House of cards: Charging mortgages idea fails
Several companies thought consumers would love the idea
Putting your house on cards -- a credit card, that is -- isn't the wisest financial decision, but that didn't stop several companies from trying to get you to do it.
About a year ago, several third-party companies cropped up offering consumers the ability to charge their mortgage payments. They marketed themselves as giving customers a chance to build more rewards points, and by offering a temporary escape route for those who found their funds depleted one month.
But these startups have all but disappeared as the weak economy and tighter credit standards had consumers asking how long a house on cards can stand.
Traditionally, most lenders don't allow consumers to charge mortgage payments directly, primarily because they don't want to have to absorb credit card companies' merchant fees. So these companies acted as a third party for reward-hungry cardholders; they would process the online credit card payments for a fee and send them directly to lenders.
In return, the cardholder picked up more rewards, the lender was paid on time and another small company prospered. For a little while, at least.
"It's not surprising that these types of services are struggling," says Jim Campen, executive director for the consumer awareness group Americans for Fairness in Lending. "Either no one signed up for it, or no one is making the payments due to cutbacks and the current economic condition."
Experts also attributed the service's downfall to lack of incentives. In order to divert your mortgage payments to a credit card, most companies wanted about 2.5 percent of the payment plus a flat fee per transaction. For most people, the extra fees weren't worth the additional rewards and convenience.
"Even if you're financially stable, I have a hard time believing that reward points and other incentives offset the fees these programs charge," says Gail Cunningham, senior director of public relations for the National Foundation of Credit Counseling. "I can't say financially speaking that it would ever be a good idea to use a service like this."
San Francisco-based ChargeSmart is the only company offering the service today. Started in July 2008, the company allows consumers to put mortgages, auto and student loans and utility payments on a credit card for a fee of $4.95 per transaction and 2.3 percent of the total bill amount.
The company doesn't generate loans. It acts as a third-party service provider that transfers funds from a cardholder to a lender. Customers can opt to use the service once, or every month to gain rewards and buy more time when between paydays.
Philip Mikal, chief operating officer of ChargeSmart, says most companies like his are folding because of the high fees they charge, which make the service too expensive to consider.
"Most of them used prohibitive cost structures that alienated credit savvy consumers," says Mikal. "If you charge 5 percent, for example, the rewards aspect is negated entirely for most cards."
He says his company is staying alive by charging low fees so users can benefit from their card's rewards points. To him, using a credit card to pay your mortgage is the same thing as using it to pay for groceries or gas.
Not all survived
In April 2007, New York-based BillCharger was offering consumers the ability to put their mortgage payments on plastic, as well as insurance premiums, property taxes, rent and other bills not traditionally diverted to a credit card. For a small amount of time, it seemed the new service offered convenience and the ability to build rewards, both of which attract people to use credit cards in the first place.
However, the company suspended operations after five months. An article for McClatchy Newspapers quoted BillCharger's founder saying the company is reworking its business model. E-mails and phone calls weren't immediately returned to CreditCards.com, and throughout late January 2009, the company's website was down.
A similar story happened to American Express when it became the first card issuer to take on the idea of paying your mortgage with plastic in May 2007. The issuer launched its Express Rewards Mortgage program aimed at the "premium customer, the affluent, high-spending American Express card member," according to a press release.
These services are here in the hopes that they can trip someone up and make money off it.
|-- Kathleen Day
Spokeswoman for the Center for Responsible Lending
But customers had a hard time joining after IndyMac and American Home Mortgage, the first lenders to offer the option, failed near the beginning of the subprime mortgage crisis.
"The first thing I saw on Google about American Express's mortgage program was IndyMac," says Campen. "IndyMac made all kinds of bad decisions, so that should tell you something about the success rate of these programs."
American Express's service was different from BillCharger because it didn't charge a percent of the payment; it simply required a one-time $395 enrollment fee and from then on automatically charged the mortgage payment each month. Once set up, the cardholder had an opportunity to earn benefits, such as coupons at retail shops and airline and hotel points.
The program also only offered the service to customers with mortgages from the two now-failed lenders, as other companies offered payment to many lenders.
Four months after American Express unveiled its mortgage program, ChargeSmart's Mikal co-founded Cardit. The startup offered the same services his current company does, but charged a slightly higher 2.49 percent for each transaction. Cardit closed its doors after three months due to funding issues.
Weighing the costs
For many lending experts, the problem with redirecting your mortgage to a credit card has to do with a company's intent, fees or no fees.
"These services are here in the hopes that they can trip someone up and make money off it," says Kathleen Day, a spokeswoman for the Center for Responsible Lending. "They are clearly very risky for consumers."
Campen adds that ChargeSmart and programs like it are designed to be used by people in financial trouble. He says the notion that the rewards will outweigh the risk is absurd, and that there are better solutions for people needing quick cash.
"If someone did this once or twice, it might help them get over a problem, but a cash advance could do the same thing," says Campen. "The likely customers are those having trouble paying their mortgages, and my organization is highly critical of these types of programs."
Mikal disagrees. He says out of his company's more than 1,000 transactions, only 1 percent to 2 percent of them involve delinquent accounts. He views his service as a necessary convenience geared to help those in need and to advance those who can afford to pay their bill in full each month.
"Credit is a very effective tool for those who use it wisely," says Mikal. "It can significantly improve a person's financial standing if allocated correctly and carefully."
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