Reuters Money

New credit score tool offers insight into getting the best credit card

There’s a certain mystery about applying for a credit card: Is your credit score good enough for the best card and rate? Just how much credit might you get  if you are approved? What does everyone else get?

Now there are answers to these questions. With a new tool from CreditKarma.com, you can use information from a long list of credit card companies to find the best card for you, and figure out the one that you’re most likely to get approved for.

CreditKarma, which has been providing users with their credit scores for free for the past few years, is now offering anyone the opportunity to look at real-world data to see what credit scores it takes to get approved for hundreds of different credit cards. And there’s a whole lot more you can do, including sort cards by average household income of those approved, sort by the amount of credit extended and even a cardholder’s age. It’s a handy tool for anyone who might want to see where the lines are drawn before applying for a credit card.

“Credit card companies generally know everything about you before you apply and you don’t know much about them,” CreditKarma CEO and founder Ken Lin says.

The reason this data is now available is that CreditKarma is looking to expand its audience and keep people coming back for more, since Lin says the site gets more of its revenue from advertising. The site operates by paying TransUnion to for access to the credit scores it then provides to its users free of charge, and in turn, CreditKarma gets to harvest the data from its more than three million users. While advertisers don’t get preferential treatment in the sorting, but they do get featured positions in other parts of the site.

Some highlights from the site about the most widely-held cards:

• Chase leads the pack with an average credit score of 728 (based on nearly 305,000 cards issued to CreditKarma users).
• American Express has the highest average amount of credit extended at $9,766
• American Express also tops the list with an average household income of approved applicants of about $89,000.

Time to refinance? How low can mortgage rates go?

Mark Sass and his wife Jan decided to refinance the mortgage on their Cincinnati, Ohio, home on Friday, just days before the Federal Reserve pledged to keep rates near historic lows through the first half of 2013.

“I knew the Fed statement was coming out and rates had dropped to historically low levels, and it just seemed like an opportune time. I hadn’t even thought about it until then,” says Sass, who owns his own marketing research company.

Their original mortgage had a 20-year amortization period — at a 4.875 percent rate — with 12 years remaining. They are rolling it over into a 10-year mortgage with a 3.5 percent rate. “I was able to knock a couple of years off the term with a very modest increase in the monthly payment,” Sass says. “It seemed like a no-brainer to me.”

Sass and his wife are both 55, so retirement is on the horizon. “The opportunity to look 10 years out and know that – unless things change – we won’t have a mortgage when we retire looked like a smart decision,” Sass says, adding the overall savings on interest by reducing his term will be in the neighborhood of $20,000.

Sass is one of many jumping on the refinance bandwagon in the wake of the current financial crisis. Mortgage applications shot up 21.7 percent for the week ending Aug.5, according to the Mortgage Bankers Association Market Composite Index. The spike was largely driven by a 30.4 percent jump in the group’s refinancing index.

“In a few years, these rates will be a memory that people talk about at cocktail parties. Just like when our parents talked about how low interest rates were when they bought their homes,” says Dan Nigro, principal at Warfield Consultants in Montclair, New Jersey. “These are the kind of levels that people should lock in for the long term and it certainly is what the government has in mind.”

But the question remains: With the average rate on a 30-year fixed mortgage hovering just below 4.5 percent – the lowest levels for 2011 according to LendingTree.com – should consumers jump to refinance or buy a new home? Or should they wait for a new bottom?

Stock loans can put your securities to work as collateral

A few years ago, homes provided a deep and seemingly endless pool of loan collateral. Now, depressed real estate values and tight lending standards are prompting some brokers to float the idea of using stocks and other securities as collateral for people with healthy portfolios but limited borrowing options.

As the name implies, securities-based loans rely on the value of stocks, bonds or mutual funds as collateral. The most common form of a securities-based loan is a margin loan, which typically allows you to borrow up to 50 percent of the value of stocks in your account, and a higher percentage for less volatile assets such as Treasury or municipal bonds.

Another type of securities-based loan, called a non-purpose loan, follows similar collateral rules but often carries better rates and terms than a garden-variety margin loan. These are usually for larger amounts of $100,000 or more and are arranged by brokers or bankers for their most well-heeled clients.

In either case, custodial and retirement accounts, including IRAs, are off limits in these transactions.

While most people are familiar with margin as a way to finance stock purchases with borrowed money, the loan proceeds need not be used for investments. In fact, there are no restrictions on what you can do with the money and no set schedule for paying it back.

Margin loans fell out of favor in 2008, when the stock market crash forced many people to add collateral to their accounts at a time when they could ill-afford to do so. But the market recovery has sparked a comeback and over the last year margin debt at New York Stock Exchange-member companies has risen from $236 billion to nearly $316 billion.

While it’s hard to say how much of that money is going toward personal use, securities-based loans are filling a gap for some people whose borrowing capacity has been choked off by the recession.

It’s time for banks to pay back their debt to the rest of us

The devilish deficit dance going on in Congress right now has been a convenient distraction for big U.S. banks. They’ve not only escaped new taxes for now, but they also are relishing their taxpayer bailout by earning robust profits.

Except for Bank of America, the major U.S. banks are doing just fine, thank you. Yet for all of the abundant generosity and forgiveness of the American people, have banks lent out enough money to Americans to make a difference to the economy at large?

No. Banks are lending less to consumers than they did in 2007, the year before the full-blown financial meltdown, according to recent Federal Reserve Consumer Credit tallies.

Outstanding consumer credit was $2.5 trillion in 2007 compared to $2.4 trillion through May of this year. Revolving credit was down fivemo percent in the first quarter of this year. Total consumer lending was down about $100 billion in 2010 and 2009 alone from 2007 levels.

The net effect was less money flowing to consumers, who are the engine of the U.S. economy. Even if you wanted to build that addition to your home or buy a foreclosed home, good luck getting a large loan from a bank — unless you have perfect credit ratings.

Banks’ bowstring-tight standards for mortgages and home-equity loans triggered the lending squeeze. The Fed’s July 13 Monetary Policy report told the story:

“Mortgage originations trailed off with the end of the refinancing wave that occurred last fall, when interest rates declined … Bank lending through home equity lines also remained extraordinarily weak, reflecting in part tight lending standards amid declines in home prices that cut further into home equity.  Both credit card and other consumer loans from banks contracted, on balance, over the first half of the year.”

Consumers buy the wrong credit scores, new agency warns

At least some of the millions and millions of dollars that consumers shell out to buy their credit scores could be misspent, and possibly even damaging, the Consumer Financial Protection Bureau suggested in a report released today.

Consumers spend more than $1 billion a year buying credit reports and credit scores from credit rating agencies or other online scoring sites, the study said.

But “he or she will often receive a score that will not be the same score used by a lender to evaluate the consumer’s creditworthiness,” said the report, released two days before CFPB’s official launch as an agency. “It is important to note that many of the credit scores sold to lenders are not offered for sale to consumers.”

The downside of that? Besides wasting money on the wrong score, a consumer could make costly financial choices based on bad information. For example, if the consumer thought her credit was better than the lender did, she might spend time and money applying for loans for which she doesn’t qualify. If she thought her credit score was worse, she might not try for the best credit card or mortgage, thinking she wouldn’t qualify for it.

Some of that problem may go away soon. Beginning on July 21, lenders will be required to share the credit scores they use with consumers who get turned down for credit. But that won’t really help consumers who want to review (and possibly improve) their credit scores in the months leading up to a big credit application.

For them, there’s some takeaway from the CFPB report, as follows:

– If you’re going to buy a score, buy one that lenders actually use. The most commonly used credit scores are the FICO scores (available at myfico.com), but even the score you purchase there can differ from the one a particular lender is using, because there are different FICO score models, says the CFPB report.

5 reasons why banks hate Elizabeth Warren

Elizabeth Warren, it’s not you they hate. It’s what you represent. You want to be an honest cop when so many before you in Washington have looked the other way and pretended that the banking industry could police itself.

I can’t think of a better reason why this presidential adviser shouldn’t be the new chief of an unfettered Consumer Financial Protection Bureau.

She knows where the bodies are buried — in countless toxic forms and statements that only bank lawyers fully understand. She’ll make every attempt to end the silent rip-offs and myriad shenanigans that cost consumers billions.

As the debate about Warren — and what she stands for — rages on, here’s a look at why the banks despise the idea of her as a strong regulator:

Weak consumer regulation was the norm, but banks love the status quo Prior to the Dodd-Frank financial reform law, which established the consumer bureau, there simply was no real consumer watchdog over banks. The Comptroller of the Currency, Federal Reserve and state regulators wrote rules, but rarely enforced them in a meaningful way to consumers. The CFPB will be the first regulator in American history that didn’t answer to the banks, but to their customers. It will be a true watchdog.

Mortgage abuses were rampant More than three years after the biggest financial meltdown since 1929, we’re still trying to unravel what the banks did to foul up the global financial system. Did the banks fudge mortgage documents simply to grease the way to securitizing loans? Did they trigger foreclosures even when homeowners were paying their bills? Did they push people into bad loans they knew they would default on? If any or all of these things were true, it certainly wasn’t because the banks were over-regulated. Somebody fell asleep on their watch in Washington like Rip Van Winkle. A consumer financial bureau would keep an eye on an industry that’s operated in darkness for too long.

Credit abuses are rampant Take a look at your credit card disclosure statement. Do you have any idea how much you will owe if you’re late or lose your job and can’t pay? This is not a mystery to the banks, who have conceived elaborate formulas for charging you more money for credit.

Affluent plastic: Are high-end credit cards worth it?

Competition is heating up in the lucrative high-end credit card market, where annual fees can run into the hundreds, or even thousands, of dollars. Issuers are offering luxury benefits and exclusive rewards programs in an attempt to win the loyalty of affluent consumers.

“Many of the larger card issuers covet high-net worth clients because of their huge charge volume, rather than the typical finance charge revenue they might earn from the masses,” says Ben Woolsey of CreditCards.com. That charge volume can top $20,000 a month, by some estimates. “People with large charge volume generate significant amounts of interchange revenue for the issuer,” he said.

But are the perks of that diamond-encrusted or titanium status symbol worth the minimum spending requirements and hefty annual fees?

Described as “the world’s most prestigious and versatile credit card,” the Visa Black Card recently made the list of CardHub.com’s Worst Credit Cards on the Market.

This patent-pending carbon card carries a $495 annual fee and a 14.99 percent APR. Benefits include VIP airport lounge access and promises of luxury gifts from leading brands, but only one percent cash back on purchases, falling well below the cash-back rewards of cards with no annual fee, says Odysseas Papadimitriou, CEO of CardHub.com and a former Capital One executive.

“Affluent consumers can get anything they want. For them, it’s even more important that they comparison shop and look at all their options so they don’t get caught wasting their money on cards that are poor choices for them,” he says.

The behemoth in the luxury card market is the “rarely seen, always recognized” American Express Centurion card — known colloquially in top-tier circles as the “Amex Black.” So exclusive — the only information on the company’s website is: “Available by invitation only, The Centurion Card is the world’s rarest American Express Card and confers a level of service that can be extended only to selected individuals worldwide.” Amex representatives are quick to uphold the mystique:  “We don’t share much,” says one rep I spoke to, adding only that membership affords personalized benefits based on what is known about the client.

Why are credit scores such a mystery?

Do you know how your credit score is calculated?

Most people don’t because it’s a trade secret, and the private firms that collect credit data are poorly regulated. You have better chance of reading classified U.S. State Department cables on Wikileaks.

It’s troubling that your so-called “FICO” score, which measures your ability to pay back loans and maintain credit, is such a black box. This one number can determine not only your ability to get a mortgage or installment loan, but how much interest you’ll pay over time.

How important is your FICO score? Some 90 percent of banks use it in determining your finance charges. The lower your score, the higher the interest rate. (The highest-possible FICO score is 850, but even people with stellar credit don’t tend to exceed 825.)

On a four-year, $20,000 auto loan, a 740 FICO means you’ll pay $139 less each month over someone with a 620 score. Over the life of the loan, that’s real money: $6,672, according to myfico.com, which can send you your free score.

Potential employers and insurance companies also check credit scores, so your FICO is a keystone to your future security as well.

How is your FICO determined? Only a handful of employees at the Minneapolis-based Fair Isaac Corp. know and they won’t tell you — or government regulators. Then how do you know you’re getting a fair assessment of your credit practices? You don’t. You have to trust them.

The best credit cards for college grads

The din of hallowed halls is quieting and as college students reach for their diplomas, they may also be reaching for some new plastic. Grads who have reached the ripe-old-age of 21 are now unencumbered by credit card regulation and free to start building a credit history — and choosing the right card can mean extra rewards.

Cardratings.com has compiled a list of the top credit cards for graduates, depending on your goals after college and the state of your credit history.

“When looking at the various cards, we’re looking at what their next step is in life,” says Ellen Cannon, editorial director of cardratings.com. “If they’ve decided they’re going to Europe for the summer, than they should have the Capital One Venture Card which has no foreign exchange fees and a good interest rate.” Note: The Capital One Venture Card has an annual fee of $59, which is waived for the first year.

You need credit to get credit, but recent consumer protection measures mean it’s harder than ever to establish a credit history from a young age.

The Credit CARD Act, passed by Congress in 2009, stipulates rules for credit card issuers on marketing on college campuses and access to cards for people under the age of 21. If you happen to be under the age threshold, you’ll need a cosigner or will have to indicate to your issuer an “independent means of repaying any obligation arising from the proposed extension of credit in connection with the account.”

“From a creditors perspective, no credit history can be as bad as a poor credit history,” says Melinda Opperman, senior vice president of community outreach and industry relations at Springboard Non-Profit Consumer Credit Management. “Their credit score is going to affect their buying power. So, in order for lenders to be able to extend you credit, they have to be able to see how you performed with credit in the past.”

No credit history? Cardratings.com recommends the Orchard Bank Classic MasterCard for its extra features: email and text message bill payment reminders, online and telephone customers service to track purchases and maintain a budget and credit bureau updates to help grads build credit quickly. Annual fees range from $0 – $59 for the first year and $35 – $59 per year thereafter, based on creditworthiness.

Need a loan? 4 tips to improve your debt health

You’re young, ready to start a family and make the most significant investment of your life — the purchase of your first home. You’ve saved for a sizable down payment, but have you assessed your debt health?

The Great Recession has driven home the perils of plastic dependency, yet the average credit card debt per household in the U.S. is $14,750, according to CreditCards.com. And, in March alone, there were 144,657 consumer bankruptcy filings, up 41 percent from February’s total of 102,686.

“Right now, in this economy, credit is essential to getting a mortgage. There are different kinds of mortgages, but credit is a huge factor, along with the value of the property and your income,” says Tracy Becker, author of the Credit Solutions Kit and founder of credit restoration company North Shore Advisory.

Debtscore.com — a free financial tool developed by oweing.com — is designed to take the guess work out of assessing your debt health and help “borrowers understand for the first time how much debt is appropriate for their age, income and educational level.”

A debt-to-income ratio — the number used by many lenders to assess loan candidates — doesn’t adjust according to age, whereas this tool grades your debt health more strictly as you get older, taking into account your earning power through the years, JB Orecchia, CEO of oweing.com and former executive vice president of marketing for freecreditreport.com, says.

“The main need for the service was we saw people were paying the minimum payments on their bills and they weren’t making any headway in terms of paying down their debt and they also didn’t know exactly where to start,” Orecchia says.

A credit score tells you what you can borrow whereas a debt score tells you what you should borrow. Everyone is entitled to a free annual credit report from each of the three nationwide credit agencies: Experian, Equifax and TransUnion. Log on to annualcreditreport.com for your quarterly update.