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Fine Print Alert: Student Loan Defaults and Bank Hackers

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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In our weekly Fine Print Alert we call out news from the financial community and shine a spotlight on any sneaky changes in the fine print. We also share our favorite reads from the week.

FINE PRINT ALERT

Hackers Steal One Billion Dollars From Banks…

Kaspersky Lab, a Russian security company, released a report that alleged a global crime ring stole up to $1 billion from banks globally. The criminals used phishing and other methods to gain access to bank systems. Over time, they would learn about the internal control processes of the banks, which included isolating the process weaknesses. They would then proceed to siphon off funds, but never too much from any one bank. The amount of money stolen from each bank was typically less than $10 million. The crooks targeted banks around the world, including in Europe and the Americas. But they didn’t stop with the banks.  28.8% of phishing attacks were aimed at stealing financial data from customers.

Learn how to protect yourself against phishing scams here.

Student Loan Defaults Continue to Rise…

This week the New York Fed released its report on household debt and credit for the fourth quarter of 2014. Student loans held the highest level of delinquency with 11.3% of student loans being 90 days or more delinquent. Students loans now have the highest delinquency level of any form of household debt. Because it is nearly impossible for people to eliminate student loans in bankruptcy, we are seeing the creation of an “ever-increasing pool of delinquent debt.”

American Express Loses Lawsuit…

American Express has always charged merchants higher interchange and sets strict rules for merchants who accept their credit cards. One of those rules prohibits merchants from favoring one credit card company over another. A small store accepting both MasterCard and American Express was not able to encourage people to pay with their MasterCard, even though the costs to the merchant would be lower. The court believed that these non-discrimination rules prevented competition, and remedies will be launched against American Express in the near term.

MAGNIFYMONEY IN THE NEWS

OUR FAVORITE READS

Rethinking Money, Not as Good or Bad but as a Tool What if we start treating money like a tool? Tools are meant to be used. They’re not meant to sit on a shelf and collect dust. Instead of thinking in terms of saving and spending money, I started to think of using it. Carl Richards explains his new way of thinking in The New York Times.

How To Invest Your First $5,000 Since the Great Recession in 2008, many people lost their stomachs for investing. It can seem like a scary thing, reserved for the world of Wall Street and financiers. But that doesn’t mean that millennials shouldn’t get involved. Whether you want to buy a house in 10 years or save for your retirement in 30, it is important to start now. Alexandra Talty shares expert opinions on how to begin investing in the stock market on Forbes.

Goodbye Sallie MaeI realized I needed to get out of debt after I finished with my Finance MBA program. I knew I was just months away from receiving my first monthly student loan bill, and I knew it was going to be expensive. I didn’t want to feel like I was drowning in student loan debt forever, so I created an action plan to pay off my student loans as fast as I possibly could. Chenell of Bright Cents shares Michelle Schroeder’s tale of dumping $38,000 of student loan debt in 7 months.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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Warnings From An Insider: 7 Store Credit Card Traps To Avoid

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

7 Store Credit Card Traps To Avoid

This holiday season, you will likely be offered a store credit card. You need to be careful before signing on the dotted line. Although the in-store discounts might look appealing, there are some real dangers and traps you need to avoid. (And I know, because I used to run a rather large credit card company).

Why are these products so dangerous? First, the retailer just wants you to spend as much as possible. So, all of the incentives will be to get you to spend more money than you had originally planned.

Second, the credit card companies pay a lot of money to the retailers in order to get the credit card deal. Typically, credit card companies have to pay a “bounty” for every credit card booked to the retailer. In addition, most credit card companies have to share a percentage of interchange revenue with the retailer. (Interchange is the fee paid by merchants to credit card companies when a card is used for a purchase). Because credit card companies have to give all of this money to the retailer, they need to make it up somehow. And the usual way to make back that money is by charging much higher interest rates.

You can get a good deal. I once moved into a new house. I was very tactical: I went shopping on a day with deep in-store discounts (Columbus day, ironically), and I applied for a credit card that had a 10% discount for purchases made on the day. Because I knew I would be spending more than $2,000, the savings (more than $200 for the credit card purchase alone) was a great deal. And, most importantly, I paid the balance in full at the end of the month. I had planned my purchase in advance and used the store card offer to save more money. That is the only way to get a good deal.

Here are the 7 traps to beware:

1. The interest rates are high, regardless of your credit score.

The vast majority of store credit cards do not offer lower interest rates for people with excellent credit scores. In other words, there is no risk-based pricing. In addition, the average interest rate on store cards is much higher than traditional credit cards, and often starts with a “2”. Even people with an 800 FICO would receive a 20% (or higher) interest rate on most store cards.

2. 0% financing is not really 0%.

Most store cards will offer some form of 0% financing. However, most store cards do not waive the interest. Instead, the interest is deferred. If you pay off the balance in full during the promotional period, you don’t pay any interest. However, if you don’t pay the balance in full you will end up getting charged interest retroactively at the high store card interest rate. Using deferred interest is a common practice. Even Apple, in partnership with Barclays, uses this offer.

3. Your Credit Score Will Be Hit With A Hard Inquiry.

When you apply for a store card, a hard inquiry will hit your credit report and your score. Although inquiries do not have a major impact (it could be as few as five points), the impact could be consequential if you plan on applying for a mortgage or auto loan in the near future. With a mortgage, five points could be enough to put you in a different pricing bracket, costing you thousands of dollars over the life of the loan.

4. Rewards for “out of store spend” are usually much better on other cards.

Store cards often have great rewards for in-store spend. For example, the Amazon Visa offers 3% cash back for purchases at Amazon.com. The Target Red Card offers 5% off in-store purchases at Target. However, the deals are much worse for spending out of store. For spending outside of the store, many credit cards offer no rewards or only 1%.

5. You will spend more money than you planned. Yes, you will.

The oldest “trick in the book” is an offer that gives you 10% off in-store spending on the day that you apply for the card. The purpose of the offer is to encourage you to spend more money than you planned. And years of data shows that people will in fact spend more money.

6. Because interest rates are high (and retailers demand it), store cards are willing to accept people with very low credit scores who have a lot of debt.

Retailers sign agreements with banks to issue store cards. These agreements come up for renewal every five or seven years. Retailers force banks to bid on the business, and it is “all or nothing.” If a bank loses a deal, it can be a huge hit. So, the power really sits with the retailer, who owns the customers. Retailers will demand higher bounties (payments when cards are booked), better rewards for consumers and better interchange deals. Retailers want to pay very little interchange for in-store purchases, and they want to collect as much interchange as possible for out of store spend. However, one of the biggest requests is “approval rate.” Retailers want banks to approve as many people as possible, for obvious reasons. As a result, banks will charge very high interest rates and will often approve people through store cards whom they would otherwise reject. There is a real danger that people with bad credit who are already in too much debt will get a line. Some store card programs approve people with FICO scores in the low 500s.

7. You will be pressured by a sales person.

Retailers are most focused on increasing sales. And giving someone a store card with a same day discount will increase sales. So, they will put a lot of pressure on employees to push credit card sales at checkout. The financial incentives for retailers can be sizeable. As a result, you should expect to get this sales pitch constantly and regularly. Stay strong!

Store cards are not all bad. Here are the three reasons why a store card could be a good deal:

  • You are making a big purchase and want to take advantage of the discount offered. You can afford to pay the statement balance in full and on time. And you are not applying for a mortgage or auto loan in the next six to twelve months.
  • You do a lot of shopping with one particular merchant. For example, you live at Target for most of your needs. Getting the big in-store discount would be more rewarding than a traditional 2% cash back credit card. But, this only makes sense (like all cash back cards) if you can afford to pay the statement balance in full and on time every month.
  • You are looking to rebuild credit, and have a lot of discipline. Because store cards approve people with lower credit scores, this can actually be a good tool. A store card with no annual fee is actually a much better deal than most other credit cards targeting people with scores below 650. Just make sure you never spend more than 10% of the available credit limit and you pay your balance in full and on time every month. By doing that, you can increase your score over time without paying an annual fee or interest. But, if you don’t have the discipline, don’t do it.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Fine Print Alert

Fine Print Alert: CFPB Dishes Out More Fines

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Fine Print Alert: CFPB Dishes Out More Fines

In our weekly Fine Print Alert we call out news from the financial community and shine a spotlight on any sneaky changes in the fine print. We also share our favorite reads from the week.

FINE PRINT ALERT

 The CFPB is Ordering Two More Banks to Pay Up… 

Last week the CFPB hit Chase and this week Discover and Citibank are both handing over money.

Discover has been ordered to pay 18.5 million dollars for allegedly engaging in illegal practices for the repayment and collection of student loans. Discover is the third largest student-loan lender by origination volume. The CFPB maintains that Discover used illegal debt-collection tactics, overstated the minimum amount borrowers needed to pay each month and did not give borrowers information about how the borrowers could receive federal income tax benefits. Discover will be returning $16 million to more than 100,000 borrowers as well as giving account credit to about 5,200 who overpaid their minimums. Nearly 130,000 borrowers will receive up to $300 or account credit of $75 for each tax year to amend for their 2011 or 2012 tax returns.

Citibank was fined $35 million by the CFPB and is being ordered to reimburse $700 million to the consumers who were victims of deceptive marketing, unfair billing practices and deceptive collection practices. This included over-stating the benefits of add-on insurance products, misrepresenting the cost of a fee to pay by phone and being enrolled in programs without being qualified.

FAVORITE READS FROM AROUND THE WEB

When smart personal finance habits just become stupid When you start getting your finances in order, it’s exciting. You see the basic concepts and rules of personal finance in action, and, after a while, they start to pay off. This makes it easy to become a personal finance devotee. But even the best financial advice can become counterproductive.Sometimes we try to use these rules when they don’t make much sense. Here are a few instances when otherwise smart personal finance concepts become kind of silly. Kristin Wong shares 4 ways that typically smart personal finance moves can result in some stupid behaviors on LifeHacker’s Two Cents blog.

A choice you make for your money today could cost you as much as $100,000 by the time you retire Erickson and Madland pinpoint two overarching problems with the fee structure of the investment options offered to most Americans through their retirement accounts: First of all, the fees are difficult to understand, and second, they “are often simply too high.” They point out that the better Americans understand the fees, the more likely they are to choose low-cost investments for their savings. Libby Kane shares details of the study from the Center for American Progress on Business Insider.

 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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