Should the Government Regulate the Credit Card Industry?

The truth is, there is no industry that does not have some sort of government control over it. The credit company is no exception. Granted, a large part of the sector does remained "unregulated," however, there is government regulation is some respects. For example, the law states that a credit card cannot be denied based upon discriminatory reasons, credit card companies have to pay taxes and abide by other state and federal financial laws, and if you have a grievance, you can sue a credit card company. All of those examples show that there exists some level of government control over the credit card industry. However, many people believe that the government should regulate who gets a credit card, how many credit cards one should have, the maximum amount of credit one can have, and the maximum interest rate a credit card company can charge. Doing so would effectively cause the government to take over, and not regulate, the credit card industry.

It is important to note that nobody is forced to obtain a credit card. A credit card can be a powerful financial tool, but this does not mean that it is mandatory for a person to get one. Additionally, each individual person makes the decision on how to use or abuse his/her credit card privileges. As such, the credit card company is not to blame when somebody defaults on a payment.

Some argue that the credit card companies raise your credit limit so that you will spend more money. This is absolutely true, but it does not change the fact that each human has free will. Therefore, just because your credit limit is raised does not mean that you have to use the additional amount of available credit.

Another argument pressed by proponents of government regulation is that the interest rate on credit cards is too high because there is no limit on the amount of interest a credit card company can charge. Theoretically, this is true (however, I find it hard to believe that if a credit card company charged a 60% interest rate that lawsuits would not rain down upon that particular credit card company), but once again this argument negates a person's ability to choose. A person does not have to apply for, or accept a credit card offer that charges a high interest rate. Therefore, it is again not the fault of the credit card company if the person applies for and obtains such a card.

The bottom line is that credit cards are a privilege and not a right. As such, there is no need for government regulation as to the practices of credit card companies. Every person has the right to choose the card he/she wants and whether or not he/she wants a credit card in the first place. The answer is to educate people about responsible credit card use. Credit cards, like all privileges, can be abused, and as such, sometimes a person needs to learn a tough lesson before they figure out the proper use of such a privilege. If the government intervenes and "bails out" these people every time they get into trouble, no lesson will have been learned and the irresponsible behavior will continue.

What Does a Credit Score Mean to You?

There are many frequently asked questions by people who are not entirely clear as to the significance of a credit score. These people understand that a high credit score is good because it will help them get loan approvals and lower interest rates, but these same people do not know how high their credit score needs to be in order to obtain these advantages.

A FICO score ranges between 300 to 850. Obliviously, if you have a credit score of 850 you have nothing to worry about. You have reached the pinnacle of credit worthiness and will get the best interest rate and best loan, guaranteed. However, what if I have a score of 720? Will a score of 720 get me a better interest rate than a score of 715? A score of 720 is higher than 715, thus, many would conclude that a 720 would get favorable interest rates and loans. However, such is not the case. Lender will treat a score of 715 and a score of 720 the same. Why?

In addition to being scaled between 300 to 850, most lenders create credit score categories. These categories have various different names depending on the lender, but generally, the credit scores are broken into 5 categories and have names similar to (1) Poor; (2) Fair; (3) Average; (4) Good; and (5) Excellent. The lender will then take your score and put it into the appropriate category. Once you are placed in a particular category, you are given interest rates and loan terms based upon that category.

Generally, a lender’s ratings are as follows: (1) Poor is equal to credit scores 619 and below; (2) Fair is equal to credit scores 620-659; (3) Average is equal to credit scores 660-720; (4) Good is equal to credit scores 721-749; and (5) Excellent is equal to credit scores 750 and over. So, what is the point I am making? The point is, a score of 715 is not different from 720 for lending purposes. Therefore, you do not need to worry about these couple of points when applying for a loan. The only thing you should worry about is the point difference between the categories. In other words, if you have a 720, you should try to boost your score a couple of points so that you can get the more favorable terms and interest rates given in the “Good” category.

Additionally, remember that your credit score is based upon the time it is pulled. Therefore, your 720 today could be 718 or 725 tomorrow. Everything such as paying a bill, taking out a loan, getting a new credit card, getting a larger credit line on an existing credit card, and/or having a credit card for more than three years will affect you credit score. Because many people do at least one of these things several times per month, your score will thus change several times per month. This is one of the reasons why lenders do the category system.

The point is, take care of your credit score, do not worry about the points in the same category (because, based on our example, a 660 will get the same rates and loans as a 720), and strive to get your score into the highest category.



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Should you Pay off your Debt or Invest?

Many financial gurus advise that you should always pay off your debt first. In my opinion, whether or not you should pay off your debt first comes down to the interest rate you are paying on your debt versus the interest rate you could collect (or the return you could get) by investing.

Debt comes in many different forms. Many people have credit card debt, student loans, a mortgage, and some kind of auto loan. Many financial gurus state that you should pay half of your monthly mortgage payment every two weeks. By the end of the year, you will have made an additional monthly mortgage payment. This extra monthly payment will help you pay off our mortgage faster. Unless you plan on living in your home for the next 30+ years I do not like this plan. A mortgage is a fixed payment. Additionally, if your monthly payment is too high you can refinance your loan (if your credit is good). Also, many people do not live in a home long enough for the mortgage interest rate to take a toll on their finances. Also, most homes appreciate in value at a rate higher than the interest rate on the mortgage. Last, mortgage interest is tax deductible. Therefore, paying off a mortgage is not something I would take into account when deciding whether to pay off debt versus investing.

The main inquiry should be whether you should pay off your credit card debt before investing. Credit card debt usually carries an interest rate of anywhere between 8-30+%. If you have a credit card with an interest rate of 8%, you are in the minority. 8% is a very low credit card interest rate, therefore, it is more likely that you possess a credit card that has 10% or higher interest rate. Meanwhile, I am unaware of any risk-free investment that yields a 10% return. Therefore, in this case, you should pay off your credit card debt first.

If, however, you find an investment that yields a return higher than your credit card interest rate, than the investment looks like a good choice. However, you must take into account the risk involved in the investment. The stock market goes through many changes. You definitely do not want to pay your full credit card interest rate and at the same time lose a percentage of your investment.

Always carefully analyze the investment situation before you choose to invest in lieu of paying off your credit card debt. In most cases, it will be better and more profitable to pay off your debt before you invest. However, do your homework and there may be an exception that you discover.

Moral Issues Involving Credit Cards

Some moral issues exist regarding credit card use, ownership, and providing. Credit card companies are faced with the moral issue of offering credit to people that cannot afford to have credit. On the other hand, credit card users are faced with the moral dilemma of maxing out a credit card with the intention of not paying back the debt. Both issues are equally important and both can be viewed as business decisions.

In regards to credit card companies; sometimes, a credit card company will target people with bad credit and/or low income. A credit card will be offered to these people. The credit card will have numerous fees and an astronomically high interest rate. Credit card companies will argue that these fees and high interest rates are necessary in order to offset any losses due to people defaulting on their debt. However, another way to look at it is that a credit card company can charge these high interest rates and numerous fees because people with bad credit and/or low income do not have an alternative option. Therefore, the moral issue of taking advantage of people comes into light. Should credit card companies be allowed to offer these sub standard credit cards to people with few assets? The quick answer is that credit card companies are not doing anything illegal. Then again, the plain for what is legal is far below the plain for it is considered “moral.”

In regards to people; many people take advantage of credit card companies by obtaining many credit cards, “maxing” them out, and then refusing to pay the debt. Basically, this is fraud because the person never had the intention of paying back the debt. Other consumers are hurt by this default by way of higher interest rates and more fees (as discussed above). Therefore, what if a poor person used a credit card to buy food and supplies with the intention of never paying back the debt? Should they be punished? Isn’t that person merely trying to survive and not trying to take advantage of a credit card company? Is it the credit card companies fault for giving such a person a credit card?

I cannot provide any answers to these questions because everybody has a different sense of what constitutes “morals.” There is no general standard for moral behavior. Therefore, the situations presented above are for personal consideration. What do you think the moral standard should be? Do you think that a degree of morality should be infused in the practices of a credit card company and an individual credit user? Would you be willing to pay more fees and a higher interest rate in lieu of a credit card company giving credit cards to people with bad credit and/or low income?

Should you Transfer your Credit Card Balance?

A credit card balance transfer is when you take the balance on one credit card and pay off that balance with another credit card. The balance on the first card is thus effectively transferred onto the second credit card. Why would anybody do such a thing? Put simply, people do this to save money on interest rates. However, there are some dangers that can defeat the purpose of a credit card balance transfer.

As I stated, people transfer credit card balances in order to save money on interest rates. If you have a credit card that has a 23% interest rate and another card with a 15% interest rate, why not transfer the balance on the 23% interest rate card to the credit card with the 15% interest rate? You will save money and you will only have to make one payment instead of two.

The first problem that people run into is that sometimes a credit card does not have enough available balance in order to receive the transfer. Therefore, if you need to transfer $500, but only have $300 available balance on the card to which you want to transfer, obviously you cannot transfer the whole amount. I would caution transferring $300 of the $500 because then you will have one card “maxed out.” This will negatively affect your credit score, and could lead to trouble with fees (over the limit fees) down the road.

The second problem people face is that sometimes they transfer a credit card balance to a card with a teaser rate. You might see a credit card that advertises a 0% interest rate for six months on all credit card balance transfers. You may think, “This is great!” However, you have to check the fine print. Most of the time, the interest rate after the six month introductory period changes from 0% to 20%+. Make sure that the default interest rate is lower than the current interest rate on your credit card or else the whole purpose for transferring your credit card balance will be defeated.

Third, make sure that there are no fees associated with your balance transfer. You should not have to pay additional money for transferring money. If the credit card to which you want to transfer your balance wants to charge you a fee, find another credit card.

Balance transfers can be a benefit. Avoid the teaser interest rates with sky high default interest rates. Additionally, if you conclude that a balance transfer will save you money, make sure that the card to which you transfer has a noticeably lower interest rate. It is a waste of time to transfer from a 22% interest rate credit card to a 20% interest rate credit card. If you use balance transfers effectively, you could literally save thousands of dollars.