Consumers and credit disclosures: credit cards and credit insurance

Over the past three decades, much of the federal consumer-protection legislation for credit has required that certain items of information be disclosed to consumers in mandatory formats at specified times. The most prominent legislation in this area is the Truth in Lending Act.

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Provisions of the original Truth in Lending Act, enacted as Title I of the Consumer Credit Protection Act in 1968, were extensive and detailed. Since then the act has been amended and expanded many times as markets and needs have changed.

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Under the original act, the Federal Reserve has the responsibility for writing the implementing rules, which it has carried out with its Regulation Z. Because this law is so critical for federal consumer-protection policy in the credit area and because it imposes significant compliance costs on creditors, questions have been raised about its effects on consumers' understanding and behavior.

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Assessing the direct effects of disclosure legislation in these areas is difficult. For example, an apparent increase in consumers' understanding of credit matters might be explained by improved disclosure laws, but it might also be explained by advances in education, more widespread and frequent use of credit, or by more-effective solicitations for credit, advertisements, and publications that are not specifically tied to disclosure requirements.

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Regarding consumer behavior, some consumers may use less credit after the introduction of expanded disclosures if the required information persuades them that credit is expensive. Others may not change their use of credit at all or might even increase their credit use if the required disclosures either confirm their previous view that credit is affordable or increase their confidence that using credit is a desirable option.

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In terms of competition, knowing what conditions might otherwise have prevailed in the marketplace in the absence of required disclosures is not possible. And many other factors affect competition, including the number and size of competitors, production costs, and the information conditions prevailing when the disclosure rules are implemented.

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The Congress well understood the difficulty of predicting specific outcomes when it passed Truth in Lending. Rather than suggesting that the purpose of the act was to change markets or consumer behavior in some precise manner, the Congress instead stated less specifically that the act's intent was to improve information conditions generally so that consumers could avoid being "uninformed."

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Section 102 of the act states, "It is the purpose of this title to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit...." Presumably, informed consumers could then make choices that are most appropriate to their individual circumstances.

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Even though measurement of the precise effect of particular disclosure requirements on credit-use behavior or competition is problematic, one can study consumers' reports of their views about marketplace information conditions and their uses of required disclosures. To this end, the Federal Reserve Board and others have periodically sponsored and analyzed consumer surveys on disclosure matters since 1969, when the original act was implemented. (1) Over the years, survey questions have covered consumers' experiences with a variety of credit and related products, including mortgages, home equity loans, installment credit, credit cards, and credit insurance.

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In this article, the results of two surveys undertaken in 2001 of consumers' opinions about information availability are examined in the context of the earlier survey findings. The new data focus on consumers who use two, sometimes controversial, financial products--credit cards and credit insurance. When relevant, consumers' attitudes toward and experiences with these products are compared with earlier survey findings regarding these and other credit products.

How Shopping for a Loan Can Make It Harder To Get One

When shopping for a mortgage at LendingTree.com, I received offers from several lenders. Now my mortgage broker tells me that Web shopping lowers my credit score. Does this really happen?

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Using LendingTree.com alone should not hurt, but your score may suffer if you shop around too much. When lenders calculate your credit score--which assesses the probability that you'll repay the loan--your bill-paying history and how much debt you already have are the keys, says Craig Watts, consumer-affairs manager for Fair, Isaac, which develops credit-scoring calculations.

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But part of the score is based on how often you've authorized lenders to review your credit report. Lenders worry that too much activity means you're trying to get too much credit and may become overextended.

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Asking for a personalized quote usually triggers a look at your credit record. LendingTree.com, for example, gets a copy of your report and passes it on to potential lenders. Deborah Roth, a spokeswoman for the firm, says individual lenders usually don't request your report again. But even if they do, credit-scoring rules prevent the inquiries from having too much effect on your score. Any mortgage or auto-loan inquiry made in the past 30 days appears on your credit report but isn't included in your credit score. All inquiries made during the previous two weeks are counted as a single one for scoring purposes.

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Because of this time frame, searching on LendingTree won't affect your score nearly as much as visiting several lenders separately and asking for personalized quotes over a lengthy time period, long before you buy a house.

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"The Internet makes shopping for loans a lot easier," says Rasha Elass, an analyst with Gartner Group's e-business intelligence group. "Ninety percent of shoppers do it as window shopping. My advice to consumers is not to shop around unless you are serious about closing."

Downsize your debt: Is credit card debt cramping your cash flow?

Is credit-card debt cramping your cash flow?

By raising your prosperity consciousness, you can ease the money squeeze and get on the path to financial freedom

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Mention the word downsizing and what usually comes to mind are negative images of job loss and financial deprivation. But downsizing can be viewed another way--as a carefully structured plan to reduce and even eliminate your debt.

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There's no special secret to achieving effective debt reduction, but there is a path you should follow. As a financial counselor, I guide my clients in moving beyond practical skills, like checkbook balancing and budgeting, to exploring the emotional and spiritual traits that subconsciously affect their spending habits. Identifying and understanding your belief systems and attitudes about money and the core issues of why you create so much debt are essential to putting a successful debt-reduction plan in place.

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I recall one client who had purchased a fur coat she could ill afford. At the time of her "retail therapy," she was angry and depressed because her husband was out of town on their wedding anniversary. After reviewing her spending patterns and leveling with herself, she finally acknowledged that many of her impulse-shopping binges were efforts to make herself feel better about voids caused by unmet emotional needs.

If you're tired of being overwhelmed by debt, living from paycheck to paycheck and wondering why you can't get ahead, there is a way out. When practiced consistently, these five simple steps are guaranteed to bring down the size of your debt.

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THINK HOLISTICALLY If you want to change your spending patterns, you'll have to change your thought patterns. * Work on developing a more positive belief system about money. Because our beliefs are typically formed in childhood, we tend to either emulate or go 180 degrees from what we have seen, heard or absorbed from family members, friends and others close to us. What childhood experiences regarding money are you re-creating as an adult? What effects are they having on your current financial life?

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For instance, if you were raised with the message "Money is the root of all evil," you could subconsciously believe that money is bad. This could explain why you quickly get rid of money by spending it or giving it away. Or you may believe "I just don't understand money," when in fact, it's high finance that you don't understand. Join the club!

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To better understand your finances, you don't need a Ph.D. in economics. Some simple arithmetic will do. Get clear about how much money comes in and goes out monthly. Balance that checkbook. These very basic measures can help keep you "in the light" about your money and make you feel more financially empowered. * Boost your self-esteem. The way we handle money is a direct reflection of how we feel about ourselves.

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Dr. Brenda Wade, a San Francisco psychologist, recalls working with a millionaire client who wouldn't pay her Neiman Marcus bill. This particular woman's inner critic was constantly telling her that she wasn't good enough, smart enough or successful enough. Her sense of self-worth was so low that she always found ways to sabotage herself. One way was by not paying her bills, which created unnecessary drama and chaos in her life. For women who chronically need to raise their selfesteem, Wade suggests sitting quietly and affirming to yourself I am enough. I have enough. I know enough. I do enough.

Repetition is a powerful way to reprogram your subconscious to accept these ideas as reality. * Develop a prosperity consciousness. Meditate on positive affirmations that can help you envision a life of abundance, such as: All my wants and needs are met, because God is my source or I deserve the best that life has to offer.

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Visualize prosperity and success. Use your imagination to see your life as you would like it to be. Hold the vision of yourself being surrounded by loving, supportive and nurturing family and friends. See yourself living in your dream home and having an emergency savings account that will tide you over in case of need. Let your imagination expand as you consider all your heart's desires and see yourself with all your needs and wants met.

Can bad credit=insurance problems?

You've just bought the home of your dreams. The next stop is to protect your purchase with insurance but, to your amazement, the insurance company has turned you down. You consider yourself a good risk: your new home, complete with an impressive security system, is located in a safe neighborhood. So why were you denied coverage? A poor credit report could be the culprit.

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An increasing number of property and casualty insurers are using credit reports when deciding whether to grant a policy, renew an existing one or offer a preferred rate. Some insurers use credit reports as their sole deciding factor. These companies say that credit information helps them Spot insurance risks, allowing them to write more insurance than they would in the absence of credit reports. However, consumers who've never had a car accident or made a claim on their homeowner's policy could have a poor--or an erroneous--credit history used against them.

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Credit reports contain identifying data (name, addresses, Social Security number and date of birth); trade lines (detailed information on credit cards and loans); inquiries (requests for credit history); and collection items (judgments, liens, collections and bankruptcies). Under the Fair Credit Reporting Act, credit reports can be ordered for: insurance underwriting, credit transactions, hiring (with your written permission), license eligibility or for a legitimate business purpose, such as verifying the credit worthiness of a potential business partner. Insurance companies don't have set standards for determining when to order a report. What one insurance company considers a bad credit report another might find acceptable. Other insurers use "scoring" models from Fair, Isaac & Co., a San Rafael, California, firm that reduces the data on a credit report to a single score.

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The National Association of Insurance Commissioners, which wants this practice monitored, recently issued a white paper suggesting that insurers not be allowed to deny policies based solely on credit reports. It also recommends that the industry develop objective, verifiable guidelines for ordering credit reports.

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How is a credit report used? Allstate, for example, uses credit reports in most states as one of their deciding factors. The insurer, which doesn't use income as a factor, orders reports for all new business, auto and property applicants. It denies an applicant only if there is serious evidence of financial instability within the past five years. It does not consider paid collections and accounts. "Unless there was some major financial trauma [i.e., bankruptcy or foreclosure] in a potential insuree's background, we will still consider their application," says spokesperson Raleigh Floyd.

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If you suspect that your credit may lead to denied insurance, take the following steps:

1. Ask the insurer if it uses credit reports as a determining factor. If it does, order a copy of yours before you apply by calling the three credit reporting agencies: Equifax Credit Information Services (800-685-1111), Transunion Corp. (800-916-8800) and Experian (formerly TRW) 800-682-7654. The reports are free if you were recently denied credit.

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2. When your report arrives, make sure it's accurate. If you find a mistake, request a correction from the credit bureau. The Fair Credit Reporting Act requires credit bureaus to resolve a consumer's dispute within 30 days.

3. If you've been denied insurance, appeal. If that too is unsatisfactory, ask the insurer to pUt the reason in writing. If you think you've been denied unjustly, complain to the state insurance department (the White Pages will list local offices).

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4. Improve your credit report. Some credit unions and banks offer free or low-cost credit counseling. The government issues two free brochures: Build A Better Credit Record and Solving Credit Problems. To order, write: Consumer Response Center, Federal Trade Commission, 600 Pennsylvania Ave. NW, Washington, DC 20580; or call 202-326-3128; or visit the FTC's Web site at www.ftc.gov.