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Credit Card Debt is a Bad Cycle


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In 2002, Georgetown University published a study on credit card debt that offered some pretty interesting figures.

For instance, approximately 2 million Americans seek the help of debt counselors every year, mainly to help them avoid bankruptcy. Of those 2 million Americans, 75% of them mentioned that the main source of their debt was a credit card.

The Georgetown study also mentioned that college students in particular carry a particularly heavy debt load, which is compounded by the fact that they have a tendency to both make late payments and to only make the minimum payment on their monthly bills.

This is exactly what the credit card companies want them to do.

Chase, Capital One and all the other predatory lenders routinely engage in practices that are specifically designed to not only raise the amount of money that you will owe, but are also designed to keep you in debt for as long as possible. As a firm believer in the principle that “forewarned is forearmed,” the Castle Law Office would like to tell you about some of the more reprehensible practices that credit card companies use to keep their customers almost perpetually in debt.

Hair Trigger Interest Rates: Everyone understands the concept of interest. If you borrow $15,000 from the bank to buy a car, everyone knows that the actual amount that you will be paying back over time will equal more than what you initially borrowed. While the interest rates may vary from bank to bank, at the very least you know that the interest rate will remain the same over the life of a loan.

The rules change completely with credit cards. Those “low rates” that they use to get you in the door are truly temporary. While most people think that they have nothing to worry about as long as they make their credit card payments on time, that has very little to do with it. Almost half of the credit card companies have clauses in their cardholder agreements that give them the right to raise your interest rates to the highest possible level if you make a late payment to any other creditor. This doesn’t just mean other credit card payments. This also means your utilities, cable or cell phone. Many debtors find that their rates have skyrocketed due to the fact that they were a few days late paying the electricity bill.

Creditors can also change their rates for no reason at all. The fine print on many of the cardholder agreements often has language that states that they “reserve the right” to change the terms at any time for any reason. One common indicator that you rates are going to go up is when the stock or bond market performs poorly. It’s safe to say that if the investments of your credit card company have gone down, you can expect to be responsible for making up the difference.

Minimum Payments for the Rest of Your Life: One of the more popular characters in Greek mythology was that of Sisyphus, a King that insulted Zeus. As a punishment, he was sentenced to roll an enormous boulder up a hill. Whenever Sisyphus got near the top of the hill, the boulder would roll all the way back down and he’d have to start all over again.

This myth is over three thousand years old, but it seems like a perfect metaphor for those that opt only to pay the minimum payment on their credit cards.

The interest is usually very high on credit cards, and the minimum payment is meant to be the amount that can address the interest without significantly affecting the principal. Assuming you are 22 years old, and if you have racked up $5,000 in credit card debt at 18 percent interest. If you only made the minimum payment each month, you would be 50 before you've paid it off. To add insult (and interest) on top of injury, the amount that you would have paid back over the years would be anywhere from 1.5 to 4 times the amount of the original debt.

Solicit, Solicit, Solicit: Johnny Appleseed was a rank amateur when it comes to credit card companies. Credit companies send out 5 billion credit card offers every year, often to people that don’t have jobs. They set up solicitations at concerts, malls, sporting events, college campuses, or anywhere that groups of people tend to congregate. They give away t-shirts, umbrellas, iPods, keychains, and baseball hats. They offer credit cards that are decorated with your favorite sporting teams, television shows, cars, cartoon characters or rock bands.

They also want to give you every opportunity to get deeper into debt. If you are a cardholder that hasn’t been spending enough, they send you blank checks (called “courtesy checks” or “convenience checks”) that come with a letter encouraging you to “take care of some bills,” “take a vacation” or to simply “treat yourself.”

Responsibility Proof: Like any ethically shady business, credit card companies do everything they can to deflect the misery they cause back onto the consumers themselves. The usual refrain that you hear from credit representatives is a minor variation of “Hey, nobody forced these people to use that card.”

They have done everything that they can to make sure that the checks keep coming in no matter what. In 2005, they used their financial muscle to lobby congress, and the end result was a bill that made it very difficult for the average citizen to declare bankruptcy. Enormous corporations now have a much easier time resolving insolvency than you do.

Many credit card companies also have language in the cardholders’ agreement that prohibit the customer from engaging in legal action against them. That means that if you take exception to a sudden and unexplained hike in your interest rates, you are officially forbidden from taking them to court or joining in a class action lawsuit.

There is No Upside: It is impossible to get through life without some sort of financial emergency. Your car breaks down. A pipe bursts. Your child gets sick. You lose your job. At times like these it seems that having a credit card is a good thing. The solution to your immediate financial worries is right there in your wallet.

But the price for this convenience is high. Unless you are able to pay off what you spent as quickly as possible, your finances will essentially be held hostage to the credit card company. That is no way to live.

Your best bet is to avoid using credit cards altogether. Rather than depend on credit cards for emergencies, go to a bank and establish an emergency fund. Having three months of your salary on hand in a higher interest money market savings account in the event of an emergency or the loss of a job could be the difference between having your financial future in your own hands, or spending the foreseeable future in financial servitude to Chase, Bank One or Capital One.

The Castle Law Office takes the needs of its clients very seriously, and to us that means helping them get away from a life of debt and collection agencies. If you or a loved one is living in Illinois or Missouri and feel like your debt level is out of control, contact our offices for a free legal consultation today.

 

©2008 Castle Law Office of St. Louis, P.C., All Rights Reserved, Reproduced with Permission
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