The Dangers of Credit Card Debt

Many Americans see their credit cards as vehicles to financial freedom – a way to spend later and enjoy today. They feel their creditors will act honorably and fairly as long as they pay their minimum monthly payment each month and that everything will be fine. Later on, when they’re “making more money”/ “have extra money lying around,” these Americans plan to pay off their bills and live happily ever after.

Unfortunately, these myths cost Americans thousands of dollars each year. The reality is: even if you are good about paying your bill every month, you can still get whacked with penalties. In 2004, the Consumer Action advocacy group found that 44% of creditors went by a policy of “universal default penalties,” meaning that if you’re late paying ANY of your other bills, that’s reasonable cause to hike your interest rate to intolerable levels.

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Credit card companies see in dollar signs. They may send you a bait-and-switch offer in the mail that promises one low interest rate and delivers another. They might say your grace period is 30 days before they begin charging interest -- and later change it to 20 days. If you didn’t have a big purchase month, they might use the last two billing cycles when calculating your interest so they have an excuse to charge you more. In fact, some companies even charge “inactivity fees” to penalize the responsible! Conversely, if you go over your balance, they’ll charge you $39. When you mail your payment out each month, you assume it will be processed on the day it’s received; however, credit card companies may process your payments late and claim they “didn’t receive them on time” to charge you a $29 late fee. Just two late payments are enough to trigger an interest rate hike. You see where this is going!

The most dangerous thing about credit cards is that they give the illusion that all one needs to afford each month is that minimum monthly payment. However, paying the minimum creates thousands of dollars in interest for credit card companies and leaves Americans riddled with debt.

How to Minimize the Dangers

To minimize the dangers, you must be vigilant, first and foremost. Each month when your bill comes in, sit down with your receipts and your checkbook to verify the charges, the balance and the fees. If you find a discrepancy, write to your credit card company requesting that they investigate. In some cases, cardholders found that their latest payments weren’t credited to their accounts!

Be sure to send your payment out right away to avoid any possibility of late fees. If you can’t do this, call your creditor and ask to change the billing cycle to a more convenient date. You might even want to consider paying through direct deposit each month, which will take the burden of remembering due dates off your shoulders.

Don’t bite off more than you can swallow. If you have eight credit cards and you’re always picking and choosing which ones to pay each month, then you have a problem. Remember that paying late on one bill can trigger a domino effect with all your other bills, so it’s important that you simplify your life.

Lastly, shop around for the best card offers. Don’t be afraid to threaten your current creditors with the pledge to switch if they don’t meet your needs – which may include lowering your interest rate, taking off an illegitimate late fee, changing your billing cycle or cashing in your rewards. Competition is incredible within the credit card industry, so don’t forget your most valuable bargaining chips!

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The Fair Debt Collection Practices Act

Knowing the Fair Debt Collection Practices Act is one of the best consumer protections. According to this law, you cannot be contacted by a creditor outside the hours of 8 am – 9 pm. If you write asking that they cease harassing communication, they must obey. They cannot call constantly just to annoy you and they cannot bug you at work if you have told them not to. They cannot misrepresent themselves as lawyers, use profane language, communicate with third parties, threaten legal action or report false information to the credit bureaus.

By law, your creditors must identify themselves in every communication, provide the name and address of the original creditor if requested, notify you of your rights, provide verification of your debt if you ask and deliver a notice to your home if they intend to sue you for a debt. These laws are enforced by the Federal Trade Commission so you should contact them if you feel your rights have been violated.

How to Determine the Next Step

Inaction almost feels more natural when you’re deep in debt. You feel if you just stay in bed and deny the reality of the situation, it’s almost like it just doesn’t exist. Yet deep down, you know avoiding your obligations will only rack up interest charges, accrue late fees, erode your credit and increase your risk of being sued. If you’re in over your head, you may choose debt negotiation, debt consolidation, debt settlement or bankruptcy.

Debt negotiation is for borrowers who are normally very diligent about paying on-time. If you’ve missed one payment or if your interest rate is suddenly hiked because you’ve missed a payment with another creditor, you should aim for negotiating directly with the creditor yourself. Threaten to take your business elsewhere if they don’t acquiesce to your demands. Send them a letter to let them know why you are dissatisfied. You may even have a shot at DIY debt negotiation if you are several months in arrears and haven’t made a single payment. Sometimes creditors will agree to settle for less than the full amount or knock off some penalties if you agree to pay it all off in full.

Debt consolidation is for borrowers who feel they can never get ahead because of high interest. You’ll be able to take all those high interest cards and wrap them up in one low (or no) interest loan. The balance will remain stagnant and you will enjoy the simplicity of paying off one loan each month, rather than eight or more individual creditors. Many people can get out of debt much quicker this way – but only if they refrain from using their credit cards until the debt is paid off.

Debt settlement is for borrowers whose income cannot possibly cover all of the debt. Years of interest hikes, late fees and other penalties have escalated the balance out of control. With a settlement, a company will facilitate the debt repayment at 40-70% of the original balance, saving you thousands of dollars. Compared to consolidation, this option isn’t as good for your credit report in the long term, but it will save you more money in the short term and get the creditors off your back.

Bankruptcy is for borrowers who have very few assets and extremely high debts. Often people who claim bankruptcy have very high medical bills, are physically unable to work enough hours at their jobs due to disability, debts almost as high as their annual salaries, have children to raise, have substantial mortgages to pay and cannot repay what they owe in less than five years. While it will impact your credit for 10 years, bankruptcy can be a fresh start for many Americans.