Stay Away From Me, Credit Card Crisis

Bailout. Meltdown. Housing crisis. Credit crunch.

If these words don't instill some sort of panic in you -- however contained -- then you are a rare bird. Granted, unless you were one of the thousands turned out on Wall Street, the hundreds of thousands who lost their home to the bank from a subprime mortgage, or the countless numbers whose bad credit is finally catching up to them, you still may not be affected by any of it.

But it will. Unless you still keep your money under your mattress -- and I don't doubt that some people do -- the financial mess is going to hit you, the most likely way being through your experiences with credit.

Here's why: As debt grows, credit card companies have to tighten their standards on consumer credit. Americans can no longer rely on home equity and other assets to leverage their debt because of their decreased value, so credit accounts are their final hope.

In June, consumer credit rose at an annual rate of 6.5 percent to a record $2.459 trillion, the Federal Reserve reported this month. Revolving credit -- the category that includes credit-card debt -- jumped 8.4 percent. Delinquencies and charge-offs are at their highest levels in years.

All this means that the credit card companies are scared out of their mind.

Fear makes people panic and run. But what it does to companies -- who are facing immense demand and less desirable applicants -- is make them more selective -- and often downright picky. People left and right are having their credit card applications turned down -- as much as 85 percent of online applicants are rejected. This is making for some sad, rejected consumers: application volume has been relatively flat and the number of shoppers fell 39 percent compared to a year ago.

From Netbanker: "Although [June] data only shows application volume, there has likely been a sharp drop off in approvals, as underwriting standards stiffen and credit-worthy applicants stay on the sidelines."

And among those who do have credit, many are unhappy with their current plans. Many plead victim to the "evil" credit card companies, who take advantage of shopping addictions and allow customers to carry ridiculously high balances -- at a ridiculously high interest rate. Others blame the marketing and aggressive promotions surrounding new offers -- "I just wanted the miles!"

And the lack of knowledge surrounding credit is appalling. Fewer than one-third of Americans, for example, understand that credit scores indicate risk of not repaying a loan, according to a July report from WaMu and the Consumer Federation of America.

Young adults are the worst of all: some 78 percent of those between the age of 18 and 24 said their knowledge of credit scores was fair to poor; 62 percent had fair to poor knowledge of credit reports.

The report found that US consumers could reduce card finance charges by $105 annually if they raised their score by 30 points. (If all did so, total annual consumer savings would be an estimated $28 billion.)

No one, it seems, has done a very good job at explaining why the increased amount of rejections, why the less-than-perfect credit plans, and why it's so important to maintain a good credit score. Most importantly, no one has stepped in and shown consumers all of the options available to them.

Other options, you say? Yes, there are options. This is the eBay age of the "transparent marketplace," where the liquidity of information on the Internet can empower consumers to make better choices and create customizable solutions.

We're hyper-connected. We're hyper-aware.

So, although spending less would certainly help you -- though it surely won't help the economy -- the best thing you can do is use the biggest, broadest, easiest tool out there to help you understand your personal credit score and see what your best options are.

Here are a few of the online services that you can use to get and monitor your credit status, and, going one step further, to get credit card offers.

Note: These are only the FREE services. There are plenty of companies that offer paid subscriptions, like Equifax, FreeCreditReport.com, and myFICO, but there's no reason you should be paying for something as simple as this.

Know Before You Apply: KnowBeforeYouApply.com uses real credit data to match up consumers with their offers, so they -- you guessed it -- can "know" what they'd most likely be approved for, before they actually apply. It has a clean, easy-to-use interface, and the sign-up process is much less involved than most other services.

Credit Karma: Credit Karma jumped into the scene last year boasting free credit scores, but users should take note that it's another FICO-clone and scores were found to be significantly higher than those actually sent to lenders.

Quizzle.com, Mint.com: Both of these services offer credit scores within the framework of a larger money management system, which may be annoying for people who don't want to deal with importing their bank information into a central system. Neither focus much on actually providing high-quality, customized credit offers based on users' profiles.

Billshrink: This company found its initial niche in the cell phone plan market, helping people find the best mobile plan according to their overall use, geographic area, etc. Last week it busted into the credit market with the same idea - to give users the best credit card options based on their estimated use and typical payment behaviors.

Comments

[JustinMc]

I agree with the overall theme of this article, but I don't think we should overreact in terms of what's available in the credit market, in particular with credit cards. If you have a good credit history, you actually are in a nice position, because credit card rates for new customers are near two-year lows, and credit card companies want to bolster the mix of customers they have in order to make their overall portfolios more stable (i.e., fewer people defaulting). If you have excellent credit history, now may actually be a good time to look for a better deal than what you're getting now.

It's completely self-serving, but I would also suggest IndexCredi­tCards.com as a source for comparing current offers. The site has received a number of accolades from major publications for its card comparisons and overall comprehensiveness.

[Fleurdamour]

The school system in this country should get some of the blame for this - they don't teach personal finance to kids at any level. I was in college and had messed up my credit score with a VISA card before I ever even heard of a credit report. It took getting in trouble to get some information. I was never taught how to balance a checkbook, pay bills or make a household budget and had to learn those skills in a financial recovery program in my late twenties. My family dropped the ball, but there is no excuse for schools not to cover some of this stuff. We send our kids out into the lion's den of adult responsibility but give them no tools to deal with it.

[DuganS1]

I took such a class in 9th grade. Today it's even much easier because of on-line banking, where you can monitor your transactions on a daily basis (or even real time). I don't even think taking a class on this stuff makes sense, unless if it's a week long or after hours class, because these things are just so simple. Most people get into trouble because they're irresponsible, not because they don't know what to do or how to do it.

[thegaygardener]

To my understanding The Bankruptcy Law of 06 had a lot to do with this
Written by the banks & credit card companies themselves with the aid of Congress.
So like many Americans before this Wall Street debacle, I received notices from my bank & credit card company that they would now be charging me any old interest rate they wanted & oh, just for good measure, they were doubling my minimum payment due amounts as well.
When I tried to get them to be reasonable & keep the interest rate at around 10% they said no & also reduced my credit available amount as well (Thank you BofA) I have had these cards for years. I have never made a payment late nor have I ever actually paid only the amount due, as I was interested in paying off the debt more quickly and not just addressing the interest. So now debt that was fairly manageable has become unmanageable. And just in case I was thinking about declaring bankruptcy I can forget that, as they raised that bar to an impossible level as well.So yea, they changed the rules and now me & millions are screwed. Has this happened to anyone else?

[jinjinpinti]

We figured it out years ago, and I have made a "career" out of frugality, thrift and living within our means. I believe if there was a contest for who has saved the most money on the best bargains, and a way to tabulate just how much I've saved over the years, while still having it pretty good, I'd have to be in the top ten in this country. My beautiful, custom rattan style sofa cost $19.99 + tax 10 years ago, and is still comfortable and gets me compliments. Buy my bread from the thrift bread store, groceries from outlets, etc. I used to sit in wonderment watching that House Hunter show on HGTV as young couples bought million dollar California mcmansions, parked their twin pricey SUVs in their triple garages and shelled out fantastic amounts for only the best: high end stainless steel appliances, expensive granite counters and wood or even marble flooring, bathrooms that a pharoah would covet, then furnish the place with the priciest items they could find. Then it had to be a backyard with a pool and waterfall reminiscent of some exotic resort. I couldn't figure out where so many people were getting the funds for all this opulence. Now millions of them can't even pay their "creative" mortgages each month. Makes my big old, worn out, but paid -for Craftsman bungalow with the mismatched appliances and un-updated bathroom a lot more appealing these days.

[KillTheMessenger]

How about this: spend only what you have.

Worked for me all my life. A student in Europe twenty years ago couldn't get a credit card. And so I was totally surprised when I opened my first bank account in the US that it came with a credit card. I never had one before. And they knew nothing about me. Still, they would let me have $2000 at any time? Why?

But I was used to keeping a positive balance on all my accounts all the time. So I turned it down and waited for my first salary to be deposited. In the meantime I went shopping for groceries on $500 or so which I had brought from Europe.

And to this day I do most of my transactions with my debit card.

[XME]

That's a great idea for most things, but if your car cr@ps out on you and you NEED a car to hold down a job, you need credit. Same is true of buying a house, or even if you need major urgent repairs to a house, car, etc. Add to this that most business's cannot survive without credit to buy supplies, pay employee's etc., the world comes to a halt without credit.