Credit Card Processing Blog

Dealing with credit card debt is difficult enough on its own, but it can get even more complicated when marital considerations are entered into the equation. Typically, both parties are equally responsible for all debt accumulated during the marriage. But things get much fuzzier when debts accumulated prior to or after the marriage are added to the picture. Helping people find their bearings in this gray zone has been keeping financial experts busy for a long time.

Last week, for example, a CreditCards.com’s reader sought advice on protecting herself from her fiancé’s $150,000 debt mountain (which he claimed was all his ex-wife’s fault). She is right to be worried, because even though she will not be in any way responsible for paying any portion of her future husband’s debt, his credit has already taken a hit, which can directly or indirectly affect her in at least two major ways:

• Joint credit applications. Any time the couple applies jointly for any form of credit – e.g. credit cards, auto loans or mortgages – the husband’s poor credit score can lead to a higher interest rate or an outright rejection.
• Debt servicing. Paying down such a huge amount is sure to affect the husband’s ability to pull his weight in keeping up with the couple’s current bills, putting additional pressure on his wife, whose credit may suffer as a result.

It goes without saying that, for the average person, dealing with such an issue will not be a simple matter. On the one hand, you wouldn’t want your spouse’s past financial troubles to affect your future happiness. On the other, if you are not careful, such a huge debt can quickly turn into a major headache. Ideally, if you have the means as a couple, you should pay off the debt just as quickly as you can. If you don’t, you should be very careful to keep all of your financial accounts separate.

Now, this may sound as an extreme case, and it probably is, but it is far from isolated. Again from CreditCards.com we learn of another conjugal debt story, involving a divorcing couple. This time the husband is concerned that, once they get divorced, his unemployed wife will run up their joint credit cards’ balances, damaging his credit in the process.

The only way to guarantee that his wife’s spending habits will not have any effect on his personal finances after they get divorced, is to close down all joint accounts, even if that means paying off the existing balances. Otherwise, he is inviting trouble.

For most of us money doesn’t matter when we fall in love. Unfortunately, financial considerations come into play much more often when things don’t work out the way we hoped and a divorce becomes the only way out. How we resolve financial issues at this stage will depend on the concrete circumstances, but one thing is certain: it will be a messy affair and you will have to make compromises. Just as you did during your marriage.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

The WSJ reports that the prepaid card business is booming and is expected to reach $200 billion in revenue by 2013. The biggest prepaid card company, Green Dot Corp., raised $160 million in its IPO last month and has seen its stock rise by 30 percent since then. The second-biggest company in the industry, NetSpend Holdings Inc., hopes to raise $200 million in its own coming IPO. This is good news.

Prepaid cards are used as debit cards, with the difference that they are not linked to a checking account, but are drawing funds from an account with the issuing bank. Yet, they are not credit cards either, because the issuer is not extending a credit line to the cardholder, who is actually purchasing his or her card’s spending limit. Once the balance is used up, the card can be re-loaded.

Prepaid cards limit the cardholder’s spending to the amount that is pre-loaded on the card. Unlike with bank cards, prepaid card issuers do not offer overdraft protection, which, if activated, enables cardholders to go over their limit, for a charge.

So paying with prepaid cards is much like paying with cash. They offer the convenience of bank cards, while eliminating the possibility of running up debt. Moreover, most fees associated with prepaid cards are fairly predictable, such as activation or reloading fees.

Prepaid cards’ biggest drawback is that they don’t help consumers build credit history. The reason is fairly obvious: with prepaid cards you are spending your own money, not someone else’s. Some issuers now offer prepaid cards with credit building features, but these are expensive and offer uncertain results. Additionally, some cards come with fees that may surprise you. For example, you can see a $2.50 ATM fee, or a fee to reload money into the account, or a fee for using a PIN, rather than a signature at the checkout, etc.

Now, some prepaid cards promise credit lines, according to Consumers Union, the non-profit publisher of Consumer Reports, and these are the ones you should stay away from. These credit lines are similar to payday loans, with very high interest rates and must be paid within a short period of time. The Consumers Union report offers as an example the AccountNow Prepaid card:

The loan operates like a payday loan. The loans are small and provide short term credit with a flat fee ($25 per $200); require that borrowing consumers have recurring direct deposits such as of paychecks or government benefits and lead to frequent rollovers and triple digit Annual Percentage Interest Rates (APRs). The disclosed APR is 150%, but this assumes that the loan is outstanding for 30 days. This is highly unlikely, as the loans are most likely taken out at the end of the pay cycle. The APR is 650% if the loan is taken out a week before payday, and even higher if the loan is taken out only for a few days.

Yet, on balance, prepaid cards are probably the least costly card you can have and the best evidence to support that claim is the fact that the big banks are staying away from them. After all, Green Dot and NetSpend are not exactly household names. J.P. Morgan Chase, Bank of America Corp and Citigroup don’t sell prepaid debit cards directly to consumers, according to the WSJ’s report.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Credit history is a determining factor when lenders make a decision on a personal credit application, whether it is for a credit card, a personal loan or a real estate mortgage. The information your personal credit file contains tells creditors how creditworthy you are, i.e. how likely you are to repay the loan. But how does a personal credit history affect a merchant account application?

Before we answer this question, let’s first take a look at the list of documents that are required from applicants for merchant accounts. The list may be different for each applicant, depending on the way the business is organized, the type of merchant account that is needed and other factors. Certain items, however, are always required, in order to help payment processing companies to evaluate the credit worthiness of both the business and its principals. Typically, applicants will be required to provide one or more of the following documents:

• Most recent tax returns (business and personal).
• Most recent personal and business financial statements.
• Most recent bank statements.
• Fictitious name statement (for DBAs).
• Partnership Agreement (for Partnerships).
• Articles of Incorporation (for Corporations).
• Dun and Bradstreet or other third party agency report showing the same legal name and address as the applicant along with a description of their location / facilities.
• IRS Confirmation of Non Profit Status – 501(c)(3) status – or other supporting documentation (for Non Profit Organizations).
• Government Entities must submit a Request for Approval of Proposal to do Standardized Government Business on Form “A”.

For new organizations, or if the business is a sole proprietorship, the principals’ tax returns are typically requested as a substitute to the financial statements. Additionally, unless the applicant business is a publicly traded company, the principals are required to provide their social security numbers, so that the processor may pull up their credit files from one of the major credit reporting agencies.

In order to understand why processors go into such great lengths to ensure that their prospective merchants handle credit in a responsible fashion, we need to first understand exactly what a merchant account is, from the processor’s perspective.

As far as merchants are concerned, a merchant account is a service that enables them to accept their customers’ credit card payments and then to have their money deposited into the merchants’ bank accounts, after the processor subtracts the transaction processing fees. At first glance, it looks like the processor is not taking much of a risk. After all, the merchant only gets its money after the processor gets it processing fee. So why are processors so cautious?

From a processor’s standpoint, a merchant account is a form of credit. When merchants accept credit or debit card payments, these payments are authorized by the card issuer and settled by the processor. While the processor does get its transaction fees before the merchant gets its money, the processor is also fully liable for the transaction amount, in case of a fraud or a chargeback. While any fees resulting from fraud and chargebacks are typically passed on to the merchant, if the merchant becomes insolvent or goes out of business, the processor must cover all such expenses. To further complicate matters, transactions can be charged back for up to six months after the transaction date, which leaves plenty of room for unforeseen events to take place. Moreover, in case of a fraud, in addition to the financial responsibility, the processor may also face legal challenges.

Personal credit history is just one of the factors that influence a processor’s decision when reviewing a merchant account application. Typically, it will only be an issue if there are many derogatory items in the credit file, especially if it shows a bankruptcy. For most applicants, however, an average credit score will be sufficient to pass the test.