More than 8 Million Drop out of Credit Card Use

According to an analysis from credit reporting agency TransUnion about 8 million taxpayers stopped using credit cards over the past year. Currently, 62 million Americans have a card featuring a MasterCard, Visa, Discover, or American Express logo compared to 70 million last year. This represents an 11% decline.

Breitbart.com reports

The Chicago Company found that consumers in the subprime category, or those with low credit ratings, were believed to be without cards mostly because they were shut down by banks after payments fell behind or balances were written off.

"One can quite reasonably infer that's not voluntary," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. Banks have written off record amounts of credit card balances in recent years.

But a significant portion of the decrease in card usage reflects decisions by cardholders to stop using credit, Becker said. "They're simply either not purchasing as much or paying down balances."

Many of these individuals may have shifted to using debit cards. In the past several years the use of debit cards has grown steadily and now surpasses credit card use in both the number of transactions and dollar volume. Interest rate increases by credit card companies and reduced credit lines have contributed to that trend.

Read more here

Student Loan Debt Exceeds Credit Card Debt In USA

Almost all Americans have at least some credit card debt, however according to USAToday.com the total student loan debt exceeds credit card debt in the country. As of June, the consumers in the country carry a total balance of $828 billion of credit card debt, while students owe an astounding $850 billion in loan debt.

Oddly, some students don't even know how much they owe — or to whom.

"I'm scared to know," said Carla George, 20, of Detroit, a junior majoring in biology at Wayne State University. She knows that her mother, at one point borrowed about $10,000 through a federal Parent Loan for Undergraduate Students. The PLUS loan lets parents borrow for costs not covered by a financial aid package.

George estimates that she has taken out at least $10,000 in other loans.

"I think it's a whole bunch more," she said.

A college diploma and a good job are supposed to be the payoff for years of hard work in school. But for thousands of today's students, there's going to be a payback, too — as those loans come due after graduation.

Some college students are failing financially long before they get a diploma — or a ‘grown-up’ paycheck.

"Students are far worse off today with student loan debt," said Alan Collinge, who runs a website called StudentLoanJustice.org, where students discuss their troubles with college loans.

With tuition far outpacing inflation for the past 20 years, student borrowing has continued to grow — a whopping 25% last year. Some students who are borrowing never expected to, but their parents have lost jobs or suffered other financial setbacks in the recession.

Continue reading at USA Today.com…

The Best Starter Credit Cards

Credit card companies frequently setup tables on college campuses these days, and often prey on vulnerable students who are already strapped for cash. Luckily, new laws have tightened restrictions on banks that offer credit to students, such as income and age requirements.

NewsWeek.com put together a great article on which credit cards are the best for “credit virgins,” read more below.

Laura Lee got her first credit card during the freshman Welcome Week at Central Michigan University.

“[Representatives] sat at a long table in the Student Union just outside the large conference room with displays from all the on-campus student organizations,” she tells MainStreet. “[I could] sign up for a Sears card, get a $5 gift certificate and a tote bag full of gifts.”

The opportunities to take on credit didn’t end there, however. Weeks later, applications from Citibank, Discover Card, J.C. Penney and Chase started appearing in her dorm room mailbox. By the holiday season, Lee’s wallet was bulging with plastic.

“They all welcomed this 18-year-old consumer with open arms,” she says.

Of course, credit issuers aren’t giving out cards quite so readily these days. Under the CARD Act, companies are now prohibited from issuing credit to anyone under 21 unless the applicant has a stable source of income or a willing co-signer. But college freshmen aren’t the only ones faced with roadblocks when trying to establish credit.

Continue reading at NewsWeek.com…

Family Finance: Credit Cards Part of College Plans

Credit cards are often essential for college students struggling to pay for food and lodging, in addition to huge tuition fees. However, a new law is going to make it harder for students to get credit cards, and many families are being forced to reevaluate their finances to provide for students in college. The New York Times posted a new article explaining the new law and how it will affect students across the country. You can find a section of the post below, or read the full text at NY Times.com.

Choosing what kind of plastic a college-bound student should carry may seem like an easy decision to make after all the work it takes to pick a school. But a new law making it harder for students to get their own credit cards means most parents now have to choose whether to help their kids get one, or send them off with less flexible choices like debit or prepaid cards.

The right choice could help a graduate enter the working world with a strong understanding of how credit works and a solid credit rating. The wrong choice could be costly, not only in terms of how much debt gets charged up, but also in the potential damage to the credit histories of both parents and student.

One part of the new credit card law says applicants under 21 must prove they can pay the bill, or have a co-signer to open an account. But most parents want their kids to have some card available, at least for emergencies.

That leaves parents to debate whether they should co-sign, or get their child a card linked to their own account? They might also ask if a debit card or prepaid card would be a better option.

The answers depend upon several factors, including the student's spending habits, whether they have any income, and the strength of the parent's own credit history.

''This whole situation with college students and credit is starting to turn into a thorny issue,'' said Bruce McClary of Clearpoint Credit Counseling Solutions. ''A parent really has to gauge their comfort level, in how they observe their child as someone who manages money responsibly.''

Continue reading at NY Times.com…

New Legislation Could Help Consumers with Debt Management

From Credit.com:

As millions of Americans continue to struggle with debt management, a prominent senator has unveiled legislation aimed at reducing the amount they pay on overdraft fees.

This week, Connecticut Democratic Senator Chris Dodd, chairman of the Banking Committee, announced that his new legislation would reign in fees that can approach $30 or more for accounts that overdraft by even a few cents.

"Banks should not be trying to bolster their profits at the expense of their customers," said Dodd, who added that his bill would shine "more light on these practices" while giving consumers greater control over their financial decisions.

As it stands right now, consumers who overdraft may not always be aware that they have done so, and lenders will often allow a transaction to clear anyhow for a fee. However, that fee often applies to each transaction that takes place when an account is overdrafted, which can cost consumers well over $100 by the time they check their balances. Some banks have also been criticized for manipulating the order in which transactions are processed to make overdraft activity more likely.

Critics of this and similar reform bills maintain that it's the responsibility of consumers to know at all times how much money they have in their accounts, and that banks are providing them with a service by allowing them to use their cards in such situations.

Credit Card Defaults Should Not Result in DOI Income

A few weeks ago I posted an entry titled The Hidden Problems with Forgiven Credit Card Debt that explained how forgiven credit card debt is actually considered taxable income in the eyes of the IRS. In the entry I explained how this issue has created unnecessary financial hardship for many, and it looks like the issue is finally gaining more attention. Yesterday I came across an interesting study by Richard C.E. Beck of New York Law School via the Tax Professor. Beck’s publication is titled “The Tax Treatment of Cancelled Interest and Penalties on Consumer Debt” and it explains why forgiven debt is taxable, and what can be excluded. Check out the abstract below, or click here to download the full PDF.

When defaulted credit card debt is cancelled, only the forgiven principal is taxable as COD income. Cancelled interest and penalties is not taxable income unless the items would have been deductible, and thus the Tax Court's recent decisions in Payne v. Commissioner, T.C. Memo. 2008-66, and Hahn v. Commissioner, T.C. Memo. 2007-75, are erroneous. Cancelled penalties are not taxable because the borrower has received no loan proceeds, and cancelled interest is not taxable because it is in effect simply a price adjustment for the use of money. Currently required 1099-C reporting is defective because it does not require splitting out cancelled principal. Taxpayers are being unjustly overtaxed because forgiven credit card debt often consists of amounts of interest and penalties which are equal or greater than the amount of principal.

The Hidden Problems with Forgiven Credit Card Debt

Let’s be honest, the economy is a nightmare. No one’s job is safe, people are losing their homes, and relying on their credit cards to make ends meet. Credit card companies are feeling the pinch too, and are responding by settling delinquent accounts for a fraction of what is owed.

Why would they do this? Simple: collection activities cost credit card company’s money. They have to pay the person calling you to nag about payments, they have to pay for all the letters and notices. And they may never recover all the money you owe. So, when a customer offers a lump sum payment to settle the entire debt, many companies are jumping at the chance. Moreover, whatever balance is not covered by the lump sum, the credit card company just forgives. Which is great for consumers… in the short-term.

Aside from the damage to your credit (though the delinquent payments certainly are not any better), there is a problem laying in wait for you next tax season. If your credit card company forgave your debt, the IRS calls that taxable income, reported to the IRS on a 1099-C. Oh yes, if you settle your $25,000 Visa bill for only $5,000, the “forgiven” twenty grand is now considered income. So, if you are taxed at 15%, your tax bill will increase by $3,000. The increased “income” can even bump you up into a higher tax bracket!

(It is important to note that if your debt is mortgage-related and is forgiven, this may NOT qualify as taxable income, thanks to the Mortgage Debt Forgiveness Act of 2007.)

You get your credit card debt handled, only to find a brand new tax debt waiting for you. What a trade off, eh? Of course there are some ways to get around this. A title 11 bankruptcy can relieve you of the tax debt. Or you can claim insolvency (i.e. your total debts are higher than the fair market value of your assets). Neither option sounds very appealing.

One would hope that the government would see this problem as a major issue, given the large numbers of people currently dealing with overwhelming credit card debts. However, to date, no legislation on par with the Mortgage Debt Forgiveness Act of 2007 has been introduced. And with the inherent inefficiency of Congress, any new legislation would likely be too late to help the millions of struggling Americans with debt today.

Confusion Over Canceled Mortgage & Credit Card Debt

As tough economic times continue, more and more consumers are seeking to negotiate reductions to their credit card debts, as the NY Times points out their new article titled Credit Bailout: Issuers Slashing Card Balances.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.

They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.

“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.

Although it may be getting easier to negotiate with credit card companies, the IRS still considers this canceled debt taxable income. Which is creating some confusion since they changed the tax code to not tax canceled mortgage debt, which occurs when a bank allows some one out their mortgage for less than the original value.

One of my favorite blogs, Don’t Mess With Taxes, examined this issue in a new blog entry. Check it out at trading credit card debt for a tax bill.