Credit Card Debt Management

The world’s first independent credit card company, established in 1950, is changing hands. Owned by Citigroup since 1981, the sell of Diners Club international network and franchisor brand to Discover Financial for $165 million was approved this month. This was cash money, a serious investment that belies how badly Discover wants to expand its payment network around the globe.

According to Banking Times, the sell was designed to “cut costs and increase efficiency,” as Citigroup was pretty banged up by bad debt, including that acquired in the subprime mortgage fallout. Citigroup’s profits for 2007 were down more than 50%, and 2008 isn’t projected to be much better.

According to the article, this acquisition is expected to be a big boost to the ailing Discover Financial:

“Diners Club is accepted at more than 8 million locations in 185 countries and Discover expects the purchase to improve its presence among business travellers, particularly outside the North American market. The transaction should add between $10 million and $15 million to the group’s annual pre-tax profit.”

Other finer points include the fact that Citigroup will retain ownership of 13 Diners licensee territories (roughly 30 percent of the total), including USA, Canada, Europe and Japan. It’s interesting that MasterCard was co-branded on Diners Club cards since 2004, a partnership that is expected to continue in the territories controlled by Citigroup. Discover’s acquisition — which gets it into the commercial market for the first time with more than 80,000 such credit cards — totals $30 billion in charge volume. Everything is expected to be finalized within 60 days.

Your credit score is immensely important, not only in your finances, but in life. Insurance costs, job prospects, and homeownership are all affected by this three-digit number. Determined by the Fair Isaac Corporation, thus the name FICO, your credit score has tremendous power over your life.

This is why it’s quite important to understand what makes up your credit score and how you can control it. As the pie chart shows, your credit score is roughly 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% types of credit.

1. Payment History

This is fairly self-explanatory — pay your bills on time, every time. Why? Delinquent payments can stay on your credit report up to seven years. If you have problem paying a bill, talk to the lender and update them on how much you can pay and when it will be available. One important note here is that, while everyday bills like utilities won’t go on your credit report, a late payment on one of these can increase your credit card interest rate (i.e., the monthly amount you must pay). Then, you risk falling behind on the credit card payments and your credit report can become marred.

2. Amounts Owed

This category takes into account not only what you owe currently, but what you could possibly owe in the future if you were to max out all your available lines of credit. Essentially, lenders want to know how much you could borrow from all lenders combined, and whether you would be financially able to pay it all back. This speaks directly to your level of risk as a borrower. One solution is to close lines of credit that are paid off and sitting unused, but only if they are newer accounts from within the last three years or so.

3. Length of Credit History

Lenders like to see an established history of not just having credit cards or loans, but having the same accounts with the same lenders over several years. This is why, if you have lines of credit that are paid off and sitting unused, but have been with you quite a while, you should consider keeping them open. Instead of closing it, ask the lender to reduce the available balance to the minimum, then cut up the card and stop using it.

4. New Credit

Try to limit the amount of new credit accounts you open within a short period of time. Also, try to contain credit inquiries (i.e., credit checks run on you for the purpose of obtaining a loan) within a short time period. If you’re shopping for a car or home loan, lenders are going to be checking your credit report a lot. It is gentler on your credit report to get this all out of the way within a couple weeks, as opposed to a couple months.

5. Types of Credit

Revolving credit, like credit cards, should ideally appear on your credit report alongside installment loans, as in a mortgage or car loan. This shows lenders your level of responsibility in handling a variety of debt.

Also, don’t forget to check your credit report often. The best way to get started is to visit AnnualCreditReport.com. A credit check can help correct any reporting errors, as well as identify weak spots in your report and how they might be strengthened.

As if the credit card industry didn’t have enough money floating around. The latest tactic is to use credit card rewards to justify the exorbitant credit card interchange fees (basically, purchase fees assessed of merchants for consumer credit card usage). It’s a problem for merchants and they’re begging Capitol Hill for assistance. The U.S. House is finally responding with the Credit Card Fair Fees Act.

If the 1.75% merchant fees are lessened or eliminated, as is being proposed in the bill, merchants could pass their savings on to consumers and perhaps shrink inflation a bit. However, if the bill passes, credit card rewards programs would have to be cut back accordingly, industry lobbyists say.

And to that, we say a big, “So, what?” It’s not like credit card companies don’t already make tons of cash from raising interest rates at will and charging a wide variety of other fees at every possible opportunity. Besides, as the Hartford Courant points out, a Harris Interactive poll in 2006 found that 41 percent of consumers rarely or never cash in on their accumulated credit card rewards. If you’re the forgetful type, you can automate the process of rewards redemption. And you better hurry, because these rewards may be going fast!