Ask Liz Weston

Most credit cards in the U.S. include at least one practice that qualifies as “unfair and deceptive” under new Federal Reserve guidelines set to go into effect in 2010, according to a report from the Pew Safe Credit Cards Project.

Reviewing consumer credit cards issued by the 12 largest companies, and which represent 88% of outstanding credit card debt, the researchers found:

• 100 percent of cards allowed the issuer to apply payments in a manner which, according to the Federal Reserve, is likely to cause substantial monetary injury to consumers.
• 93 percent of cards allowed the issuer to raise any interest rate at any time by changing the account agreement.
• 87 percent of cards allowed the issuer to impose automatic penalty interest rate increases on all balances, even if the account is not 30 days or more past due. The median allowable penalty interest rate was 27.99 percent per year.
• 72 percent of cards included offers of low promotional rates which issuers could revoke after a single late payment.

The project called for legislation that would outlaw such practices sooner and recommended guidelines that would ensure:

• Cardholders are charged only the interest rates they agreed to pay;
• Fees are imposed responsibly and in a transparent fashion;
• Cardholders have sufficient time to review and pay their bills; and
• Interest is not charged on balances cardholders have already paid.

To access the study, CLICK HERE.

American Express has reversed course and decided if it closes your account, you don’t necessarily forfeit your rewards.

CreditMattersBlog.com has the scoop (CLICK HERE). Amex is sending letters to customers whose accounts have been closed letting them know they now have 90 days to redeem their rewards. The offer is limited to customers whose accounts were in good standing.

For more tips on managing your cards in this challenging environment, read:

• 5 tips to protect your credit scores now
• Protect your credit in a downturn
• Thaw out your frozen credit

I’ll be on a panel tomorrow night that will discuss what women need to do now to cope with a changed job and investing market.

The panel, “Adapting in a Down Market,” is sponsored by the Step Up Women’s Network, will be held at UCLA’s Anderson School of Management. Step Up helps women through professional development programs, like this one, as well as through a mentorship program. Joining me are Sue Brodecky, a managing director at Lee Hecht Harrison and Patricia Ramos, Dean of Workforce & Economic Development at Santa Monica College. Amy Swift, founder of SMARTYLA, will moderate.

Admission is free and you can register by CLICKING HERE.

Brent Kessel’s “It’s Not About the Money” is about to come out in paperback, but I just noticed the hardcover version is on sale at Amazon for $7. CLICK HERE to buy it.

Kessel, a fee-only financial planner, has been a long-time source of mine and is one of the smartest guys I know about money. He’s also a yoga practitioner, and his book melds Western know-how with Eastern philosophy for an intriguing read.

There are a few other money books I’ve read recently that stand out from the crowd, and I’ll be writing about those too in coming days.

The Federal Reserve wants to hear from you about your experiences with bounced-check fees, but your opportunity to influence future regulation is closing fast. The Fed’s comment period closes Monday.

Here’s what I wrote about a couple years ago about the relatively new phenomenon of “courtesy overdraft”:

A few years ago, banks would typically decline an ATM, debit card or check transaction if there wasn’t enough money in the customer’s account.

Today, however, many banks and credit unions routinely allow these transactions to go through and then slam their customers with overdraft fees. A single $5 transaction can trigger a $30 to $35 overdraft fee, while a series of overdraft transactions in a single day can rack up hundreds of dollars in fees, usually without warning to the customer.

These policies, often marketed as “courtesy overdraft” or “bounce protection,” have caught on like wildfire: The number of financial institutions employing fee-based overdraft services grew 80% between 2003 and 2005 to 3,500, according to the Center for Responsible Lending, and the fees charged now top $17.5 billion a year.

Some might say, “So what? Keep enough money in your account, and you won’t overdraw it.”

True enough. But few of us are perfect, and the penalty for even a single lapse can be ridiculous. The Wall Street Journal today quoted one man who paid over $500 in bounce penalties for a series of small transactions, and he’s far from alone.

What’s more, people don’t sign up for courtesy overdraft. It’s imposed upon them. The first time they learn they have it is typically after they’ve wracked up significant fees.

And some banks even encourage you to overdraw your account by adding the total amount of your “courtesy overdraft protection” when you check your account balance at an ATM. So you may think you have $300 in your account, but $200 of that is courtesy overdraft. Spend more than $100, and you’ll get slapped with fees.

This is punitive and unfair. It’s time banks were forced to come clean about how bounce fees work and give you the option of opting out.

If you agree, you can send your opinion to the Fed by using a form at DefendYourDollars.org, a Web site run by Consumers Union, publisher of Consumer Reports. CLICK HERE to access the form.

To protect yourself in the meantime, call your bank and opt out of courtesy overdraft, if you can. Try to sign up for true overdraft protection, which links your checking account to a savings account or line of credit.

For more, read:

• Decline my debit card, please
• Never pay another bounced-check fee
• Now bounced checks can trash your credit

My columns for MSN won a 2009 Best in Business award from the Society of American Business Editors and Writers. The judges said:

“Liz Pulliam Weston has developed a successful recipe for her MSN Money personal finance column: Take an important yet complicated topic, break it down to its basic components, put it in language the average reader can understand, explain why the problem exists and what readers can do to help themselves. Her columns are relevant, authoritative, well researched, and presented in an inviting manner.”

I don’t invest in individual stocks anymore. I don’t have the time to monitor companies and have no faith in my ability to beat the market, so I stick with index mutual funds and exchange-traded funds.

Still, learning about individual stocks is a great way to grasp important investing principals, learn about how the market works and improve financial literacy in general (that’s why schools use The Stock Market Game).

If you feel intimidated by the stock market, or are hesitant to invest real money, check out WeSeed, a virtual investing/social networking hybrid that uses the tag line “The fun, free, risk-free way to get a clue about the stock market.”

You can explore various stocks based on your interests or profession or the products you use, then deploy a portfolio of fake money to buy your choices and watch what happens next in real time. You can interact with other virtual investors to see what insights they’ve gained, and share your own.

Then check out the games, particularly Stock Price Cage Match, where you determine which of each pair of competing stocks has the higher price. (The best I scored was 77%, a solid C–which helps explains why I don’t buy individual stocks!)

If you missed the low rates a few months ago, get your refi application in now. Last week’s Fed announcement that it would buy even more mortgage-backed securities promptly drove rates on 30-year fixed-rate loans below 5%. (For current rates from major lenders, click HERE.)

That’s great news for folks who still have good credit, a job and some equity in their properties.

If you’re struggling, though, you may find help via a new government Web site that explains the new Making Home Affordable programs.

You’ll find simple quizzes to help you decide if you may be eligible for Home Affordable Refinancing (which can help those who have too little equity to qualify for regular refinancing) or Home Affordable Modification, which can help you keep your home if your payments are too high.

You’ll also find links to HUD-approved housing counselors, checklists to help you get organized and resources to consult for more help.

You may also want to read:

• Refi’ing with a HELOC? Bird-dog your lenders
• When to walk away from a mortgage
• Facing foreclosure? 9 options

Suze Orman has told her fans to stop paying down their credit card debt, no matter how expensive, and instead put the extra money toward building up their emergency funds.

Steve Rhodes, founder of GetOutOfDebt.org, recently echoed that advice (hat tip to CreditMattersBlog.com).

A Wall Street Journal columnist recently suggested borrowing against credit cards and using the cash to boost your emergency fund.

I know a few folks–homeowners and business owners–who tapped big lines of credit and stuffed the money into savings. They’re now patting themselves on the back for their foresight, even though carrying the debt is costing them hundreds of dollars a month.

Has the world gone mad? Not quite, when you consider:

• Most American households don’t have enough liquid savings to cover a typical stretch of unemployment, which in this recession is creeping toward 12 weeks (3 months).
• Half of households told MetLife pollsters that they were one month (or two paychecks) away from not being able to meet their financial obligations. More than a quarter–28%–would fall behind after missing a single paycheck.
• In the past, many would have turned to their credit cards or home equity lines of credit to pay their bills, but lenders are slashing access to that credit. Bankers are freezing or lowering limits on home equity lines of credit across the board, and one banking analyst has predicted that card card issuers will cut total limits by more than half in coming months.

Still, carrying expensive credit card debt–or adding more to your pile if you don’t absolutely need to–is a risky proposition, to say the least. You’re paying unnecessary interest, courting damage to your credit scores and putting yourself further at risk of the whims of your lenders, which can jack up your rates or change your terms at any time.

Furthermore, you need to be suspicious of any “one size fits all” advice, because everybody’s financial situation is unique.

The key in knowing what to do know is to gauge your total financial flexibility–your ability to pay your bills and cope with setbacks based on your available resources.

Here’s what I recommend:

Take stock of your own situation. See how much unused credit you have on cards and your home equity line. Check your FICOs. Get an idea of how much your home is worth and what the sales trend is–flat, declining, sharply declining. Figure out how much money you’d need to survive for at least three months and compare that against your cash stash and your access to credit.

Gauge your risk. If you don’t have much equity and home prices in your area are plummeting, you’re at high risk of having your HELOC frozen or the limit lowered. If your credit scores aren’t good to excellent (FICOs of 720 or above), or you’re using more than 50% of your available credit card limit, you’re at greater risk of having your limits cut and not being able to fight back by persuading the lender to rescind its decision or transferring your balances elsewhere. If you have only a few cards or lines of credit, you’re more vulnerable than if you have several accounts at different lenders. As I said last week and in my MSN column yesterday, diversifying our credit has become as important as diversifying our investments.

Make a plan. If your credit scores are great, you have tons of accessible home equity and there’s plenty of space on your credit cards, your financial flexibility is high–which means you needn’t panic and change your debt-repayment plan. Otherwise:

• If things are a little tighter, you might consider opening an escape hatch or two: another credit card if you can resist the urge to run up more debt, or a line of credit at your bank.
• If you have accounts that have already been frozen–the lender’s told you that you can no longer draw on the account–paying the minimums and stashing your cash may make sense, since you won’t free up any additional credit by paying the debt down.
  
• If you have a HELOC that’s at risk and you planned on tapping it in the next year–for college tuition, say, or to finish a remodeling job–get the money now.
  
• If you’re already on the edge, you have little financial flexiblity and a layoff would push you over, then by all means, conserve cash now. Pay the minimums on your debt. Think about the expenses you’d cut if you lost your job, and trim them immediately so you can put the extra cash into savings.
• If you’re really in deep, now may be the time to consider consulting a bankruptcy attorney–who can give you truly individualized advice, rather than generalizations that can turn around and chomp you on the butt.

Now here’s a scary concept: What if lenders used your appearance determine whether you got a loan or what interest rate you paid?

Credit-worthy beauty, deadbeat beast?

New research suggests there may be a link between looks and credit. In other words, your creditworthiness may be written all over your face.

Three university researchers examined 6,821 loan applications submitted to Prosper.com, where people seeking loans are matched up with people willing to lend money. Along with the standard financial information submitted, a photo is also included.

The researchers–Rice University finance professor Jefferson Duarte, and Stephan Siegel and Lance Young, both of the University of Washington–then used Amazon.com’s Mechanical Turk, a site that brings together people who need a task done with people needing work. The researchers gave 25 MTurk “workers’’  only the photographs of the borrowers and asked them to rate the borrowers’ trustworthiness on a scale of 1 to 5.  They were also asked to judge the probability that the person in the photo would repay a $100 loan.

The researchers found that the perceived trustworthiness of the borrowers matched the ratings on their credit history filed at Prosper.com. In other words, those MTurk workers could figure out which people had high credit scores and which ones had low credit scores just by looking at their photos.

Furthermore, the researcher found that a those deemed less trustworthy must promise to pay an interest rate almost 2 percent higher than those deemed trustworthy to have the same chance of getting a loan.

“It turns out what actually explains credit score is not actually attractiveness, it is trustworthiness,” Duarte said in a statement. He defines trustworthiness as someone’s willingness to abide by a contract.

The more people trust you, the lower the rate you’ll be charged, the researchers said. “We actually found out that people who look more trustworthy, they tend to have higher FICO scores,” Duarte said.

If you’re closer to a beast than a beauty, do not despair. Modern lending decisions aren’t made using photos–they’re based on FICOs, which don’t factor in looks, or income, ethnicity, religion, sexual orientation or anything else not directly related to how you actually handle credit.

Rather than spending thousands on plastic surgery, you’ll get more FICO bang for your buck by paying down credit cards, paying your bills on time and correcting any errors in your credit reports. For more, read:

• Raise your credit score to 740
• 7 fast fixes for your credit score
• 5 tips: Protect your credit scores