the last three months, after jumping by $131 billion in 2007.

Find information on debt relief and other debt management options at ThinkDebtRelief.com

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1. Review your credit
   Pull your free credit report from each of the three major credit reporting agencies — Equifax, Experian, and TransUnion — at annualcreditreport.com for free once a year. Check your credit reports for any inaccuracies, discrepancies, or expired records and report any errors to the individual credit bureau whose information you want to dispute. Looking at your credit report every year will help you detect any signs of identity theft and help you see what actions you’ve taken that could be dinging your credit score and limiting your access to credit.
2. File your financial records
   Gather all your bank statements, insurance and legal documents, and personal records and organize them in a file system that works for you. If you already have an organization system worked out, clean out the files you no longer need and take those documents to the shredder. Make copies of your most important documents and store them in a fire-resistant safe in your home or in a safety-deposit box at your bank.
3. Monitor your spending
   Find out where you can weed out excessive spending. If you do online banking check to see if your bank breaks down your monthly expenses by category so you can figure out just how much you’re spending on that daily cup of coffee, those weekly movie rentals, and your monthly restaurant bills. Or try the old-fashioned method: carry around a pocket-sized notebook and record every purchase you make for a month. Once you know what you’re spending your money on, you’ll know where you can cut back.
4. Protect your assets
   Work with a legal professional to draft a will. Whether your account balance is two digits or six digits, that money is yours to do with as you please so make sure your assets are taken care of in a manner you’re comfortable with.
5. Take stock of your debt
   Calculate the total debt you owe between your credit cards, student loans, car loans, etc. Check with your lenders to see if they can lower any of your interest rates. Or see if you can advantage of today’s historically low interest rates by refinancing your home and auto loan. If your debt has ballooned out of control and your lenders can’t help, you may be able to reduce your balances through a debt settlement program.

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Cuomo had accused the credit card issuer of illegally imposing the fee on customers who were lured by Chase’s low promotional interest rates on balance transfers. Chase cardholders were led to believe they would be able to lock in the low promotional rates until their balance was paid off, but earlier this year Chase announced it would be assessing a $10 fee on customers with large card balances who had made little progress paying down their debt.

“My office will not sit back and allow banks to promise one thing in its solicitations and agreements with consumers, and then when times get tough, change the deal, leaving consumers holding the bag,” Cuomo said. “Truth-in-lending laws prohibit this very conduct.”

Stephanie Jacobson, vice president of public affairs for JPMorgan Chase, said that “although the fee was permissible” the bank decided to nix the fee “in response to cardmember feedback” (”Cuomo Claims Victory for Chase Fee(asco),” Creditcards.com, March 30, 2009).

Industry observers speculate that Chase’s decision to discontinue the fee may also be a reaction to the numerous class action lawsuits filed against Chase by disgruntled consumers as well as the response to the intense atmosphere of scrutiny surrounding credit card companies and their business practices in general.

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The proposed government agency, the Financial Product Safety Commission, would also help consumers make informed decisions regarding mortgages, credit cards, retirement accounts, and other types of financial products, Reuters reports (”U.S. Lawmakers Propose Financial Products Watchdog,” March 10, 2009).

“This will be a new regulator that will focus like a laser on financial products and financial products alone,” said Sen. Charles Schumer, D-N.Y., during a press conference Tuesday. “The Federal Reserve was supposed to do this, but they were asleep at the switch.”

Sen. Dick Durbin, D-Ill. argues a financial safety commission is needed because the nation’s current financial regulatory system has broken down and has “diminished consumer protections and eroded consumer confidence” (”Durbin’s Big Idea: Consumer Oriented Financial Product Safety Commission,” Chicago Sun-Times, March 10, 2009).

The safety commission would enforce the same types of consumer protections for financial products that are currently being enforced by the Food and Drug Administration for prescription drugs, by the Environmental Protection Agency for drinking water, and by the Consumer Product Safety Commission for children’s toys, Gannett reports. The agency would have rule-making authority but would coordinate enforcement with other federal regulators that oversee consumer financial products.

Elizabeth Warren, chairwoman of the congressional panel responsible for tracking the distribution of the Troubled Asset Relief Program’s $700 billion, first pushed for the creation of the financial safety commission two years ago. Had the banking and lending industry been forced to employ proper safeguards before the economic crisis, she says, the proliferation of excessively risky financial products that has contributed to the global economic meltdown would’ve been prevented.

“Consumer financial products were at the front end of the destabilization of the American system,” Warren said at a news conference. “When you have good safety standards, you have a floor, and the competition is then consumer-friendly competition.”

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To help offset their record losses, some of the nation’s largest lenders Capital One, Citibank, and HSBC are raising interest rates for millions of consumers with certain credit cards.

Capital One informed some of its borrowers that it is raising interest rates to 17.9 percent from 12.9 percent – a 5-percent increase – in order “to reflect the current risk environment,” says bank spokeswoman Pam Girardo. For consumers who owe $8,000 in credit card debt – the average debt amount an American household carries – the interest they would accrue on that credit card with the 17.9 percent interest rate, if they made no new charges on the card, would amount to $1,577 if they paid off the card in two years, or $3,260 if they paid off the card in four years.

JPMorgan Chase is tacking on a $120-a-year fee and is more than doubling the minimum payment – from 2 percent to 5 percent of the credit card balance – for hundreds of thousands of borrowers who have low fixed-interest rate cards. JPMorgan gave some of these borrowers a choice between accepting a higher interest rate of 7.9 percent on their promotional balance of 3.9 percent or making a higher minimum payment on top of the new monthly fee.

While the Federal Reserve and other bank regulators have approved new credit card regulations meant to protect consumers from interest-rate increases like these and other unfair credit card practices, the new rules aren’t scheduled to take effect until July 2010.

“We’re all going through an economic crisis right now, and we need reforms that will help consumers now,” says Bill Hardekopf, CEO of LowCards.com.

Sen. Charles Schumer, a member of the Banking, Housing, and Urban Affairs Committee, says the “type of tripwire pricing” lenders are engaging in “is predatory and must end.”

But Ken Clayton of the American Bankers Association cautions lawmakers that any additional crack down on banks could “send further chills in a market already in a deep freeze.”

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Hackers accessed the system Heartland uses to process Visa, MasterCard, American Express, and Discover credit and debit card transactions for more than 150,000 banks and credit unions nationwide.

Heartland CEO Robert Carr says “card numbers, expiration dates and other data from the card’s magnetic strip,” may have been exposed and, “in a small percentage of cases,” the name of the cardholder may also have been accessed during the 2008 security breach. Some cardholders have reported fraudulent activity on their cards as a result of the data theft.

Carr says the company has since stepped up its security efforts to encrypt merchant and consumer data and says cardholders will not be held financially responsible for any fraudulent transactions that are “timely reported” to banks. He urges cardholders to monitor their card and bank statements for any suspicious activity.

Heartland Accused of Not Doing Enough to Help Affected Consumers

The data processor has failed to make credit monitoring services available to affected consumers or to offer them any type of financial relief, according to the class-action lawsuits filed by the law firms Berger & Montague P.C. and Chimicles & Tikellis LLP.

Berger & Montague’s complaint reveals that Heartland was alerted by Visa and MasterCard late in the fall of 2008 about suspicious activity on cards that Heartland had previously processed. Heartland didn’t announce that it had located malicious software on its network and contained the problem until mid-January.

“The lengthy delay between when the intrusion began and when it was contained reflects the inadequacy of Heartland’s security measures and intrusion detection systems,” the lawsuit alleges.

As a result of the company’s inadequate data security, cardholders have been exposed to the risk of fraud, have spent and will continue to spend time monitoring their accounts and disputing fraudulent charges, and have suffered other economic damages.

The breach, disclosed by Heartland on Jan. 20, has prompted banks from Maine to Washington to reissue credit and debit cards to thousands of customers.

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But card holders have seen little effort by credit card companies to encourage consumer spending, until now. Certain credit card companies are beefing up their rewords programs to attract new customers, The Wall Street Journal reports (“Spend a Little, Save a Little,” Jan. 16, 2009).

3 Credit Card Rewards Programs With Flexible Options

While most credit card rewards programs usually only offer 1 percent cash back on your purchases, says Curtis Arnold, founder of CardRatings.com, a credit card comparison site, two of the following programs offer 2 percent cash back rewards:

Wells Fargo Home Rebate Card

The Offer: 1% cash back whenever you use your card. Wells Fargo will apply your rewards earnings toward your mortgage loan principal in $25 increments. Rewards apply to most Wells Fargo mortgages.
The Fine Print: No cap on awards.
The Interest Rate: 10.65% to 21.65% after low introductory APR.

Fidelity Retirement Rewards American Express Card

The Offer: 2% cash back whenever you use your card. Fidelity will deposit reward earnings in $50 increments to your Fidelity IRA account, which you can redeem for merchandise and travel rewards.
The Fine Print: No monthly service fees, no annual fee, and no cap on reward points that can be earned or redeemed.
The Interest Rate: 16.99% after low introductory APR.

Schwab Bank Investment First Visa Signature Card

The Offer: 2% cash back whenever you use your card. Schwab will automatically deposit your reward earnings each month into your Schwab One brokerage account. If you choose not to invest your rewards earnings, you can withdraw them as cash funds.
The Fine Print: No monthly service fee, no cap on awards, no annual fee, and no minimum balance requirement.
The Interest Rate: 14.99% after low introductory APR.

These reward programs are unique, says Arnold, “That’s a big carrot they’re dangling. It’s unusual to see two cards with such aggressive rebates.”

Do Your Research Before Buying In

Before jumping into a credit card rewards program, you should remember three key things:

1. Credit card companies can scale back rewards offers at any time.
2. Investment options and associated fees that go along with a rewards program will have to make sense with your spending profile. If you rarely charge purchases, preferring to pay in cash instead, a rewards card may not make sense for you.
3. Once enrolled, you should pay off your balance every month to avoid paying the high interest rates that can be associated with these types of rewards programs.

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The company says the new formula, updated for the first time since it was introduced in 1989, will improve the predictability of defaults by 5 to 15 percent (“New Credit Scoring System Ready for ’09,” Kiplinger Business Resource Center, Dec. 12, 2008).

FICO scores will still range from 300 to 850 points, but Fair Isaac estimates that borrowers could see their scores increase or decrease by more than 20 points, because the formula “has a few more gray areas fleshed out,” says Ginny Ferguson, a member of the board of the National Association of Mortgage Brokers.

Two of the three major credit reporting bureaus will start using the new formula by the spring.

Who Benefits from the New FICO

Borrowers with minimal credit problems: The new formula is more forgiving to borrowers with infrequent hiccups on their credit, ignoring small collections under $100, and is less punishing to individuals with one major transgression on their credit report, such as a charge-off or repossession, if their credit history is otherwise strong. Fair Isaac says the new formula will create a greater distinction between these borrowers and those who are habitually delinquent.

Borrowers who keep their credit accounts open and active: The new FICO formula will look more favorably on individuals with multiple open accounts, but will come down more harshly on those who have had their accounts closed — a more frequently occurring scenario now that lenders are targeting and shutting down the unused and unprofitable accounts of thousands of borrowers.

Who Loses Out with the New FICO

Authorized Users: More than 30 percent of U.S. credit card holders — some 60 to 70 million consumers — “piggyback” on someone else’s credit. These authorized users — often young adults or spouses — rely on a relative’s credit to help jumpstart or bolster their own credit history. The new FICO formula won’t eliminate this option, as had once been proposed after people began abusing the option, but it will make establishing credit as an authorized user a more difficult and lengthier process.

Borrowers with little available credit: With lenders slashing credit limits across the country, millions of individuals could see their scores drop based on the new FICO formula, which will be even more sensitive than the classic FICO to how much available credit borrowers use. Even borrowers who diligently pay off their balance each month could see their scores dip.

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This month federal regulators agreed to impose some of the most sweeping limitations on the credit card industry seen in decades, preventing credit card companies from raising interest rates on consumers’ current credit card balances.

The new rules, which go into effect in July 2010, state that card companies can only raise interest rates on new credit cards and future purchases or cash advances, unlike now when companies’ credit card contracts allow them to raise consumers’ interest rates indiscriminately and with little warning.

“These protections will allow consumers to access credit on terms that are fair and more easily understood,” Federal Reserve Chairman Ben Bernanke said in a statement.

What the Regulations Mean For You

Fees. Creditors can’t penalize you with high fees for exceeding the limit on a credit card that gets placed on hold. And creditors can’t charge you a security deposit or other fees just for issuing you credit or making credit available.

Billing. Creditors can’t double-cycle bill you, meaning that banks can’t charge you interest on balances that you carry over from one billing cycle to the next. You can only be charged interest on the balance amount that remains unpaid, not the full amount you previously owed.

Balances. Lenders who have borrowers with multiple credit cards will be required to apply any payment that borrower makes above the required minimum toward the borrower’s lowest-rate balance.

Terms. Lenders will be required to give you 45 days notice before they can make any changes to the terms of your account.

Late payments. Creditors have to give you a reasonable period of time to make your payment before it can be considered late.

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We’ve gotten so comfortable with our spendthrift ways, charging whatever we want onto our credit cards no matter the cost, that our sudden inability to buy on the fly has hit at the core of our personal identity, spawning feelings of depression and a barrage of irrational behaviors.

“We don’t buy products, we buy feelings. We’re buying the anticipation of the feeling that we think that product or service is going to give us,” Vaccaro said. “People start seeing their economic situation change, and it stimulates a sort of survival panic.”

Because our identities have been tied to our material possessions for so long, some mental health experts are anticipating that we may begin rebelling against these forced lifestyle changes by shopping more or even resorting to theft or violence.

But, Timothy Fong, a psychiatrist at the UCLA Neuropsychiatric Institute and Hospital, says stealing and aggression aren’t acceptable or healthy responses, and that this is the perfect opportunity for us to reform our old ways and establish new patterns for defining self happiness.

3 Strategies to Help You Ditch Your Spend-Happy Ways

Although the downturn may be painful, Vaccaro says, it represents a chance for us to become “a more discerning consumer” and move away from “irrational” and “careless” consumerism.

Here are three strategies to help you relearn how to buy only what is necessary:

1. Stop and think about every purchase. Step away from an item for a few minutes or even leave the store to avoid making an impulse buy. Taking the time to breathe may help you realize that despite today’s bargain basement prices on flat-screen TVs, or on a new car, these “status symbols” may not be necessities.
2. Take advantage of stores’ on-hold policies. If you don’t think you can stand the anxiety of walking away from an item for fear that it will be snatched up, put the item on hold as long as the store will allow. You may forget about the item altogether, which means you didn’t really need it, but if you decide to buy it, the store will have it waiting for you.
3. Keep the price tags on and keep a shopping journal. Write down all your purchases and their costs. When buying items that aren’t necessities, note how you felt when you bought the item. Check your entry a week later and see if you still feel the same excitement for that item now that you own it. If your feelings have changed and the item has lost its luster, you can return it with the price tag intact.

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