Credit card quagmire
TERRY SAVAGE firstname.lastname@example.org Jul 13, 2009
Updated: May 3, 2013 12:15PM
What should you do with the credit cards in your wallet? They are no longer the friendly convenience that allows you to spend now, and pay later. Suddenly your credit card is either your saving grace -- allowing you to feed your family or pay the electric bill, or it is the enemy -- piling up balances that seem to grow, instead of shrink.
Even cardholders who have paid their bills on time are feeling the pinch -- as rates on balances rise, fees increase and spending limits are capped. When did your credit card start attacking your finances instead of helping them?
Who is to blame for rising credit card interest rates and fees? The fingers are pointing in every direction. Talk radio is filled with angry voices demanding to know why the banks keep raising rates after they've taken taxpayer bailout money.
The latest target is Citibank, which reportedly raised rates of 15 million cardholders, mostly those who have accounts that are co-branded with merchants.
There's a lot of anger -- but should it be directed at the banks, at consumers who have over-borrowed, or at Congress -- which keeps enabling the borrowing process?
The banks and card issuers are an easy target, but should we really blame them? The Fed and Treasury have just given the banks a stern lecture about not making any more bad loans. Banks are looking at nearly $1 trillion in unsecured consumer debt -- and a growing default rate, not to mention soaring bankruptcies. Should they stand by and wait for more losses? Do we want them to do that?
Maybe it's the fault of consumers. After all, everyone knows you can't finance your lifestyle on your credit card forever. But can we blame consumers who, having lost their jobs, and maybe even their homes, are now charging food and essentials on their credit cards. After all, it was the banks who gave them the "line of credit" in the first place.
Has anyone pointed a finger at Congress?
We know that Congress can pass a law and have it go into effect instantly. They seem to do that every time they want to increase taxes. They make laws that go into effect immediately when they want to "stimulate" the economy -- and buy votes.
Washington seems to treat credit card reform as if it were a time-released cold capsule. First, in December, they promulgated new regulations to restrict rate increases, but those weren't set to go into effect for 18 months -- July 2010.
This time, in May, Congress passed a credit card reform bill -- the Credit Card Accountability Responsibility and Disclosure Act -- that doesn't go into effect for nine months, not until February. Why?
Do you think our congressional leaders might have received some contributions from the financial services industry, encouraging them to forestall the inevitable?
Meanwhile, since the new law doesn't go into effect for months, card issuers can operate under existing contracts, allowing them to reach more deeply into the pockets of those who can least afford it. Why would they court such adverse publicity? The numbers speak for themselves: The credit card "charge-off" rate is now at 10.6 percent -- an unprecedented level. And it may go to 12 percent or even higher, according to credit experts.
The banks are just trying to protect themselves -- belatedly. And the only way they have to do that is to raise fees and rates. That's not to absolve them from blame! After all, they extended that risky credit in the first place. Now they're taking it out on anyone foolish -- or unlucky -- enough to need to use credit to survive.
What can you do?
Well, there's a simple formula for paying down credit card debt in less than three years. Just double the current minimum monthly payment -- and keep paying that same amount every month. Don't charge another penny, and your balance will be paid in full in less than three years. If you keep paying only the minimum, it could take from 12 to 25 years to get out from under!
If you can't handle that solution, you should call Consumer Credit Counseling Services at 1-800-388-2227. That will connect you automatically to the nearest local office, where you can talk over the phone or in person about your financial situation. They even have a debt-repayment program.
But a word of warning. Don't fall for those commercials from businesses promising they'll negotiate away your credit card debt. In order to do that you have to have enough money to make an "offer." They instruct you to stop paying your bills --and put money in an "escrow" account. That's when they'll negotiate for you -- after they've taken their fees!
In the meantime, you've further ruined your credit. For everyone who might get a reduction in credit card balances, there are many who drop out of the plan because they can't set enough money aside to even start the negotiation process.
There is no easy way out of credit card debt. Americans have nearly $1 trillion charged on their credit cards -- debt that is "revolving" and accruing interest. It's estimated that half of those people are making only the minimum monthly payment. That's digging a hole that gets deeper every month.
This is a huge problem for our economy, because as more people lose their jobs, and resort to using credit cards to finance their daily lives, the problem is only getting bigger. Congress can't have it both ways -- a strong banking system and a free hand with credit. And that's the Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.