House of cards
by Kate BavelockJust how easy is it to have credit card debt take you down? Very easy, according to Jennifer Morrow of Consumer Credit Counseling Services in Hyannis.
Since most people don’t keep adequate savings to handle a crisis or lost wages, it only takes one missed payment or late fee to make debt build exponentially.
It is a national problem. Morrow reports that her average client in the region matches the national picture: usually a woman in her late 30s to early 40s with five credit cards. Here, however, that woman is single and a renter living with a family member; nationally, she more often is married and owns a home. Morrow believes the difference reflects our high cost of housing.
Morrow also reports that the average Cape client earns about $31,000, but 16 percent make more than $50,000, and 3 percent have incomes exceeding $80,000.
“People with higher incomes are not immune to financial crisis. People with more zeros at the end of their income have more zeroes at the end of their debt,” she said. “When you see credit debt in six figures, you know they had to have a high income to even qualify for that amount of debt. All it takes is one setback and the payments become very hard to make.”
Here, the No. 1 reason for an average debt of $19,000 is loss of job, a salary cut or reduced hours.
CCCS offers educational seminars to community groups, colleges and employers for free. Its primary advice is simple: Stay out of debt with responsible credit-card use and adequate savings to cushion against loss of wages or an emergency. Know the difference between your wants and needs – and never charge more than you can pay at the end of the month.
Once the problem exists, however, it is very important to pay off the credit cards quickly. Because of sliding scales, if you miss a payment or make late payments, you can get bumped to a higher interest rate, getting further and further behind.
“At this point, very little goes to your principal – and if you don’t get help the structure is there to stay in debt for 20 to 30 years,” said Morrow. In addition, your credit rating can get ruined, damaging your ability to buy a home, obtain a car loan, and even get a job or promotion – when the employer looks at your debt picture as a reflection of job responsibility and reliability.
CCCS counselors recommend looking quickly for other sources of money to pay off the cards. Refinancing your home may make sense in some cases. A relative willing to loan you money can save your credit rating. CCCS even suggests looking around your home for personal property to sell.
Selling that new dining room set may hurt in the short term, but it will hurt a lot less than losing everything. In short, credit cards are the worst place to borrow money for unexpected expenses in the first place.
Paying off credit card debt faster can cut your overall cost in half
Federal banking regulators are issuing guidelines to credit card companies and banks stating that monthly minimums should cover interest, any fees or extra charges and at least 1 percent of the principal amount. Credit card companies contend that if their customers have problems with the new guidelines, they need to contact the companies immediately.
According to Bankrate.com, it would take more than 60 years and nearly $35,000 to pay off a $12,000 credit card balance under old guidelines. If a credit card issuer implements the monthly minimum to cover at least 1 percent of the principal balance along with interest charges and fees, it will take just over 30 years and about $18,000 to pay off that same $12,000 credit card balance.
Here is a summary of what the five top credit card issuers are implementing, according to Bankrate.com:
• Citigroup – Includes finance charges and any late fees, plus a minimum payment equal to 1 percent of the customer’s balance.
• Chase – The greater of either 2 percent or 1 percent of the balance plus interest and fees.
• Capitol One – Your minimum payment will be 3 percent of your outstanding balance or $10. If your balance is less than $10, your minimum payment will equal your balance amount.
• American Express – Two percent of the outstanding balance and finance charges or $15, whichever is greater. If the balance is less than $15 it must be paid in full.
• MBNA – Includes finance charges, late fees and 1 percent minimum payment towards the principal balance.
Bankrate.com said it is hard to determine how much minimum monthly payments will go up for every cardholder. Several factors such as fees incurred from late payments or exceeding one’s credit limit and interest rate trends play a role in determining that amount.
Top causes of debt
Source: Bankrate.com
1. Reduced income/same expenses
2. Divorce
3. Poor money management
4. Underemployment
5. Gambling
6. Medical expenses
7. Saving too little or not at all
8. No money communication skills
9. Banking on a windfall
10 Financial illiteracy
Originally published in the Sept/Oct 2006 issue of Cape Business.
Cape Business Newsletters
Keep up with the latest issues affecting your business and your life! To sign up for any of the Cape Business newsletters, click here.