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Credit Card Act – Weekly Round-Up

The Senate has passed a new credit card legislation designed to stop abuses in the industry. Consumers will particularly benefit from this measure because of unfair rate increases, provisions in small print, and fee traps will no longer be permitted. In addition, there will be greater accountability required in the credit card industry.

If you have been burned by a credit card company in the past, you can relax. With the new measure, you can start using your credit card again without fear that you will be mercilessly charged penalties, finance charges, and other types of fees without your previous knowledge or consent.   This week’s round-up of blogs focus on posts that talked about the new credit card measure and how it will affect your finances.

Jim Manzi @ National Review Online wrote an interesting article titled “Credit Cards Don’t Kill Credit Ratings, People Do“. Essentially, he cited the reasons why bad credit should be attributed to individuals, not financing institutions. It is still an individual’s own responsibility to oversee their personal finances by determining how much they can afford to spend. Credit card companies are simply the medium that lets them borrow money.

Jennifer Freeman @ Think Glink wrote a short blog post “Credit Cards: Changes in New Credit Card Legislation“. Here, she discussed about what the average consumers can expect from the new bill that has been passed. The blog post was particularly inclined towards outlining the benefits of the new legislation. At the end, she posed a question about what readers think will happen with this law being implemented.

Ismat Mangla @ CNN Money outlines the effects of the newly revised legislation on credit cards for the ordinary consumer. The post entitled “What Credit Card Legislation Means to You” was especially helpful in identifying the areas in which the law will make the most impact on your life.

Bart Narter @ Celent Banking Blog stated his musings about the new credit card legislation in his post “Credit Card Legislation“. His blog post gives an unbiased view about how this law will affect the banking industry and consumers alike. While consumers will benefit from exorbitant penalty fee, credit card companies will suffer because they cannot appropriately penalize irresponsible cardholders. The blogger calls for a compromise.

Bank of America Now Closing in on the $33.9 Billion Gap

Previously, the government stress test had revealed that Bank of America (BofA) has a deficiency of $33.9 billion in common equity. Now, it seems that the company is fast plugging this loophole. The bank announced its plans to add an extra $26 billion, or as much as 76%, of the $33.9 billion that they were told to raise.

The Charlotte-based bank was able to raise $5.9 billion by exchanging its 436 million common shares into preferred stock. The bank further noted that it might issue an additional 564 common shares in the same scheme. Another source of capital was the sale of its stake in the China Construction Bank Corp. which is worth $13.47 billion. It is highly likely that the BofA will also sell its Columbia Management Group and First Republic Bank units to close the remaining gap.

The BofA statement included stipulations that requires future capital raise to fulfill the regulator’s mandate. In the earlier part of this month, it was revealed that 10 of the nation’s biggest banks need to infuse capital into their system.

Government regulators have asked these institutions to raise common equity levels as the safety net against possible adverse economic situations in the future. In addition, this will provide a sense of security for the banks’ depositors. After the expected announcement, the shares of the company went up 1.5 percent to $11.5.

Other Banks Are Doing the Same

BofA, as the largest US-based bank, does not stand alone in these drastic measures. Several major financing firms such as Citigroup Inc increased its common equity by requesting preferred shareholders to swap their stakes into common shares.

Meanwhile, PNC, the seventh-largest bank today, was asked to raise $600 million by the government. This bank is plugging their shortfall by selling 15 million common shares in a market offering. PNC has also said that it planned to repay the $7.6 billion it took from the TARP program as soon as it was “appropriate”.

Although the TARP has greatly helped the banking sector at the time of crisis, it is seen as a weakness by most. Furthermore, most of the banks it helped does not like the excessive restrictions imposed including its executive pay regulations.

Larger Banks to Pay Bigger Share in FDIC Levy

The Federal Deposit Insurance Corp. has approved a new policy that requires big US banks to pay a larger share of the insurance bill. Recent bank failures have been draining the funds from FDIC forcing the institution to ask for larger contributions from the banks even at the time when a significant number of them can barely keep afloat.

The FDIC board, composed of five members, will collect an extra $5.6 billion for these banks to a total of $17.6 billion. The new assessment can decrease the amount of loans available to customers and businesses. Bigger banks will feel the brunt of this change. Those with at least $100 billion in assets will foot an estimated $500 million more than was previously forecasted.

Forcing larger banks to shoulder a larger share of the levy is a good move because the bailout funds have been disproportionately given to the largest banks in the country. This leaves smaller community institutions at a big disadvantage. Sheila C. Bair, the FDIC Chairman, is particularly aware of these problems. According to her, collecting more money from major banks will contribute to equity. In addition, it was the big banks that played a major role in the financial crisis.

There are some dissents over this structure though. For example, the Controller of Currency has mentioned that asking larger amounts from big banks was unsuitable because majority of the insurance funds are being used by smaller banks. However, Bair doesn’t agree with this because she said that because of government intervention in not letting larger banks fail, smaller banks are hurting as the government guarantee takes away business from community institutions.

Traditionally, the FDIC has collected its percentage from each institution based on its deposits and adjusted for its overall health. Under Bair’s leadership, the assessment now includes the likelihood of failure based on the bank’s business structure. The shift to asking bigger banks to pay its appropriate share is a big step away from the previous deposit model.

Now, the FDIC will collect 0.05 percent of bank asset, the amount invested, loaned, or committed to clients in any way. Smaller banks have the tendency to lend out the same amount they receive from deposits. Meanwhile, larger banks tend to lend from different sources. Thus, the larger assessments asked from them.

Credit Score and Credit Rating – Weekly Round-Up

As everyone probably knows, credit scores play a very important role in an individual’s personal finances. It can determine how much interest one will need to pay and even whether they will be granted a loan or not in the first place. The credit score, though most might not be fully aware of it, affects a person’s lifestyle and standard of living simply because of the number of financing options available to you depends on it.

This week’s round-up will focus on the blogs that talked about credit history, credit rating, and the tips that will help your record. Essentially, the important aspect that can affect your credit score is outlined here:

Jim Wang @ Bargaineering wrote a useful post titled, “How to Build Your Credit History with Tradelines“. He starts the blog post by simply stating that getting a good credit history depends on how you act when given credit. This particular article goes into the core of what goes on in establishing credit history. Tips on how you can use tradelines to build a good record are also outlined here.

David @ My Two Dollars tries to help a reader prevent their credit record from being damaged in his post, “What Damages Your Credit Score the Most?” His answer to this is straightforward: late and missing payments. The credit score always comes back to a person’s ability and willingness to pay their financial obligations. This ability will show in one’s payment history.

JC @ Get Rich Slowly posted an interesting article, “Should Repaying Debt Be an Obsession?” As mopst are probably aware, the economic crisis today occurred not only because of banks’ careless behavior, it actually became worse because the average American simply has too much debt. So is going to the other extreme the solution to today’s problem? JC doesn’t seem to think so; he states that balance is important.

Carrie Reader @ Hints Club shares her thoughts about getting a good FICO Score with her article, “Good FICO Credit Score? Tips to Getting the Most Out of Your Home Mortgage Loan with Good Credit“. Well, the title actually says it all. The blog post basically talks about how homeowners can take advantage of their good credit history with the four tips outlined in the article.

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