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Credit Card Climate Change May Come Too Late

Time to Get Control of What You Owe

By Fred Yager
ConsumerAffairs.com

March 20, 2007

• Credit Tips And Tricks • Get Control of What You Owe • No Easy Way Out Of Credit Card Debt • Penalty Fees, Interest Rate Hikes, and Misleading Contracts Await Credit Card Shoppers • "Convenience Checks" Carry a Heavy Price Tag • Understanding Credit • Credit Bureaus: Who You're Dealing With • Reading Your Credit Report • Credit Scoring: The Fickleness of FICO • Credit Knowledge: A Long, Hard, Struggle --- News • New Credit Card Rules Take Effect February 22 • Credit Card Direct Mail Back on the Rise • FTC Urged To Place Tighter Controls On 'Free' Credit Reports • Attorneys General Warn of 'Free' Credit Report Confusion • Retailers: Hidden Credit Card Fees Cost Jobs • Interchange Fees Fleecing Consumers, Retailers Say • Minnesota Sues Clinic For Credit Card Fraud • Retailers Applaud GAO Report On Interchange Fees • Schumer Moves to Clean Up Credit Reporting Ads --- • More about credit cards

There's a saying among professional money managers that goes something like this: "Managing what you owe is just as important as managing what you own." To that I would add "because if you don't, you're liable to end up not owning anything at all."

This also happens to be the theme of a controversial new film called "Maxed Out," a documentary that has been creating a lot of buzz lately, similar to last year's "An Inconvenient Truth." Instead of global warming, the threat this time involves a spending-addicted middle class America getting buried under a mountain of credit card debt.

Entertainment Weekly called it "the scariest horror film of the season."

The movie portrays banks and credit-card companies as financial predators who prey on middle- and low-income Americans, luring them with cash-back rewards, frequent flyer points, and low initial interest rates, and then sucking them dry once those low come-on interest rates rocket into the kind of double digits only a loan shark can love.

What's really frightening is how accurate this scenario is for a country that has become a nation of debtors.

What's more, those companies whose goal is to perpetuate that debt forever continue to be rewarded. While many financial services companies suffered huge losses during the latest stock market correction when the sub-prime mortgage market tanked, one financial sector actually grew in value.

What was that sector? You guessed it, credit card companies.

That's because nationwide, credit card debt is closing in on the two trillion (with a T) dollar mark. Meanwhile, the personal savings rate in the U.S. has fallen into negative territory, hitting its lowest level since the Great Depression. This is happening because Americans are spending more than and Americans can do this because of credit cards. It's become a vicious cycle feeding off itself.

Congress has belatedly taken note of the situation and has held hearings, rattled swords and threatened action to reign in the biggest offenders. But like anything involving Congress, it's likely to be a long time before anything actually happens -- so it's up to you to take action now to keep your credit card debt from turning into a monster that can't be tamed.

What To Do

So what can you do? Should you just cut up your cards and use cash whenever you buy something? For some, that may be the only answer, especially those for whom using credit cards and amassing debt have become an addiction. And like any addiction, the first step on the road to recovery is to admit you have a problem.

This isn't easy to do. Few people are ready to admit they have a problem with money.

Even Debtors Anonymous, the 12-step program modeled after Alcoholics Anonymous, sometimes has a hard time attracting new members. However, there are more than 500 Debtors Anonymous chapters throughout the U.S. and in 13 other countries. The only requirement to join is a "desire to stop incurring unsecured debt." Basically, that means credit card debt.

But what if you have to rent a car? Car rental companies will only take credit or debit cards unless you're willing to put down a huge cash deposit. And who wants to carry bundles of cash on them? Let's face it, credit cards are a convenience. The key is in how you manage your credit card debt responsibly. So here are ten steps you can take to do just that.

1. If you simply can't control mounting debt, but you still want to use a card instead of carrying cash, you may want to shift to a debit card. In fact, a recent poll found debit card use has risen quite a bit in the past two years from 21 percent to 30 percent of all store purchases. With a debit card, you won't build up debt because the money is removed from your own account immediately whenever you use your card. The trick with a debit card is keeping close track of the money in your account. Otherwise, you can "max out," and incur bank penalty charges because you don't have the funds to cover those purchases.

2. Therefore, the next step, which is really your first step in managing your credit card debt, is to know exactly how much you owe in total. Make a list of how much you owe on each credit card along with the rate of interest on each card. Then arrange those cards in order of highest interest rate to lowest.

3. Once you have your cards in order, pay off the higher interest rate cards first because those are costing you the most money.

4. Don't wait until the last minute to make your payments. Late payment fees now average $39 per late payment. Also, a late payment could trigger an interest rate penalty pushing your once-attractive low rate up to 25% and in some cases 30 percent if you make even one late payment.

5. If you think making timely payments is going to be difficult, consider setting up an automatic payment plan that deducts money from your checking account each month.

6. Keep track of your credit limit. If you go over that limit, you could be penalized with a fee of around $40. This fee continues each month until you're back below your limit.

7. Not all interest rates are carved in stone. You just may be able to call customer service and ask for a lower interest rate. You might just mention that your mailbox is full of great offers urging you to transfer to other cards offering lower rates. You'd be surprised how often customer service representatives authorize lower interest rates just to keep a customer.

8. Now, if you're one of the lucky ones who actually get a lower rate, you may be tempted to make a lower minimum payment. Avoid this if possible. If you keep paying your usual amount, you'll pay off the credit card debt that much faster.

9. This ninth tip comes with a warning: You can actually save money by transferring balances on high interest rate cards to cards offering initial zero or low interest rates. But you have to read the fine print to make sure you're not going to end up spending more than you thought you'd save. These cards may be tricky. The fine print is filled with things like balance transfer fees, restrictions on use, and time constraints.

Each card has its own set of rules so be careful. Most of the low interest rates only last between six to nine months, a few for a year, but then they jump to double digits, averaging around 16 percent. Most of these cards charge a transfer fee based as high as 4 percent on the balance being transferred. Sometimes there's a cap that ranges from $25 to $50. However more cards are raising or eliminating that cap so if you transfer $5,000, you can expect to pay around $200 as a transfer fee.

Finally, some credit cards offering these low interest rates say they have the right to charge you a higher rate interest rate if your credit score is low and you won't even know it until you see your statement. That's why it's important to read the agreement-of-terms pamphlet carefully before transferring that balance. If it's still not clear, ask the credit card company -- or a trusted financially-smart friend -- to explain it to you.

10. Since the higher your credit score is, the lower your interest rates will be, work on improving your score. Your credit score tells lenders how responsible you are when it comes to your paying bills. If you've been late, or carry large balances on a number of credit cards, your credit score will be lower than if you make your payments on time and pay down your balances.

You can usually find out your credit score from any of the credit reporting agencies such as Equifax. Let's say your score is below 660, which is considered low. You may be able to raise your score by 50 points by going six months without a late payment and by paying down any large balances.

Now if you can't manage this by yourself, there are companies and non-profit organizations that can help you manage your debt such as Consolidated Credit Counseling Services. They help you construct payment plans you can live with as well as instructing you in how to apply for lower interest rates. They usually charge a fee but the fee entitles you to make only one monthly payment to the counseling service and that service makes separate payments to each of your creditors.

Check the terms of any service you sign up with carefully, however, since some of these services are not cheap. If you're paying more than $10 a month for the service, you're probably paying too much.

Try to find a local non-profit credit counseling service. Don't just surf the Web and grab the first one that comes along. There are many scams and sleazy operators who will, sad to say, steal you blind.

Just keep in mind that these services don't really do anything you couldn't do for yourself just by contacting the credit card companies directly and working out your own payment plan as well as requesting a lower interest rate. Most companies would rather have you repay them, even at a reduced rate, than not paying at all.

However, if you don't have the time, or you're reluctant to approach the credit card companies on your own, asking a legitimate service to help you work out a credit card debt repayment plan to manage your debt is better than ignoring the debt as it mounts and mounts to the unfortunate possibility of forcing you to have to declare bankruptcy or even default on your mortgage or car payments so that you lose your home, apartment, or car.

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