Managing Credit Card Debt

Credit Cards, A Love – Hate Relationship for Most People

Credit Cards, for many people, are a fact of life. Like them or hate them, modern life requires their use and sometimes things can’t get done without a credit card. Airplane tickets, hotel reservations, and even some internet activities require the use of a credit card, even when nothing is being charged. In 2010 the Credit Card Act was fully implemented, changing the landscape of credit cards for consumers and for credit card issuers.

Four Credit Card categories

Consumers with good credit get offers from credit card companies in the mail and over the internet almost constantly. Consumers with not-so-great credit get the same offers, but from a different type of card issuer. Overall, there are four different categories for credit cards based on their user:

  • Good Credit Card – may or may not charge annual fees but has a competitive interest rates and offers benefits like Rewards programs or Cash Back programs for usage and can also offer “No Interest” periods for certain purchases
  • Bad Credit Credit Card – almost always charges annual fees and the variable interest rates are higher than other credit cards with severe penalties for missed payments and generally don’t offer rewards programs.
  • No Credit Credit Card – charges application and annual fee, limited card amount (usually around $300-$500 total credit), high interest rates, and no rewards programs.
  • Pre-Paid Credit Card – charges up-front fee to set up card, “credit” balance is amount already paid in by consumer, so no rewards programs and no interest charges and there are usage fees and service fees charged in most cases.

US Congress Puts Everyone on the Same Page

The credit card regulations passed by Congress for consumers cleared up problems with credit card issuers concerning:

  • Limited interest rate hikes – no more “surprise” interest rate changes
  • Limited universal default – outside creditors can’t be used determine interest rate
  • The right to opt out – consumer accepts new terms or keeps old terms for 5 years
  • Limited credit to young adults – no credit cards for anyone under 21 years of age
  • More time to pay monthly bills – 21 days to pay on charges with no interest
  • Clearer due dates and times – no more “short” billing cycles or changing due dates
  • Highest interest balances paid first – pays off balances to diminish interest charge
  • Limits on over-limit fees – can’t charge a $50 fee for a $20 over limit charge
  • No more double-cycle billing – no prior cycle billing for paid off card balances
  • Sub-prime credit cards for people with bad credit – upfront fees cannot exceed 25% of the available credit limit in the first year of the card
  • Minimum payments – consumers see how long and how much it takes to pay off the entire balance if minimum monthly payments are made
  • Late fee restrictions – fees are capped at $25 for occasional late payments
  • Gift cards – can’t expire in less than 5 years

Before reading on, here are some other credit card topics you might be interested in:

New Rules, Same Old Issues

When credit is used, the balance on the credit card triggers several events. Credit reporting agencies are notified of the change in the credit amount, up or down, and the consumer’s credit score is adjusted accordingly. Interest rate charges are re-calculated depending upon the type of transaction. For example, charging a new television on a credit card usually costs less in interest than getting cash on a credit card as most companies charge higher interest rates for cash advances. Credit limits, repayment terms, and interest rates can be altered based on a consumer’s use or lack of use. Consumers should re-verify terms and conditions for cards which have not been used in a while.

Proceed With Caution

Consumers frequently don’t read through the terms and conditions the credit card issuer provides along with the plastic. Suffice it to say that the fine print contains many caveats which could affect the user’s costs for using the credit. In many cases, late payments on the card triggers higher interest rates on the card balance. Missing a payment due date might result in a doubling or tripling of the interest rate on the card forever. Making payments which are higher than the minimum payment amount can help reduce the interest rate as well as increase the credit limit amount over time.

Help For Those in Financial Distress

Credit card companies recognize that the economy is in tough shape and that consumer’s needs for extensions of time to repay debt or to modify payment programs is a fact of life for many. Most companies offer special terms, providing lower interest rates, lower payment amounts, and even payment holidays for cash-strapped consumers. Be careful about entering into one of the programs as it may cause the credit card to be terminated permanently, making it unavailable to the consumer in the future. Some special payment programs provide relief for anywhere from a few months time to several years, depending upon the consumer’s needs. In some cases, utilizing a special payment program does not affect a consumer’s credit score, in other cases, it can affect it greatly.

Credit Cards Are a Double-edged Sword

For most, credit cards simplify life. For others, credit cards can be an avenue to financial destruction if not properly monitored and managed. Paying off balances on credit cards is always a good thing. Likewise, leaving large balances on credit cards for an extended period of time can cost hundreds and hundreds of dollars in interest fees. In some cases, alternative financing (home equity loan) is a better way to provide long-term financing.
A survey, titled Taking Charge: America’s Relationship with Credit Cards was taken by CreditCards.com and fielded by polling firm GfK Roper Public Affairs and Media.  The national study, conducted by phone, surveyed 1,000 Americans about their credit card usage. “Just like interpersonal relationships, Americans’ relationships with their credit cards are both passionate and conflicted,” explains Elisabeth Demarse, CEO of CreditCards.com. “Credit cards, virtually ubiquitous modern accessories, play a fundamental and often misunderstood role in people’s lives. This milestone study examines America’s personal finance decisions, exploring the contradictions between how the public thinks about credit cards and how they actually use them.”

The average American household has over $9,300 in credit card debt. Yet, despite Americans’ concern about their spending habits, few people are willing to own up to their balances: over 90% of survey respondents believe they had the same amount — or less — debt as the average American. This is a revealing statement about most Americans’ complex relationship with credit cards.

New Laws Don’t Cover Everything

Consumers should take note: Although the reforms are the most dramatic changes in credit card laws in decades, they do not protect card users from everything. Issuers can still raise interest rates on future card purchases and there is no cap on how high interest rates can go. Business and corporate credit cards also are not covered by the protections in the CARD Act. If credit card accounts are based on variable APRs (as the majority now are), interest rates can increase as the prime rate goes up. Credit card companies can also continue to close accounts and slash credit limits abruptly, without giving any advance warning to cardholders. Many banks are already finding ways around the law and launching new fees not specifically banned by the credit card reform law.