Review Those Statements! The CARD Act Is In Effect Now

Just a friendly reminder to our readers to check your credit card statements. Many Americans are discovering that in the month of July their credit card providers snuck up on them and slipped in fees, higher interest rates or other charges in advance of the enactment of the CARD Act, which will further regulate issuers of credit cards.

Here’s a breakdown of the phases and what they include.

First phase: August 2009
Consumers will now receive statements 21 days in advance of their payment due date. The industry standard before was just 14 days.

Card issuers must also give consumers 45 days of notice prior to an interest rate change.

Second phase: February 2010
Card issuers can only raise rates on existing balances if the consumer is A: 60 days or more past due, B: A promotional rate expired, or C: A consumer doesn’t complete the workout plan or D: A variable rate increase because of movement in an index.

The CARD act will also restrict access to credit cards for borrowers under the age of 21 without a co-signer. I expect that P2P lending will be a place to turn for these borrowers—and potentially as part of a long term trend, as these borrowers won’t be “hooked young” by credit in it’s plastic form.

Already credit card borrowers are turning towards peer to peer lending as a replacement/payoff strategy to their credit cards. Blogger Matt Jabs, of DebtFreeAdventure is conducting a “DIY Consolidation” with Lending Club after his credit card company hiked his rate up. I considered it myself after a credit card I no longer use increased its annual fee, but I decided instead to close the account, as interest on my remaining card is still low.

In sum, don’t forget to take a look at your latest statements to make sure that your credit card company didn’t sneak in adjustments to your agreement before the CARD Act took effect this month.

Movie Review: Maxed Out

If you enjoy banking, finance and lending, I'm recommending that you rent the film Maxed Out.

"Maxed Out" was released in the summer of 2007 as a documentary and shows inside stories and behind the scenes tales of the credit industry, collections and bankruptcy--and left me a bigger believer in peer-to-peer lending than ever.

The film is unrated and covers some pretty heavy topics. Language includes a couple of "F-Bombs" and some discussion of suicide, but it wasn't so offensive that I felt bad about letting my tween daughter watch the film for financial literacy.

The bonus features are also very good including a 1940's educational film about credit (a fun one to watch) and an interview with Dave Ramsey.

Maxed Out also shows debt from the view of the consumer, the investor, the collector and many other steps along the way. It also shares diverse perspectives from Dave Ramsey who doesn't believe in debt, to a Real Estate agent who sees debt as a tool and a way of life to Robin Leach of Lifestyles of the Rich and Famous. I was surprised at how well the movie showed such varied perspectives without feeling fragmented or disjointed.

The subject matter movie is a downer for sure, but the movie is eye-opening in so many ways. It has a perky soundtrack and comedic interludes (not kidding). I think will motivate you to humanize your finances more. If you've seen it--please comment and let us know what you thought.

Prosper warns lenders of high risk credit grades

Prosperousland points out an interesting change in the bidding page for the riskiest credit grades. When you click to bid on E and HR credit grade loans you are now greeted with a large banner - Warning: Very low credit grade.

The disclaimer shows that E borrowers with 2 or fewer delinquent accounts have a default rate of 9.2% and E borrowers with 3 or more delinquent accounts have a default rate of 35.3%. High risk borrowers with 2 or fewer delinquent accounts have a default rate of 17.5% and high risk borrowers with 3 or more delinquent accounts have a default rate of 52.1%. This data is for loans with origination dates of Jun-Nov 2006 and as of Jan 2007.

There have been complaints in the forums that many lenders, especially new lenders, do not fully understand just how risky HR and E credit grades are. A lender who goes by the username thisguy has been the most vocal proponent of warning new lenders about the risk associated with E and HR borrowers. He has posted several messages such as this one, "If nothing else I still think there should be a 30 day ban from day 1 thru 30 of your lending life here where you are banned from bidding on HRs - then at least you will have had some time to build up your knowledge base, and see the 'reality' of the site." Other veteran leaders agree. In an open letter to Prosper in April Fred93, one of Prosper's largest lenders, accused Prosper of misleading lenders about potential returns and default rates.

This move by Prosper appears to be an attempt to respond to the criticism. It helps increase visibility of the likelihood of default on E and HR loans and will help new lenders fully understand the risk associated with lower credit grades.

While I think this is a great move for Prosper, it is also likely to make it harder for E and HR borrowers to get loans. As I mentioned in an earlier article, nearly 7 of 10 listings are from E and HR borrowers but very few of them get funded. Six months ago lenders aggressively funded low credit grade loans, but they have backed off due to the high default rate.

Analyzing the data using Prosper's Marketplace Performance, it appears that Prosper presented the most brutally honest, worse possible data. It also appears they included the rate adjustments in the default amount to come up with their percentages. If you move the range of dates forward or back the default rate gets slightly better or stays about the same.