Now that the days of 0% balance transfers and no balance transfer fees are likely a thing of the past, I thought it might be interesting to actually price out the true cost of a rate reducing balance transfer. I’m going to use a hypothetical, of course, so let’s lay out this story …

Mr. Oscar Grouch has been challenged in the past with his spending habits. Slimey, his pet worm, isn’t all that expensive to care for, but Fluffy, his pet elephant, is pricey. He also has a longtime girlfriend, Grundgetta, and we know how expensive girlfriends can be. Last but not least, Oscar invested in some kind of superfly technology that allowed him to open up some new dimension so that while he looks like he just lives in a regular old trash can, in actuality he has quite the luxurious pad, complete with an Olympic sized pool, a skating rink, and a bowling alley.

A few decades of these spendthrift habits has resulted in not a little bit of debt for Mr. Grouch, but he has recently committed to a goal of eliminating it entirely. Good for him!

In order to reduce his debt as quickly as possible, Oscar has decided to first look around in gratitude at what he already has and then curtail his spending dramatically when it comes to new purchases.

He has also organized all of his bills and put together a cash flow calendar so that he can match up his incoming and outgoing money efficiently and will not be surprised by a dip in his account or overspend when his balance looks good.

Finally, after pondering whether to knock out his lowest balances first in order to get a thrill of accomplishment, as recommended by some financial personal finance advisors, or to knock out the ones with the highest interest rates first in order to lower the actual interest paid over time, as recommended by others, Oscar decides to go with getting rid of the high rates first.

By the way, I’m going to use calendars at Bankrate.com for this illustration - they have a lot of tools that anyone can use at no charge.

Beyond just focusing the bulk of his extra payments to the highest rate card (while paying the minimums to lower rate cards), Oscar figures he can get more bang for his buck by doing a balance transfer. He takes the $5,000 he has on a card charging him 13.99% interest and moves it to another company offering him 1.9% for the first six months. He is planning on being able to pay $500 per month towards that card, which means that he’ll pay it off in eleven months if he leaves the account with his current bank:

With this balance transfer, he figures that right off the bat, he’s saving $50 a month in interest, and that’s true. Changing his rate to 1.9%, his payment schedule looks like this instead:

By switching to a card with a lower rate, Oscar saves $303. 79, which is great! Except that …

1. Oscar didn’t include balance transfer fees in his original payoff amount, and
2. The low rate only applies for six months.

In the good old days, balance transfer fees used to either not apply or would be something like 3% of the amount being transferred, up to a max of $75 or something like that. Now, it would be very unusual to receive a no-fee balance transfer offer, and there is no maximum. Taking that into account, Oscar’s real starting balance is $5,150 and his payment schedule looks like this:

Oscar is still ahead by about $151 by transferring his balance, but we still have to take into account the change in his interest rate after six months. If Oscar is a customer at Chase, he might get an offer with verbiage kind of like the rate increase notice I recently received, which said:

Default APR - The Prime Rate* plus up to 26.99%, with a maximum of 29.9% (0.08216% daily periodic rate). This rate is currently the maximum rate.

*Estimate variable APRs above are based on the 5.00% Prime Rate on August 15, 2008. The “Prime Rate” is the highest (U.S.) Prime Rate published in the Money Rates section of The Wall Street Journal as described in your agreement. These changes to your APRs do not affect any higher APRs currently in effect on your account.

That means nothing, really, except to let Oscar know that his minimum rate will be somewhere between 5% and 31.99%. Just for the sake of argument, let’s go with an almost-worst case scenario and assume that in month 7, his rate jumps to 29.99% (the max Bankrate.com will take is 30%). There isn’t a Bankrate calculator that can do this switch up that I know of, so I’m going to mash a couple together for you because I’m just that nice. Flipping his rate from 1.9% to 31.99% midstream makes his payment schedule do this:

Interesting, hmm?

Even with a flip to 29.99% starting in month 7 and a 3% balance transfer fee, Oscar’s payoff time and amount didn’t really change much - within one dollar or so.

This illustration is not meant to show that balance transfers are useless - I could have chosen different starting interest rates for Oscar’s initial debt and come up with more pronounced differences in the outcomes between sticking with the rate he had versus going with a balance transfer, fee and all.

Without going into more tables, had Oscars original rate been 8.99%, it would have cost him an extra $130.74 to take the balance transfer offer. He’d be better off sticking with his current rate.

If, on the other hand, his credit card company recently bumped his rate up to, say, 26.99% as a business decision, then moving his money, fee and all, to take advantage of this balance transfer offer would save him $382.64.

You can do your own analysis of the differences in payoffs with online calculators and a handheld calculator, and if you need help, please feel free to ask me. I can walk you through it and I promise it’s not difficult. Remember too that there are other issues that arise with balance transfer offers, such as whether low interest balance transfer balances will be paid off at all if you are carrying other debt on the same card, so please see this post for more information.

Seeing an increase in bankruptcy filings probably isn’t much of a surprise in this economy, but the increase is all the more compelling because of this (from USA Today):

The sagging economy sparked 106,266 consumer bankruptcy filings in October, the first time monthly filings topped 100,000 since the bankruptcy law changed in 2005, the American Bankruptcy Institute said Tuesday.

During the first year after the new law took effect, personal bankruptcy filings plummeted dramatically, and since then, have risen gradually. In October, though, filings jumped 40% over the same month in 2007.

The change in the bankruptcy rules, which was mostly a nice little gift to imprudent lenders everywhere, substantially decreased Chapter 7 filings in particular by making it much more difficult to qualify. Chapter 7 bankruptcy is a liquidation bankruptcy, which means that certain debts can be erased entirely, while Chapter 13 bankruptcy is a reorganization bankruptcy, which means that debts will still be repaid under the watchful eye of the court over a certain amount of time. Whatever is still left at the end of the payoff time may be erased.

Those who earn an income above their state’s median will generally not qualify for a Chapter 7 bankruptcy under the 2005 change in the law, which meant that people either needed to go through the much more time consuming and less “immediate gratification” process of Chapter 13 … or (more likely) just not file at all and try to get by some other way, maybe through family loans or debt settlement programs or by playing a little shell game with balance transfers and home equity loans.

The fact that bankruptcy filings are increasing, and according to the article, increasing in the Chapter 7 category specifically, means that 1) the debt switching game is over, as people are losing their home equity lines due to falling home prices and tightening offers at credit card companies, and 2) people are losing their jobs, putting them below the median price that qualifies them for liquidation instead of reorganization.

Although it would be devastating to the credit card industry, I think the bankruptcy laws need another review when President-Elect Obama gets into office. The law changes in 2005 were clearly a desperate effort to save an industry and an economy that had lost its mind, much to the detriment of the consumer who was being lied to the whole time about the “strength” of the economy, and reversing some of provisions of the law would be a good first step towards that Main Street bailout that most of us seem to find quite elusive.

Partly to make up for bad mortgages, banks are increasing account and transaction fees. From USA Today:

Bounced-check fees, ATM fees, monthly service fees and balance requirements for interest checking accounts all hit highs in 2008, before adjusting for inflation, according to a survey released Monday by Bankrate.com., which tracks and compares bank products.

[...] consumers now pay an average of $3.43 to use another bank’s ATM, up 13% from a year ago (or 7% after adjusting for inflation).

It’s not just the size of the fees that hurt consumers. In the past year, large banks have also “substantially changed the design of how they charge those fees to get more revenue,” says Michael Moebs, founder of Moebs Services, a bank consulting firm.

More banks, for instance, are imposing lower fees for the first bounced check, but significantly higher fees each additional time consumers overdraw.

Frankly, most fees are a matter of customers just not planning ahead or paying attention - especially the ATM fees. If you’re withdrawing funds from an ATM that is not your bank’s, shame on you. Seriously, where’s the logic in paying almost a 10% penalty on a $40 withdrawal of your OWN money? Recently another blogger, Mr. Tough Money Love, found out that NFL games are somehow outside the normal space-time-money continuum (people will spend money on bad nachos at a football game as part of the “experience” - myself included!), but his son saw some interesting behavior at the ATM machines that I think fits here:

I learned about a new wasteful money expenditure last night from one of my sons.  He had gone to the concession stand in the first half (for hot chocolate) and noticed that the line at the in-stadium ATM was at least 25 people deep.  His girl friend had used the machine for free because she was a customer of that bank.  (No, she did not buy beer.)  Everyone else paid a $5 ATM service fee!  So here we have fans during the first half of the game lining up to withdraw more cash and paying $5 to access their own money. No doubt that a lot of those expensive cash withdrawals were used to purchase more $7 beers.  It gave me a sick feeling to even think about it.  Paying $5 to access your own money in this situation is similar to taking a payday loan.  The interest cost is astronomical.

Silly, isn’t it? Of course, after a few $7 beers, sound financial judgment goes out the window.

Back on topic, your goal should be to never pay a bank fee. If you tend to coast close to the edge of zero, apply for overdraft protection. If you go negative, you still have to pay but it’s only the interest on the amount you owe and only for the amount of time that you owe it - and it doesn’t matter if you went negative because of one big check or ten little ones. Contrast that with a $20 fee times ten bounced checks.

If you have a monthly service fee, ask your bank what it would take to get it waived. If they say that there’s nothing that can be done, shop around. If there is a minimum balance for an interest bearing account, figure out whether the interest is worth the fee - it may be more beneficial to change your account type to one that doesn’t pay interest but has lower fees or none at all.

If your bank offers a credit card with a cash back reward program and you believe you have the discipline to not go nuts, consider using the credit card to pay for many of your monthly expenses and set up automatic transfers from your regular checking account to your credit card account. For example, if you know you spend $500 per week on groceries, gas and entertainment for your family, use that card to get cash back and transfer enough money every paycheck to cover your costs. Remember, this one’s ONLY if you are disciplined enough not to use your credit card to overspend - the idea is to get a little cash back while NOT paying interest and NOT having your checking account hover near zero and risk overdrawing.

I have to admit, this kinda pisses me off. From Associated Press:

Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

The new pilot program — which the banks hope will become permanent — could involve as many as 50,000 people struggling with credit card debt. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower’s financial situation, up to a maximum of 40 percent.

[...]

Under the groups’ proposal to U.S. Comptroller of the Currency John Dugan, whose Treasury Department agency oversees national banks, a pilot project would allow big credit card companies to sharply reduce the amounts owed by consumers in over their heads who don’t qualify for the repayment plans now available.

Nearly all the biggest credit card banks have agreed to such a pilot program in which lenders would forgive as much as 40 percent of the amount consumers owe, allowing them to pay back the remainder over time.

The test program could reach as many as 50,000 borrowers, said Scott Talbott, senior vice president at the Roundtable. Borrowers would have to be in a counseling program for their credit card debt. The amount of debt to be forgiven would be determined case by case, depending on the borrower’s financial condition; those receiving close to the maximum forgiveness level would be nearing a personal bankruptcy filing.

And there would be a tax benefit. Borrowers would be able to defer payment of income taxes they owe on the forgiven part of the debt until after the remainder was paid off. The lenders could wait until then to book their loss on the forgiven debt.

OK, you know what? Our family could have bought a huge flat screen TV, we could have cars that don’t have 100,000 and 200,000 miles on them, and we haven’t been on a vacation that didn’t involve family in … well, ever. My husband and I have gone on a couple of weekend trips in the last SIX YEARS but that’s it.

While I think I’ve been pretty consistent in saying that I empathize with people who dealt with sleazy mortgage brokers, believe credit card companies have been way too lenient with the offering of credit in the first place, and know sometimes people get caught up in illnesses or accidents that just tank them financially, but dammit - this looks like a blanket pardon to me, and that means there are people who have been completely irresponsible and are getting a nice little “get out of bankruptcy free” card.

I hope this “plan” isn’t administered as willy nilly as this article makes it sound, that’s all I’m saying.

Actual verbiage from a credit card notice we received from Chase today announcing rate changes:

Default APR - The Prime Rate* plus up to 26.99%, with a maximum of 29.9% (0.08216% daily periodic rate). This rate is currently the maximum rate.

*Estimate variable APRs above are based on the 5.00% Prime Rate on August 15, 2008. The “Prime Rate” is the highest (U.S.) Prime Rate published in the Money Rates section of The Wall Street Journal as described in your agreement. These changes to your APRs do not affect any higher APRs currently in effect on your account.

OK - so what’s the rate?!

Prime plus some number between zero and 26.99%?? To me it looks like it’s DOUBLE variable, once based on prime and once based on whatever percentage they decide from month to month.

Am I crazy? Am I having a blonde moment? Can someone explain what I’m missing here, if anything?

I’m counting the days until some serious credit card reform is put into place. Keep hope alive…

Note: I’m not even going to try to avoid politics in the next week and a half. It’s impossible. Everything about the economy is coming down to these two guys who won’t be able to do most of the stuff they’re going to say they’re going to do, but hey, at least it gets some discussion going.

One of the biggest issues in this election is taxes. In an economy burdened by dropping home prices, tight credit, an expensive war, and government bailouts, citizens are justifiably concerned about how much of their money will be scooped up by the government.

Both candidates have similar stated goals (grow the economy, middle class relief, get out of this crisis) but they have very different ideas about how to reach those goals from an income tax standpoint. They also both say that the other guy has got it completely wrong. What’s a poor voter to do?

Yesterday over at MoneyNing, there was a nice little table posted that broke down what taxpayers at different income levels would pay under each candidate’s proposed plan. I went poking around online and found a similar table from CNN/Money in June of this year, which is reproduced below.

Now, this chart isn’t perfect because the only point at which the numbers in that chart are valid is when you’re at the very top dollar within the given range. That’s because it’s a representation of the marginal tax rates, which we’ve discussed before. It’s a stairstep system, remember. Still, it’s a good representation of the real impact of each candidate’s plan would be as far as federal income tax burdens.

The single most important thing to remember about both of these plans is that they apply to adjusted income. The tax rates in both candidates’ plans do not apply to your family’s gross income. If your combined household salary is $55,000 (about the national average), you are most likely not going to pay taxes on that amount. Personal deductions, deductions for children, mortgage interest, pre-tax contributions to retirement plans or flex spending accounts - all of these adjustments (and many more) lower your final adjusted income and therefore lower the amount of taxable income.

That’s important to keep in mind because the fundamental debate over taxes comes down to whether or not raising taxes is a disincentive to ambition. The basic argument is that if we have a progressive tax (higher incomes are taxed more), people will simply choose to not take that next promotion or start that business. That is, in effect, the whole Joe the Plumber debate, right?

According to this chart, McCain’s statement in New Hampshire recently that he would not raise taxes for anyone is apparently true. Unfortunately for him, that statement doesn’t take into account that by most polling numbers, he will be facing a strong Democratic majority in Congress if he wins.  What he says he wants to do and what he would actually have the ability to do, therefore, are two very, very different things. His plan can be read here.

Obama’s plan is to not raise taxes on anyone until you see salaries of over $250,000 and according to this graph, this also appears to be true. The slight increase given in the table comes from the current tax tables actually starting below $250,000. Still, it’s interesting to note that even up until a household hits $600,000, Obama’s not exactly digging deep into pockets.

Bearing all of this in mind, let’s ponder for a moment.

If we have Joe the Plumber who thinks Obama of Locksley is going to take away his American Dream, what should Joe do?

One course of action would be to simply forget about buying that business and stay an employee of a plumbing firm for the rest of his life. That is what critics of Obama’s plan say will essentially happen - hardworking ambitious Americans will simply give up the dream and stay worker bees forever. I don’t think it’s true in general because I have faith in the innate drive people have to grow, but I’m sure there are some who will decide that it’s not worth the hassle.

Another plan would be to buy that business and work as a sole proprietor until he hits that $250,000 a year magic number (ADJUSTED, remember) and then take the rest of the year off. Also not exactly a shining example of American gung-ho drive and probably quite impossible to do as a single person plumber, but also not an irrational plan if he thinks he can pull it off.

But there’s a third option, and that’s the one that seems to be getting lost in the shuffle. The third option is that Joe buys his plumbing business and then uses all of the tax advantages he can to keep his taxable income below $250,000, and those resources are considerable. Wages to hire employees, equipment, vans, trips to see vendors, trade show expenses, sponsorships for local charity events - the list goes on and on. By taking this path, Joe not only reduces his taxable income, he also provides jobs and helps his community and charities of his choice.

McCain also believes that Joe should invest in his business and community, but he believes that the best way to accomplish that is to simply lower Joe’s taxes and let him choose where he’ll invest or donate. I don’t disagree with the idealism of this belief at all. In the long run, it is beneficial for Joe to invest in his community - more jobs, better incomes, less people living in poverty all mean there are more people who can build out their basements and install a bathroom or upgrade their current bathrooms and kitchens. The question comes down to whether or not individuals will work towards a long term goal as a trade off for short term luxury without an incentive (or disincentive, as the case may be) to do so. My personal belief is that when we don’t spread at least a smidgen of the wealth around, what we end up with is a growing gap between the rich and the poor, which ultimately is unsustainable. Look around.

OK, just one more issue, as this post has gone on way too long already.

When taxes get cut in one place without a cut in spending, we have a problem. One only has to look at the debt clock running out of numbers to see that the government has run amok. I’m here to tell you that if we see a large drop in personal income taxes and corporate income taxes at the same time, you WILL see your property taxes go up, your sales taxes go up, your local income taxes go up, and (if you have them in the first place) your state income taxes go up. You will see more bond referendums in your elections in order to pay for roads, schools. We all know this at a common sense level, because we know that if our own personal incomes go down, our spending has to go down as well. Somehow, though, as a society we choose to believe that when it comes to government revenue and spending, those rules don’t apply. Silly Americans, why do we do that?

This post is featured in the Carnival of Personal Finance - Financial Armageddon Edition! at Master Your Card. Please drop by over there to for some other great posts.

Monday in Toledo, Ohio - a critical state, to say the least - Obama laid out some ideas for immediate economic relief.

Snipped (because he does tend to go on and on, doesn’t he?) from the prepared remarks on Obama’s site:

To fuel the real engine of job creation in this country, I’ve also proposed eliminating all capital gains taxes on investments in small businesses and start-up companies, and I’ve proposed an additional tax incentive through next year to encourage new small business investment. [...] And we should fast track the loan guarantees we passed for our auto industry [...].

We will also save one million jobs by creating a Jobs and Growth Fund that will provide money to states and local communities so that they can move forward with projects to rebuild and repair our roads, our bridges, and our schools.  [...]

[...] I’ve already proposed a middle-class tax cut for 95% of workers and their families, but today I’m calling on Congress to pass a plan so that the IRS will mail out the first round of those tax cuts as soon as possible.  We should also extend and expand unemployment benefits to those Americans who have lost their jobs and are having a harder time finding new ones in this weak economy. And we should stop making them pay taxes on those unemployment insurance benefits as well.

[...] I welcome Senator McCain’s proposal to waive the rules that currently force our seniors to withdraw from their 401(k)s even when the market is bad.  I think that’s a good idea, but I think we need to do even more.  Since so many Americans will be struggling to pay the bills over the next year, I propose that we allow every family to withdraw up to 15% from their IRA or 401(k) – up to a maximum of $10,000 – without any fine or penalty throughout 2009.

[...]I’ve already proposed a mortgage tax credit for struggling homeowners worth 10% of the interest you pay on your mortgage and we should move quickly to pass it.  We should also change the unfair bankruptcy laws that allow judges to write down your mortgage if you own six or seven homes, but not if you have only one.  

[...] For those Americans in danger of losing their homes, today I’m also proposing a three-month moratorium on foreclosures.

Okey dokey. Good stuff, I’m sure he got quite an enthusiastic response.

The only one of these proposals that I want to talk about today is the 401(k) withdrawal without penalty. Without seeing the details of his plan, I have some concerns about this idea.

While I’m sure it sounded GREAT in the speech, doesn’t this seem like just another bailout for the mortgage industry and other lenders? That’s ultimately who the money would go to, isn’t it? Should we really be taking money out of our retirement accounts to help them out, especially after the bailout package? After all, $10,000 taken out of an IRA now is $10,000 that can’t grow over time. I would much rather see my fabulous plan put into play, which would cost a fortune but would bring mortgages and rents back in line with housing values, would ask owners to take part of a hit along with lenders, and would probably do as much to stop the foreclosures as a $10,000 withdrawal. It would certainly do more than a three month moratorium.

But … I digress.

Back to the retirement withdrawal option. Would there be any expectation of repayment of this withdrawal? If not, there should be. I’d say let it be tax free through 2009, but expect it to be paid back by 2014. If it’s not repaid by then, slap a penalty on the distribution. Is that harsh? No … call it tough love. Although I won’t go so far as Suze Oompa Loompa and say that you should never ever ever EVER take money out of your retirement account, I don’t think an implied thumbs up from the government is a good idea, especially with concerns that Social Security is on the ropes.

And finally, is it even necessary? There are already provisions in place for hardship withdrawals (total disability, medical expenses over 7.5% of your AGI, and some others), but even that might not be the best option. For some people, bankruptcy might actually be the way to go because retirement accounts are generally left alone in bankruptcy proceedings. It might actually be worse for you in the long run to try to be responsible and pay your bills by draining your 401k.

I know it’s pretty silly to put much stock in the ramblings of a candidate during the election season, but I have a feeling this one’s going to get a lot of media attention and if Dems take over Congress in large numbers along with a Dem President, it could actually get some traction legislatively. While I appreciate the sentiment, I’m not so sure about the true benefit to Americans.

Those post is included in the 175th Carnival of Personal Finance - please go visit for more posts regarding the economy, credit cards, debt, life, the universe, and everything!

To kick off the news on our local CBS affiliate tonight, the anchors started with a story about how retailers are slashing prices already for Christmas and they let us know that thrifty shoppers are going to win big.

Really? Have we learned NOTHING? The Dow is down 40% from its high, the Nikkei is down 10% on the day (as of midnight Eastern time), central banks worldwide are worried about the world tumbling into a global depression, and these smiley faces are telling us how we can get a Malibu Foreclosure Dreamhouse for ten bucks?

On a happy note, the three people interviewed for the story all said they’re not going to be swayed much by low, low prices. One woman said her business needs to stay afloat, another said that she was happy prices would be low but is still planning on cutting back on the number of items she buys, and the lone male shopper interviewed made me smile when he said that lower prices were great but saving for an emergency in this economy was a better gift for his family.

I’ll keep saying again and again that I am sorry about jobs that will be lost as demand drops for consumer items, but - it has to happen. What we are seeing now in the market is being compounded by political choices on both ends of the spectrum that put short term happy-happy economic whitewashing over long term stability, but at the heart of it we still have several years of very fast and loose consumer spending. It’s time to rein it in and the holidays are the time to start.

Now, I’ll admit that I’m maybe a teeny bit of a grinch when it comes to the holidays, so just about any news story about holiday spending irritates me almost immediately.

I don’t like seeing updates on how much we’re all spending, I don’t like commercials implying that love can be bought better with a bigger diamond, I really don’t like the snipping back and forth between those who feel that someone saying “Happy Holidays” is a direct affront to their personal savior and those who feel that someone saying “Merry Christmas” is waging an all out war on diversity.

What I do like is time spent with family and 24 hours of A Christmas Story on TBS (which I’ll miss this year since we don’t have cable anymore), the lottery every year on whether the turkey will turn out well because I haven’t gotten it quite right yet, and seeing people come together to donate to food banks, toy drives and other charities.

But shopping? I hate it. Shopping when the economy is tanking? Oh no no no.

But … as a mother of three, I have to admit that I’m already thinking about it. I have one little guy who isn’t old enough to ask for anything and won’t really get much, if anything, from us (don’t cry for him - grandparents will more than come through). The two older boys are blessedly easy to please and willing to share video games, so we might be able to get away with maybe one or two new games and a couple of used games. My husband and I can go easy, so that’s helpful, and most of my family will understand if we pare back gifts dramatically.

We’ll be getting creative with our gifts and I’ll be sharing some ideas here - please share yours as well!

I’m not sure if this is good news or bad news, but for the first time in a decade, Americans actually paid off some debt!

From Marketwatch:

Seasonally adjusted consumer debt — including credit cards, auto loans and other unsecured debts — fell by a record $7.5 billion, or a 3.7% annual rate, to $2.58 trillion in August. That’s the largest percentage drop since January 1998, the Federal Reserve reported Tuesday. Consumer debts had risen 2.4% in July.

That’s only about twenty bucks for every man, woman and child in the country, and the numbers don’t include mortgages or home equity loans. While any decrease in debt is good, these numbers don’t provide a lot of context and I have a couple of questions …

Did consumers CHOOSE to spend less or were they not allowed to spend more? One other point the article makes is that automobile borrowing dropped sharply, but there’s a difference between borrowing being down and applications for loans being down. Did consumers try to buy a car and get denied?

Well, let’s see. Here’s a notice from HSBC on August 6, 2008:

HSBC has made the decision to exit the Auto Finance business in the U.S.. As a result, HSBC Auto Finance will discontinue offering auto loans to its customers effective August 6, 2008.

And then there’s this article from bnet on September 29,^, 2008:

In 2008, about 81 percent of prime-risk loan applications eventually got approved, down from about 91 percent in the year-ago period, from Jan. 1 to Sept. 20, CNW said. Near-prime approvals fell to 77 percent, from 86 percent.

[CNW President Art] Spinella said subprime approvals fell to only about 23 percent, down from 67 percent a year earlier.

What did credit card rates do in August?

I couldn’t actually find some quick information on this, which surprised me. I’ll update later if I find it. My guess is that the probably didn’t go DOWN.

From a related article in the Wall Street Journal, Fed Chairman Ben Bernanke did note that lenders are lowering credit card limits, which might have startled a lot of people and prompted a bit of a payoff just to create a cushion.

I did find this bit in an article in the Atlanta Journal-Constitution on October 7, 2008:

Revolving credit, which includes credit cards, has grown faster than nonrevolving credit, or installment loans such as mortgages, since May 2006, according to the Fed. But that growth rate has been slowing for most of the year, suggesting it may fade as a source of consumer-spending power.

“Banks are starting to see increased delinquencies on their credit-card portfolios and are trying to raise rates and tighten terms on payment,” says Richard Moody, chief economist at Mission Residential. “It’s an implicit way of tightening credit.”

Is this going to cause even more problems with the economy?

Quite possibly. If people spend less, companies lose money and jobs go away. I would like to point out, though, that many of the jobs lost could be overseas. It doesn’t help bring back any jobs here but for those who have been seething at the outsourcing of their livelihood to another country, there might at least be a bit of a sense of payback.

Even if it is bad for the economy, it certainly doesn’t mean American citizens should take one for the team and keep shopping. I mean, really – the debt of Americans went down $7.5 billion in August, but it went up $800 billion or so in September and October, right?

By the way, I saw this news yesterday:

The National Debt Clock has run out of spaces to display $10 trillion in red numerals.

By adding $100 billion to bail out Fannie Mae and Freddie Mac, and $700 billion to bail out banks and the credit market, there’s no room for more zeroes.

I’m so behind on my news coverage - my apologies, there just aren’t enough hours in the day.

That being said, in the midst of all of the bailout news, it’s not surprising that we’ve perhaps not been paying attention to other events. In a direct nod to Main Street over Wall Street (and seriously, are we tired of those four words being used together yet?), the House of Representatives voted on September 23rd, mostly along party lines, to give consumers a better chance against credit card companies. From Forbes/Associated Press:

It would, among other things, require credit card issuers to give account holders 45 days notice of any increases in interest rates. Monthly bills would have to be mailed at least 25 days before the due date, up from the current minimum of 14 days, and fees could not be charged on the remaining interest-only balance of a customer who has paid a bill on time.

Republican opposition to the legislation comes from a concern that these new regulations will further tighten the credit market in what is already apparently becoming a disastrous lending environment (all of the “convenience checks” and new card offers that come to my mailbox every week apparently being the exception, not the rule) and will impair the ability of credit card companies to adjust their services to changes in a client’s risk profile. While I won’t deny that it will change the game a bit, I find it hard to defend the credit card companies on this one.

From an editorial in the Wall Street Journal:

The legislation, sponsored by New York Democrat Carolyn Maloney, is intended to address supposedly unfair and deceptive credit card practices. Specifically, the bill would constrain the ability of credit card companies to price risk by adjusting interest rates. Currently, interest rates and payment schedules vary from person to person based on the fact that some cardholders are more likely to default than others. But if lenders don’t have the flexibility to react to market changes and customer circumstances, they’ll be forced to spread these risks to everyone by increasing the cost of credit. That includes low-risk cardholders who would have to subsidize higher-risk customers.

Although I think there is a valid point to be made regarding risk adjustments in the sense that a credit card is a totally different animal than, for example, a mortgage (collateral), this writer is seriously off base with his defense of the issuers.

Yes, interest rates vary from person to person based on risk, but the “flexibility” that the card issuers have been depending on is ours, not theirs, and it is a flexibility that can probably best be described as “bent over.”

And seriously, “low-risk cardholders who would have to subsidize higher-risk customers?” Give me a break. Low risk cardholders are obviously already subsidizing high risk customers, otherwise you wouldn’t see people with no income change, no debt change and no credit score rating change see their rates go up dramatically in a month, as I’ve chronicled several times here at Fools and Sages. It happened to me personally and I was told directly that it wasn’t necessarily a change in anything in my credit profile, just a “business decision.” To that I now say, fine then - call it a business decision, but don’t go whining to Congress that it’s really about risk. I have no recollection at all of suggesting to these banks that they go issue credit cards to people with scores in the 500’s, and I fail to see how it becomes my problem now either. Go ahead and raise my interest rates - see what happens.

And really, the changing interest rate bit is only a minor part of the legislation. More complaining from the Wall Street Journal editorial:

The Maloney bill would also dictate how creditors allocate payments against balances. Where credit balances are subject to different interest rates — e.g., zero-percent interest for a balance transfer, but 12% for new purchases — the legislation would ban the current common practice of directing payments toward the lower interest rate balance first.

The likely result will be fewer zero-percent promotional rates that individuals and small businesses rely on to reduce borrowing costs. Lenders now have an incentive to extend these low rate offers — which allow borrowing at below-market rates — because they know these balances will be repaid first. Remove that incentive and we’ll almost certainly see fewer promotional rate offers.

Maybe, just MAYBE, if the credit card issuers hadn’t been such jackasses about how they disclosed this practice, it wouldn’t be happening. Just so you have a nice little example, here’s those two paragraphs again in a format that looks more like you’d usually see it in a credit card offer (you’ll have to pretend that you have to turn this blog over and find it in the middle of a whole bunch of other junk):

The Maloney bill would also dictate how creditors allocate payments against balances. Where credit balances are subject to different interest rates — e.g., zero-percent interest for a balance transfer, but 12% for new purchases — the legislation would ban the current common practice of directing payments toward the lower interest rate balance first. The likely result will be fewer zero-percent promotional rates that individuals and small businesses rely on to reduce borrowing costs. Lenders now have an incentive to extend these low rate offers — which allow borrowing at below-market rates — because they know these balances will be repaid first. Remove that incentive and we’ll almost certainly see fewer promotional rate offers.

My heart’s breaking for them. It really is.

This hasn’t passed the Senate yet and so its passage will depend on who has the majority in the Senate after the elections and who is in the White House. Bush opposed the House bill, but there’s no way of knowing if he would have actually vetoed it or what the Senate response would have been like in the current public climate.

Write your letters, make your voice heard.