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The New Personal Finance Culture in America

Recently, there has been a major development that changed the way Americans looked at money management. As the US economy struggled to recovery, ordinary citizens have had to cope with the “new normal”. No longer are credit, loans, and credit cards offers as abundant as they used to be. People are being forced to adapt to the new situation characterized by the following:

Long Term Unemployment

In the previous article, we talked about long term unemployment. Well, this phenomenon is still ever present with the jobless rate hovering at about 10 percent. Figures reveal that there is minimal hiring in the private sector. Most of the recent hiring we saw came from the government. The Obama administration said that the problem is cyclical. But economists expect that while unemployment will drop to 8.7% towards the end of next year and that it won’t be an easy target. Credit card holders need to be aware.

Renting Trumps Buying

Dreams of home ownership are being set aside for now. Instead, people are renting to keep a roof over their heads instead of buying. Between the year 2006 and 2009, the S&P/Case-Shiller Home Price Index showed that property value dropped by over 32 percent. This might encourage some people to buy homes at this point because of lower prices.

For the majority though, the property market would never be the same. And buying real estate is no longer perceived as a good investment. In this regard, renting instead of owning will be the preferred alternative for many.

Saving Against Spending

Americans have high credit card balances. This is stabilizing right now; in fact, credit cards’ balances fell by 6 percent or around $4.5 billion last June. At the same time, average savings rose to 6.4 percent (after-tax income). The rate is thrice higher compared to 2007. Over the short term, saving isn’t good for the economy. But over the long term, more responsible consumers mean better economic fundamentals.

Another trend is higher taxes for the country’s top earners. While this may not affect a significant number of people, some experts say that this can slow down an already-weak economy. Whatever the case, it seems that the “new normal” outlined above are here to stay.

More Irresistible Credit Card Perks – But You Actually Pay for Them

As banks gear up for a tougher year ahead, they are making credit card deals more irresistible for consumers. In general, this is in reaction to stricter lending laws that make it more difficult for firms to profit from gullible and debt-laden clients. Some card issuers actually offer free travel vouchers, access to airport lounges, and the option to transfer reward points to other hotel and airline loyalty programs. Meanwhile, several issuers doubled and even tripled the points you can get for purchases.

At first glance, these perks may appear free or complimentary. But as always, you should expect to ultimately pay for them. Banks used to profit mainly from the interest rates charged to consumers. These days, more revenue will be derived from merchant charges and annual fees that were historically kept at a low range.

Robert Hammer who runs an advisory firm based in Thousand Oaks, California estimates that fees range from $75 to $495 compared to its range of $20 to $40 (1995-2005). Take the example of Barclay’s PLC, its Visa Black “carbon card” has an annual fee of $495 though it comes with a 24-hr concierge service.

These developments are not always bad for consumers. A lot depends on their buying cycles, purchasing pattern, and their lifestyle. Value also depends greatly on perception. For instance, a customer who loves to travel will definitely look more favorably on air miles compared to a rebate feature. In general though, credit card experts will advise you to avoid reward cards since it typically has higher interest rates.

If you can pay off your debt before its due date then you can benefit great. Otherwise, the finance charge and interest you need to pay will outweigh the retail value of the “reward” you get. Not all banks are joining the bandwagon. Charles Schwab Corp. has discontinued its First Invest Credit Card which provided 2% cash back to new clients. Expect this to be more of an exception than the rule. Most issuers are ramping up their marketing campaign in order to attract loyalty and more customers.

Consumers Still Hurting Despite Loan and Card Reforms

It is still possible to get credit today even if you’re in a terrible financial mess. However, be prepared to shoulder the cost of it. Despite sweeping reforms in the credit card law that are designed to stop banks from plunging borrowers deeper in debt, banks are still lending with devastating terms.

Consider the interest rate charged on some subprime credit cards: 59.9 percent. This is unfair and unrealistic whichever way you look at it. There are also an array of cards and loans available from prepaid cards to payday loans, which comes with a very high rate.

Bank’s Point of View

Financial institutions reason that the high interest rates and fees they charge are prerequisites of the business. This is because they are taking the risk that borrowers will default on the loan. They reason out that putting a cap on their interest rate will put them out of business. And even put consumers who need money most with no recourse than to rely on public services.

Nevertheless, President Obama and advocacy groups want better consumer protection. The President is pushing for a consumer protection agency that will oversee how financial products are handled. Right now though, its future is uncertain and negotiations are still underway for a more sweeping reform.

Worse Options?

Kathleen Day from the Center of Responsible Lending said that, “It’s in nobody’s interest to lend people money they can’t afford to repay.” That’s probably why about a quarter of households are not associated with any bank. Even if they are, many rely on alternative services such as payday loans, prepaid cards, or subprime credit cards.

As opposed to McDonald’s 14,000 branches, there are about 22,000 payday loan branches around the United States. This presence highlights the fact that many consumers are in a pinch. Around 19 million people took advantage of their services last year because it is a quick way to get cash. Basically, you just need to give the lender a postdated check of the loan amount plus the fee. Payday lenders usually ask for $15 or more for $100 borrowed.

On the surface, it is easy to understand the fee. But when you look closely, the average fee on the $100 loan translates to an interest of 391 percent in an annualized rate. While some states have banned payday lending, others worry that this may choke off an important source of money for cash-strapped individuals.

Tricky Credit Card Fees

When the Credit Card Act of 2009 was introduced, the consumers hoped that this will be the end of abusive practices. But with credit card companies the way they are, it seems like clients were too optimistic. Today, consumers should only look at their latest credit card statements to know that they’ve been had, again. Bank and other card issuers have created new ways to collect millions from users. They have also expanded the fees and coverage to squeeze every penny from credit card users.

According to Joshua Frank from the Center for Responsible Lending, “Credit card issuers are going to more than ever try to find ways to make extra profits”. A lot of changes were made in the way charges were calculated. All this resulted to a burgeoning balance in the cardholder’s account. Meanwhile, other abusive practices were also put into place even before the Act was passed as a result of the recession. If there’s one ting they have in common, it’s that none are “explicitly prohibited by the Credit Card Act.”

Changes to be Aware Of:

Hidden Rate Adjustments

Cardholders with fixed-rate card need not worry. But variable rate cardholders, which majority of the market is comprised of, should be cautious. Previously, the charges were pretty straightforward. Card issuers will choose the highest prime rate in the current cycle as the starting point. Now, they have changed the terms so they can select the highest rate in a 90-day cycle. This will cost cardholders $720 million per year.

New Fees and Expanded Charges

Rate changes are not the only tricks that interests credit card companies. They also found a loophole in charging penalty fees. Some of these so-called “penalty” fees are so extreme, it looks silly. Except that you won’t be laughing when you’re the one hit with these charges. Some of the fees you need to look into carefully these days include the late fee, minimum finance charge, inactivity fee, and cash advance fee.