Lenders might be monitoring your money management behavior via your credit card spending — and certain purchases could cost you.

By BusinessWeek 

Most borrowers know a late payment or high outstanding balance can hurt their credit. But what about frequenting a massage parlor, retreading a tire or visiting a marriage counselor? Such activities count, too, according to a suit filed June 10 by the Federal Trade Commission in Atlanta federal court against card issuer CompuCredit.

Lenders, insurers, and other financial firms use credit scoring systems to make a host of decisions about consumers, including the interest rate on their mortgages, the limits on their credit cards and the monthly premiums for their auto coverage. Some rely heavily on FICO, a three-digit score developed by Minneapolis-based financial firm Fair Isaac, while others use proprietary models developed by statisticians. But companies don’t disclose what’s baked into their formulas, leaving many borrowers to wonder what factors determine their financial fate.

The FTC suit against Atlanta’s CompuCredit for allegedly “deceptive” marketing practices offers a rare look inside the opaque business of credit scoring. It reveals mechanisms that consumer advocates and politicians have long suspected exist — in which purchasing behavior, not just payment history, matters.

Punished For Purchases

The allegations, in part, focus on CompuCredit’s Aspire Visa, a subprime credit card for risky borrowers. The FTC claims that CompuCredit didn’t properly disclose that it monitored spending and cut credit lines if consumers used their cards at certain places. Among them: tire and retreading shops, massage parlors, bars, billiard halls and marriage counseling offices.”The company touted that cardholders could use their credit cards anywhere,” says J. Reilly Dolan, assistant director for financial practices at the FTC. “What they didn’t say was that you could be punished for specific kinds of purchases.” The Federal Deposit Insurance Corp. is also seeking $200 million in penalties from CompuCredit in the matter.

It’s not the first time CompuCredit has come under scrutiny from authorities. In 2006, the credit card issuer and another financial firm agreed to fork over $11 million to consumers and reform their marketing and billing procedures as part of a settlement with then-New York Attorney General Eliot Spitzer, who had launched a probe in 2005 after receiving various consumer complaints.

CompuCredit maintains that the FTC’s lawsuit is without merit, and defends its practices. “Every time a consumer accesses their credit, a new decision to extend a loan is being made,” says Rohit H. Kirpalani, CompuCredit’s general counsel. “These scoring models are commonplace across the industry.”

Video on MSN Money

Protection from credit card companies
If new rules proposed by the Fed are enacted, some of the credit card companies’ favorite sleazy tactics will be taken off the table.

With competition increasing, databases improving and technology advancing, companies can include more factors than ever in their models. And industry experts say financial firms increasingly are looking at consumer behavior, as CompuCredit did.The worry is that companies may tweak the credit scoring systems in unfair or biased ways, weeding out or limiting borrowers based on race, gender or sexual orientation. (In the case of CompuCredit, regulators are taking issue with the lack of disclosure, not specifically its use of behavior-based scoring.)

“We as consumers should become aware that behavior is used to determine our creditworthiness,” says consumer advocate Karen Gross, president of Southern Vermont College. “What CompuCredit portends is the (use) of information to create a more robust and potentially nefarious credit scoring system.”

This story was reported and written by Jessica Silver-Greenberg for BusinessWeek.com.

Published Aug. 8, 2008

If these actions weren’t so downright dangerous, they might be humorous. Are you making these mistakes with your hard-earned cash?

1. They never figure out how much money they actually need each week to do better than just pay their bills. They don’t have a budget set up.

The correct definition of a BUDGET is: the calculation of the amount of money needed for an area [organization or household] to function and achieve its purpose. If you are satisfied to just  pay your bills, and you don’t pay yourself first into some type of savings plan, you will make other people wealthy and you will stay poor.

Every supplier you pay is in business to make a profit. You should run your business and your household the same way: like a business that is expected to make a profit. The income target must include a profit or the enterprise will go broke and fail.

2. They don’t work out ways to make more money than they currently need, and then do whatever it takes to execute the plan.

By UNDER estimating the amount of money needed to do better than just break even, they typically set their income target too low and lose money by living on credit instead of going into action to raise their income. Anyone can find ways to make more money; it is often the “willingness to do whatever it takes” that is the problem.

There are two classes of wealthy people. The large majority of wealthy people are working all the time. They have a purpose they are pursuing, and it isn’t money. Money is a sub-product they expect from their work. Their goals and purposes are the driving force in their lives.

The small minority is often called the “Idle Rich” and they are bored to death. They have seen it all, and done it all twice over and there is no thrill left in life. Think about it. If you had done everything you dreamed of and owned everything you could possible want, and were spending your days sitting by the pool in some swank hotel nursing a beverage with a little umbrella in it, would you wish you had some productive work to do? I’d bet my next few paychecks you would.

3. They habitually spend more money than they make.

Using money to buy the “appearance” of having more money than you actually have is a dangerous activity. I call this type of spender a Gratification Groupie. This can catch up with you quickly and eventually drown you in debt. This causes constant worry about money and makes for lots of sleepless nights. Money truly cannot buy happiness. But doing something productive and worthwhile and knowing you are appreciated for it can make you feel like a million bucks.

Most truly wealthy people are not interested in appearing to be wealthy, they are too busy having fun helping others in life and making more money as a result of that. Rich people always pay themselves first, have cash stashed in several places, are always interested in being productive and expect their productivity to produce more income. They don’t worry about money, and they sleep well at night.

4. They don’t figure out what they need to buy in the future and then set aside a little money each week so they can pay cash for the purchase later.

Buying something with a credit card that you can’t pay off when the statement arrives is committing your future earnings to the credit card company. You are then working for the credit card company as an economic slave.

The correct way to buy things, especially big ticket items, is to set aside a little each week till you have the cash to pay for the item, and then go out and negotiate a big cash discount. The guy with the CASH IS KING!

I recently did this when I bought my current car. I found the exact car I wanted. It was 2 years old, had 21,000 miles on it and was still under warranty. The dealer wanted $29,500 for the car. I got it for $17,500 and got an extended warranty thrown in on the deal. Don’t buy new cars. The second the front tires move off the dealer’s lot onto the street, it becomes a “used car” and loses about 25% of its value.

5. They buy products and services based on WANT rather than on NEED.

Buying decisions should be based on how your purchase of the product or service can help you produce additional income for you. Honestly, do you want the latest cell phone that offers text messaging and email retrieval because your friends have one, or do you need it to be more efficient because you are out of the office traveling to close the next business deal?

6. They don’t put money into a long-term savings plan so they have it for use later in life.

If you are relying on other peoples’ future production to pay you Social Security payments so you can retire, that is really taking a gamble.

Despite the fact the government says the cost of living is going up 3 – 3.5% a year, the truth is that it is going up 8 – 12% a year. You have to make that much more income just to stay even. Why does the government say it is only 3 – 3.5%? Unfortunately for the senior citizens, it’s because they government has to raise Social Security payments each year by the cost of living increase they quote. The Social Security system is already bankrupt and those living on Social Security are headed in that direction by going in the hole 5 – 9% every year. Are YOU planning on retiring on Social Security payments alone?

7. They never develop multiple sources of income. If one source dries up they are in trouble financially.

The old saying “don’t put all your eggs into one basket” holds true today, especially for income sources. Look for products or services that you can add, or business ventures you can get involved in that are ethical, and have a great chance of producing a consistent income. The best type of income is “residual income” where you create something that continues to generate income for you while you are off doing other things.  For example if you wrote a book and sold it on the internet as a download where potential customers could buy it 24 hours a day around the world.

8. They get stressed out about how little interest their bank pays on savings accounts while they are getting killed with much higher interest debt by carrying balances on their credit cards.

If you have substantial credit debt, you are better off using excess cash to reduce the debt and stop the high interest payments instead of trying to earn interest from the bank. As you pay off your debt, you should also keep enough cash on hand to cover a few months of living expenses and the unexpected emergency.

Once the debt is gone, or will be soon, then start investing the excess money where you can get real growth. I use a Certified Financial Planner to invest my money for me so I don’t have to do all the research and trading actions. I let the expert do what he does best while I am busy making more income.

Now don’t get me wrong, I think investing in real estate is great if it provides more cash flow in than what you have to pay out. The truth is that any real estate is a liability as long as you have to make payments on it. Only when it is paid off does it become a true asset.

9. They worry about “the economy” in general.

I’m amazed that people are actually more worried about “the economy” than they are about their business or household failing financially. They worry about what the media is reporting about “the economy” which is something they can’t control, while never looking at how they are can affect the economy of their own business or household, which is something they CAN control.

A rise in unemployment is no reason to worry. Small business creation of new jobs far outweighed the loss of jobs in big corporations, according to the latest ADP report. A failing bank is no reason to panic. Banks get bailouts from the FDIC and other investors. No one is standing by to bail out your failing business or household. That is entirely up to you. So stash some cash in a safe, in a bank, or better yet, a tax deferred retirement plan, and sleep well at night while the bad news about “the economy” rages around you.

10. They expect to survive financially without taking full responsibility for controlling their financial future.

There is a very simple solution to money problems. Cut expenses, increase your income, and correctly manage what income you do get. It’s not only about how much money you make, it’s what you do with your money that determines your financial condition.

Correct money management is something educational institutions don’t teach. People get false information and bad advice about how to handle money. Then they make these silly mistakes, get into trouble, try to solve the problem using credit, create more trouble, and then go looking for debt relief.

Fortunately there is a proven, inexpensive, easy-to-install, easy-to-learn, easy-to-use money management software system that can reverse all the money management mistakes a person has made in the past, and keeps them from making those same mistakes in the future. It is an old-school system that your great grandparents used before the days of credit cards. Very wealthy people know and use this system today.

Sandra Simmons, President of Money Management Solutions, Inc. specializes in helping business owners and individuals manage their money to achieve financial freedom. For more information about her system, claim your complimentary copy of the Debt Reduction Solutions Guide.

© 2008 Sandra S. Simmons. All Rights Reserved.

I collect the credit card offers that land in my mailbox. You might think that is nuts, but I am always researching the latest come-on that my clients may be tricked into applying for, especially if they are looking for some debt relief.

Here is the latest one, no names mentioned. Just glance quickly at the overall message and get a sense of what you think they are offering. And then answer this question.

Is this offer a trick or treat?

It is designed to look like a spectacular long term 0% interest offer. Most people actively engaged in money management and seeking debt relief automatically assume they can get this 0% deal on a balance transfer from another high interest card.

But look again, read the fine print like I always do, and here is what the offer is really saying.

The 0% is NOT for balances transferred, but is for PURCHASES made on the card which adds to your debt. The interest rate on the balance transfer is 8.99% compounded daily, plus a hefty 3% charge for transferring the balance.

Read even further and you learn that the new debt you are carrying at 0% interest (the new purchases) must be paid off first, before they will apply any portion of the payment to the balance transfer at 8.99%. And of course, they always apply your payment to any finance charges first before applying what is left to reducing the principal. No debt relief there!

My opinion is that this is another cleverly worded offer, presented in a way that makes it appear that you are getting a great interest free, long-term loan. Just another trick to hook the consumer who didn’t bother to understand what is clearly stated in the credit card offer when you read what is actually there.

Successful money management includes understanding the correct actions to take with your money. Educate yourself by reading the fine print on all documents that concern your money so you clearly understand what they mean before taking action.

Sandra Simmons, President of Money Management Solutions, has years of experience helping business owners and individuals manage their money to achieve financial freedom. Claim your FREE Debt Reduction Solutions Guide

© 2008 Sandra S. Simmons. All Rights Reserved.

It is a little known fact that more millionaires were made during The Great Depression than in any other era in U.S. history. Want to know how that happened so you can cash in on the economic crisis looming on the horizon?

I did a lot of research work to find the real facts, not just the historical data we are spoon-fed by the media about how hard the depression was on the masses and how hard the President worked to turn the U.S. economy around. It takes digging through piles of research documents including the copyright and patent office files and the Library of Congress to find a lot of the data. However, you can also find a lot of information on the internet if you dig deep enough.

There is one golden nugget in this history lesson that can enable you to make tons of money when our country is in a recession (like right now) because a recession is exactly the same thing as a depression except it doesn’t last as long and the damage is not so bad. So bear with me while I give you a short history lesson that contains this golden nugget.

It is important to know that the Great Depression actually started a few years before the 1929 stock market crash and lasted until World War II brought the country out of the Depression.

In the years before 1929, as more and more credit was extended to businesses and individuals the economy was tipping over the edge from available cash to way too much credit debt. When the amount of extended credit reached a critical mass and companies could no longer pay the credit bills, the companies crashed (the 1929 debacle.) When workers lost their jobs they could not pay their credit debts and the housing market and banking industries crashed.

All the business enterprises that were bought and sold during the depression by people with liquid cash are too numerous to mention, but because of the war effort, those with liquid cash who bought land, homes, companies, or invested in the stocks of the companies that made products that were in demand by our government for the war effort made millions. These industries included such products as:

1 – Metals: steel, iron and aluminum
2 – Communications: radios and parts
3 – Transportation: Aircraft, Tanks, boats and vehicles (and their parts)
4 – Armaments: Guns and munitions
5 – Boots, clothing, belts, backpacks, hats, blankets, tents and cots (and the textiles to make them)
6 – Containers
7 – Shipping – Truck Transportation – Railways
8 – Oil and petroleum and stocks in those oil wells (the Texas oil boom was a biggie!)

A few of the well known companies that changed hands during that period were John Deere, Douglas Aircraft, Reynolds Metals, Ericsson, and even the Goudy Gum Company – they were the first gum company to issue baseball cards with gum.

Some of the oppressive laws that our government passed during the 1930s were an effort to take money from the large number of people who had liquid cash and were using it to buy companies (or stocks in companies) as well as property. The government wanted to take it away from the people who had been smart enough to stash away liquid cash and not get into credit debt, and use it to fund the war effort as well as re-distribute it to the destitute families.

A word of caution here – Be careful to protect your cash. There are many banks that are in trouble, and while some have failed, many are on the government’s “likely to fail” list. How safe is your bank? You owe it to yourself to find out.

While your bank probably won’t reveal their rating if you ask, you can find out for yourself how safe you bank is by signing up to get my FREE Bank Ratings Report right here.

These laws were later ruled unconstitutional, but the point is that the people with liquid cash were spending it in way that made them millions, especially in industries necessary to the war effort. Yes, the stock market crashed, but the stocks could still be bought at undervalued prices and those with cash invested at the bottom of the market.

The tactic to be learned from this is a simple one that the people who use my Money Management Software implement right away. They stash cash. In case you missed it, here is THE GOLDEN NUGGET: When it comes to money, the only thing you have to fear is having no liquid cash to get you through an economic crisis.

It is a great time to buy property, but there are many people who have too much of their money tied up in non-liquid investments. They are worth lots of money on paper, but can hardly pay their bills. And there are those who have lost a lot of their money invested in semi-liquid investments like the stock market and have little liquid cash that they could get their hands on within 30 minutes if an emergency presented itself. The frightening shape our current economy is in today has the same indicators that heralded the depression of the 1930′s. Not enough cash savings, too much corporate and personal credit debt, banks failing and having to be bailed out  and the mortgage crisis / real estate crash.

What should you be doing? My clients are getting rid of their credit debt and stashing liquid cash like crazy. They are sleeping well at night and will make it through whatever comes. As martin Weiss recommends, they are “protecting their cash like a junk yard dog.” Does that mean you should sit on your cash and do nothing to recover the losses you may have sustained? Absolutely not!

I highly recommend you buy and read Martin Weiss’ book:

The Ultimate Depression Survival Guide: Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times
 

The Ultimate Depression Survival Guide

Find out how safe your bank is.

Learn where and how to buy gold and silver, and why you should.

Discover which small companies Martin thinks are the best to invest in and what price you should pay.

Get his book today and look to the future with confidence that you can weather the storm.

What are you doing to protect yourself in the economic recession / depression that is already underway? Leave a comment.