Get ready for yet another sign of the tough financial times. In an effort to cut the losses from charged off and delinquent credit accounts, credit card companies are starting to look at much more than your credit score and history, like your job and where you live. The new criteria go beyond whether you simply are approved or denied for a card. Existing customers are seeing their credit lines being drastically reduced without warning, some by as much as $50,000.

Where You Live
We know that banks are starting to use new and complicated application criteria to weed out potential ‘bad’ loan customers, and credit card companies are hot on their heels. Customers who live in areas hardest hit by the housing crisis, such as California, Nevada, and Florida will either be outright denied, or have a much lower credit line than people in neighboring states. Marketing campaigns in those areas and others have been limited, and automatic credit line increases have been halted.

What You Do
Your job may also determine your credit worthiness, and we’re not talking about how much you make a year. People with jobs in finance, construction, and even entertainment industries are being targeted as ‘high risk.’ Even those who have been faithful, paying customers for years suddenly are finding themselves curtailed. From The Wall Street Journal:

Peter Schiff, president of securities-brokerage firm Euro Pacific Capital in Darien, Conn., has been downbeat on the economy for months but never thought he was the kind of customer that AmEx would worry about. That changed a few months ago when one of his employees tried to book a block of hotel rooms for a seminar on the firm’s corporate AmEx card. The card was declined, and Mr. Schiff subsequently discovered that AmEx had cut his $40,000 credit line to $4,500.
(WSJ Online, by Robin Sidel, Monday, June 23, 2008)

Cardholders who find themselves with slashed credit lines are being asked for a lot more personal information than in the past. Small business owners in particular are being essentially audited to make sure of their solidarity. Credit card companies are hiring third parties to do their research work, finding trends, identifying risky customer groups, and conducting investigations on those ‘at risk’ cardholders.

This practice, while designed to minimize loss, may backfire. Many customers who find their credit lines cut or interest rates inflated are trying to contact their credit companies to either demand explanations, or to have their previous status re-instated. Almost all of them are finding those companies unyielding. Usually the customers will close the account and look elsewhere for the limits they had previously. An even worse scenario is one where a customers credit limit is cut or their interest rate is raised to the point where they will fall into default even quicker.

Each companies criteria for selecting customers is different, which is why it is possible for one company to deny a customer and another to approve them. The techniques for determining customer risk are usually a closely guarded industry secret. What most are saying is that FICO scores need to be higher, and that across the board banks and credit card companies are getting much more selective and conservative.

A new and disturbing trend is starting to ripple through the banking world, one that changed the airline and retail industries over thirty years ago. In the face of huge drops in profit from the now infamous sub-prime mortgage debacle, banks are looking to find any way possible to recoup those losses, and they want to do it fast. Their answer: price optimization.

In other words, charging different prices for the same product. While this isn’t a new idea in general, its application to the banking world is less than a year old. Airlines charge different rates to the same destination based on the time of year (ever try getting a flight around the holidays?) and retail shifts their prices based on how new or how popular a product is. Now banks are looking to charge different rates of interest on their loans, based upon the customer.

But it’s not going to work like you think. In the past, the more relationships you had with a bank (checking accounts, savings accounts, etc) the more perks you got. Perhaps it was a better interest rate on a CD or no fees on an account. With price optimization, the more relationships you have (and indeed, the more money you have in general) the higher your interest rate will be. Why? Because banks want money, and the need it fast. Here’s a scenario:

A 31 year old professional walks into his local bank branch and expects to get a very good rate on a loan. After all, he has an extremely good credit score (785), and is willing to make a 20% down payment on a new four bedroom home. He walks out with an offer of 6.5%, not even close to the industry norm of 5.8%. If he goes with them, he could end up paying over $21,000 more over the life of the loan.

Essentially the banks are looking to eek out as much interest revenue as possible in the shortest amount of time possible. Therefore the more money you have the higher interest rate you’re able to pay. There are many other factors that play into it as well (up to 20,000 in some models). Computer software takes your information and after running it through filters and projection models, determines how much you would be willing to pay. Live in the Midwest? You’re more likely to eat a higher rate than someone in New York. Applying at a local branch? You’re more likely to take a higher rate than a phone or internet application. Are you a lifetime customer who doesn’t have accounts anywhere else? You’re going to get hit just as bad as an uneducated consumer with a low credit score.

The lesson here is to be aware. There is nothing that says you have to take these higher rate offers. Shop around, do some research, make some calls. Essentially the banks are hoping that you don’t do these things, and take their word for granted. The best thing you can do is arm yourself with knowledge and challenge your bank to give you a better rate. If they don’t, then move on to one that does. Industry consultants say that eventually this approach will phase itself out, that once people start looking around for better rates the computer software will start spitting out lower rates to compete. However for the short term, banks are looking to squeeze every dime out of you they can. Don’t let them! Take matters into your own hands and become an educated consumer. Now, if we could only do something about airline rates…

Certificates of Deposit, or CDs as they are more commonly known, have long been the go-to savings product that people depended on to grow their cash reserves. With a guaranteed rate of return, CDs are considered one of the safest and most stable financial vehicles out there. But with interest rates so low, are they still a viable option?

CDs are essentially how banks are able to make money. When you deposit your money in a banks Certificate of Deposit, you are essentially loaning the bank your cash. The bank then takes this cash and uses it to make loans to other customers in the form of mortgages, auto, and personal loans. When those loan customers make payments, a certain amount of the interest (profit) the bank makes goes back to you, the CD customer. This is the interest you gain on your money during your CD term.

Pros and Cons

One thing that differentiates a CD from other accounts is the term. CDs are not transaction accounts, therefore once you put your money into a CD account, it’s locked in there for however long the CD is written for. Usually the longer you put your money into a CD, the higher the return interest rate. The point is to basically freeze the funds so the bank can then use them to write out loans. As the bank gets paid back, part of their profit goes to you. The longer you allow the bank to use your funds, the more they’re going to pay you in interest. They want to have as much of your money in their CDs as possible, for as long as possible, so they’re going to give you better rates to keep you interested.

So what’s the problem with this approach? Your money is stuck! If you open a ten year CD at a certain interest rate, and a better one comes out the next week, or even years later, you can’t take your money out and switch (well, you can, for a hefty fee. Usually this fee is more than you would earn by switching to the higher interest rate). You then have to sit and wait until the ten years is up to get your cash. Another thing to keep in mind is emergencies. If you suddenly have a medical expense or car repair, your money is stuck in that CD.

So why invest in CDs at all? They’re guaranteed. You will never lose any of your principle to market changes or botched stock trades. You will always walk away with more money than you started with. The question is, of course, how much more. Shopping for rates can be a tedious and frustrating experience, particularly if you’re investing in shorter term CDs. You might spend forever going from bank to bank to find the best rate of return, only to have to do it all over again in a year or two when it matures. However, if you’re saving for your kid’s college fund or your retirement, it would make sense to include several CDs in your portfolio. Even if more risky investments, like stocks don’t work out and lose you money, you’ll always have a safety net in the form of your CD. Another little perk is the fact that it stops you from those impulse buys. If you want that brand new plasma TV and have easy access to junior’s college fund, you might be tempted. CDs are not only secure in terms of return, but they also save you from your worst enemy: yourself.