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A telemarketer phoned Paschall at home the other night just as his family was sitting down to dinner. The sales pitch for the investment opportunity of a lifetime began: "Do you know how you can make anywhere from 14% to 40% on an investment in today's economy?" Before hanging up, Pashall replied, "Yes, By paying off my credit cards!"
As countless numbers of consumers will attest, it is very easy to succumb to the siren song of ready credit availability. Increased competition for your credit card business has brought forth an ever-widening array of complex and confusing products. We are deluged with online, television, radio, newspaper, telephone, mail, and take-one credit applications. On-the-spot financing and immediate credit approvals give millions of us instant access to credit. Some offers come with attractive promotional rates; others provide cash-back bonuses; still others carry frequent flyer miles or credits towards purchases. Some offers have no or low annual fees but charge higher interest rates; others charge annual fees but have lower interest rates; many cards now have tiered penalty rates where the interest rate jumps significantly for late or missed payments. Current customers see credit card limits automatically increased, required monthly payment amounts lowered, and convenience checks that hype the ability to transfer balances, pay taxes, or finance children's educations.
If you have been living on plastic to make ends meet you are not alone. Consider the following:
(1) Sources: Federal Reserve Board, US Dept. Of Commerce, CardFacts, American Bankruptcy Institute
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Americans are unnecessarily paying billions of dollars a year in annual fees, interest rates, transaction charges, late payment fees, over-the-limit fees, and other charges. Even if you are already in debt, the average credit card holder can save hundreds, if not thousands, of dollars a year on credit card expenses by following the three easy steps below.
Name of Creditor
Interest Charges Paid In Last 12 Months
Late Payment Fees Charged In Past 12 Months
Over-The-Limit Fees Paid In Past 12 Months
Annual Fee Paid In Past 12 Months
Total Charges Paid In Past 12 Months Per Credit Card
Credit Card #1
$29 x 3 = $87
Credit Card #2
$35 x 6 = $210
Credit Card #3
Total Charges Paid In Past 12 Months By Category
Late Fees: If you are being assessed late payment charges, try to submit payments before the due date. If you are cutting it close, contact the creditor to determine the monthly date when payments must be received in order to avoid these charges. This date, which varies among creditors, is normally a certain number of days beyond the payment due date. For example, while some creditors may assess late payment charges on the payment due date, most give a five- to ten-day grace period beyond the payment due date for payments to be received and credited to an account. Once your creditor's policy is determined, make every effort to ensure that your payments are credited by this date.
If You Pay Electronically - These days, most credit card companies make it very easy for you to pay your monthly credit card bill in a timely fashion. Indeed, most offer automatic and Internet bill payment services. Under an automatic payment program, you authorize each creditor to debit your bank account for a certain amount, the minimum payment, or payment in full each month. Then, each monthly payment is deducted from your account like clockwork on the same date each month. Most credit card companies also allow you to access your account online to set-up automatic payments or to manually pay your credit card bill each month.
If You Pay Manually - To allow for any delays, send your payments a couple of days prior to their due dates. This should protect you against being assessed a late payment fee as well as assuring the favorable reporting of your account with credit-reporting agencies. Follow your creditors' instructions concerning how, when, and where to make bill payments. Make sure your payments are mailed or delivered to the address indicated for receipt of payments by your credit card company. If you pay by check, write your account number on the check.
If you are bumping up against a payment due date, most creditors now accept over-the-phone payments by check. Virtually instantaneous, you simply call the creditor to make payment arrangements. You then provide account information that is on a paper check from your financial institution and authorize that a particular check number be used by the credit card company to debit your account. A one-time payment in the dollar amount you authorize will be deducted from your banking account and credited to your credit card account. While some credit card companies do not charge for over-the-phone payments by check, some do. So, check with your creditor for hidden charges before paying by check over the phone.
If you suspect you are going to be late on a payment, consider calling your creditor. Explain the reasons for your tardiness, giving the date by which the creditor should expect payment. If possible, try to make at least a partial payment by the due date. The remainder of the payment should be made as quickly as possible.
For seven of the past twelve months, Charles' outstanding balance has gone over the allowable limit on his credit card. At $35 a pop, these fees have cost Charles a whopping $245, even though his credit card company keeps letting him go over his limit.
Over-The-Limit Fees: If you are being charged over-the-limit fees, try to bring your indebtedness below your approved credit limit. Should you have difficulty accomplishing this, determine the balance beyond which this fee is assessed. Some creditors assess an over-the-limit fee if you go a penny beyond the credit limit; others charge if your balance exceeds your credit limit by 15 percent. Once this point has been determined, make every effort to bring your balance below this point, and strive to bring your indebtedness below your approved credit limit. If you are unable to do this, contact the creditor to request that your credit limit be increased to the level of your current balance, so further over-the-limit fees can be avoided. If this is done, assure the creditor that account balances will remain below the revised credit limit.
Interest Rate Charges: Interest rates have declined in recent years. Many people, however, continue to pay high interest rates 18% and more on some credit cards. Most people, when filling out Table 1 above, are startled to discover just how much they are paying in interest on their credit cards. Imagine what you could be doing with the money you are now paying in credit card interest! Just think about how much those items you purchased several months or several years ago are costing you after interest payments are factored into their cost.
Amanda & Ed are trying to pay off their high interest rate credit cards. But, they are having trouble figuring out which interest rates are being applied to which types of charges on their cards.
It is becoming increasingly difficult to determine the interest rate that you are paying on your credit cards. That is because most creditors now have tiered interest rate structures where you are charged one rate for purchases and another for cash advances and convenience checks. Many companies offer promotional lower interest rates for balances that you transfer to their card from another credit card company. In addition, many card issuers offer better interest rates to their best customers and charge higher rates to people they consider to be higher credit risks. What's more, even though you may have obtained a credit card at a reasonable initial interest rate, most credit card agreements now allow creditors to jack up your interest rate if you fall behind on your payments or if your financial circumstances change while you are a cardholder. These changes can be accomplished without notice to you, that is, if you fail to read the fine print in the finance charge box on your bill.
Warning: If the next couple of paragraphs of numbers and charts confuse the hell out of you. Don't worry. Just forget them. It gets easy again after the charts.
A typical finance charge box on a monthly credit card bill will look something like this:
Your APR for purchase transactions may vary. The rate is determined monthly by adding 5.9% to the Prime Rate
* Explanation of penalty. If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply.
** The Prime Rate used to determine your APR is the rate published in the Wall Street Journal on the 10th day of the prior month. Source: Federal Reserve Board
Given the above, it is in everyone's best interest to pull out their credit card statements and read the fine print in the finance charge box to determine just what you are being charged for the privilege of using plastic. Place this information in Table 3 below.
Interest Rate For Purchases
Cash Advance Interest Rate
Current Cash Advance Balance
Penalty Interest Rate
Current Penalty Balance
Credit Card #1
Credit Card #6
After you have listed all of your credit card information on Table 3, highlight the obligations at the highest rates of interest. Since these expenses are costing you the most money in interest charges, they should become priority repayment obligations. The sooner you are able to pay them off, the less money they will cost you.
Here is how Table 3 might look with some of the information filled in and several priority payment debts identified (1=first, 2=second, 3=third)
The balances below are the total balances on which interest charges are computed. For example, the current purchase balance of $600 for credit card #1 is being assessed an interest rate of 18.9%. So, 1/12 of 18.9% is assessed on the outstanding balance each month over the course of the year. Most creditors these days have penalty interest rate clauses in their contracts that allow them to bump up the interest rate if a consumer is late on or defaults on a couple of payments. This is not a one-time charge. The entire balance becomes payable at the much higher penalty interest rate. For example, if you're paying 14.9% on purchases then experience some repayment problems, your entire balance gets moved over to the 23.9% rate as demonstrated with credit card #4 below.
Make Extra Payments: One solution is to keep making the minimum payments due on all of your credit cards and mailing in extra payments to the credit card providers that are charging you high rates of interest. On these additional payments, clearly mark on your check and accompanying materials that this payment is to be credited to my outstanding cash advance balance (or whichever high interest rate balance you are attempting to pay down or retire). Check to make sure each payment is appropriately credited to the right high interest rate obligation. Then, after you have paid off one high rate balance, start paying on your next highest rate balance.
Transfer to Lower Rate Cards: Another possible solution is to transfer balances to lower interest rate cards. Many Americans are deluged with offers from competing credit card companies offering special promotional rates if you transfer your existing balances from one credit card company to another. Even though many of these promotional rates are effective for a limited period of time, this might buy you some time and cut your interest costs until you can find the money to repay the obligation. Several of these offers guarantee that the promotional interest rate will apply until you pay off the amount of the balance transfer. In such cases, you may simply be able to write yourself a lower interest rate loan up to your available credit limit.
Betsy has been using the convenience checks that her credit card company has been sending her. She did not realize that these checks were treated like cash advances, were at high interest rates, and had additional surcharges.
When transferring balances from one credit card to another, it is usually best to call the credit card company you wish to transfer your balance to and have them make the payment directly to the other credit card company. Since this may take several days or weeks to accomplish, make sure to keep making your minimum monthly payments until the transaction is completed. Also, be aware that some card issuers charge cash advance fees and assess charges on the convenience checks they often mail to their customers. Once such charges are added to the cost, those handy little convenience checks may not be so convenient after all.
Lower Rate Loans: Other repayment options might include obtaining a lower interest rate bill consolidation loan or taking out a home equity loan to pay off your outstanding high rate credit card balances. While such steps can save you money in the long-run, most people need to be careful not to run their credit card balances back up after credit line availability is restored due to payment with such loans.
Helen & Allen are in over their heads financially. They have been trying to balance creditor demands for money, but are having difficulty keeping up with all of their monthly payments.
Large numbers of Americans are over-extended on their credit obligations and need to dig themselves out. Depending on the extent of your current indebtedness, you will need to respond to your stage of credit difficulty by taking the prescribed actions.
Early Stages: The early stages of credit difficulty are marked by being routinely late on payments, paying penalties, being over approved credit limits, and being a month or more behind on obligations. It may be relatively easy to rectify the problem by simply cutting back on spending for a couple of months and getting caught up on bills.
If you find yourself in the early stages of credit difficulty, contact your creditors immediately. Explain the reasons for your current bind and give assurances (with dates if possible) of your intent to pay. Your creditors will probably be very willing to help you develop a temporary, revised payment plan, since you have recognized a problem and are taking steps to correct it before it gets too large. As you pay your bills, make the minimum payments as they become due. Failure to make timely payments could damage your credit rating.
If your problems are just beginning, ask to have some of the late payment and over-the-limit fees waived. Many creditors are willing to do this as a one-time courtesy on a case-by-case basis. You might see if you can negotiate a lower interest rate with this particular creditor. If you have other credit cards and they are not up to their credit limits, consider transferring some or all of your high interest rate balances to a card with a lower interest rate. You might also consider taking out a bill consolidation or home equity loan to pull your credit card balances into one loan that could be repaid at a lower interest rate over a set period of time.
Middle Stages: If your problem has progressed into the middle stages of credit difficulty, your task will be more difficult. Bills may be months overdue, minimum payments may be totally out of reach, and creditors may be contacting you.
You should seize the initiative by contacting your creditors immediately. Grabbing the bull by the horns - by voluntarily contacting your creditors - may keep creditors from taking further action or initiating collection activities against you. You are seizing the initiative at a time when you probably still have many options available to you. Remember, it is much easier to deal with a creditor in the earlier stages, since options tend to diminish as the quality of the dialogue between creditor and debtor deteriorates. Once a line of communication has been established, make every effort to keep it open.
Since dealing with creditors who are engaged in collection activities can sometimes be difficult, many people are tempted to avoid such collection activities (by refusing to return phone calls, pretending they are not the debtor when a creditor calls, or generally failing to be responsive to the creditor's overtures). However, the worst thing you can do if you are experiencing credit difficulty is to avoid your creditors. There is no way you are going to be able to wish the problem away. If you do not talk to your creditors now, you will more than likely talk to them later, perhaps in court. The preferable, responsible approach is to deal with your creditors. When contacting your creditors, you will need to negotiate repayment plans with each of them.
Develop Repayment Plans With Your Creditors: You must make repayment arrangements or develop repayment plans with all creditors. When contacting your creditors, be forthcoming with them. Provide each creditor with enough information about your financial situation and any extenuating circumstances so they feel confident there is some basis on which you should be granted special consideration.
Creditor payments must be determined on a pro rata basis. Hence your payment to a particular creditor must bear some relation to the size of your debt with that creditor, contrasted with your other obligations. Smaller debts will result in smaller payments; larger debts will yield larger payments. When negotiating repayment plans with creditors, stress that you are treating all creditors fairly through the development of a pro rata repayment plan. Let creditors know that any attempt to satisfy the demands of a single creditor, through disproportionate payments, may be detrimental to your other creditors. Do not pay any one creditor to the exclusion of others.
Assure each creditor that you do not intend to create any new obligations until all accounts are paid or at least brought under control. Be realistic when developing repayment plans with creditors, making certain you can maintain the agreed-on payments. Failure to abide by the terms of your repayment plan could be disastrous. Once a repayment plan has been devised, make every effort to follow this agreement tenaciously.
Later Stages: During the later stages of credit difficulty, court proceedings may be threatened or pending against you, your wages may be subject to garnishment, goods may have been attached, and articles repossessed.
When talking with the credit card companies in these final stages, it is a good time to ask them to lower your rates. They are likely to do this at this time because your account can begin to cost them more money through major collection activities, possible court actions, etc. This is why credit-counseling agencies find it easy to get your rates lowered for you.
After months of neglect in repaying accounts and refusals to deal with creditors when they attempted to contact you, you may think it impossible to see yourself clear of your current credit difficulties. Even if you have been conscientiously trying to handle your credit obligations, your condition may have so deteriorated that your repayment efforts have barely scratched the surface of your total indebtedness. Indeed, you may believe your credit difficulties have progressed beyond your ability to effectively deal with them.
Consider Using A Non-Profit Consumer Credit Counseling Agency: If you find yourself in the later stages of credit difficulty, do not despair. Low- or no-cost professional help in dealing with credit problems is available through the non-profit consumer credit counseling agencies identified below.
These services are staffed by counselors who will help you work through your credit problems. If you choose to enter one of these programs, they will help you set up a budget and develop a realistic, mutually acceptable repayment plan. Once this is done, they will contact creditors on your behalf to negotiate a repayment schedule. These services may even be able to negotiate lower monthly payments, reduced interest charges, or waived fees.
While individual circumstances will obviously vary, a typical program is a two- to three-year repayment plan during which your outstanding debts will be repaid. As part of your plan, you will be required to:
If you think you might need some help in resolving your credit problems, contact one of the following non-profit consumer credit counseling services:
While you may be asked to pay a nominal fee to participate in a non-profit consumer credit debt reduction program, be aware that these services receive the bulk of their income from creditors. Indeed, these services are financially rewarded every time consumers enter their counseling programs and do not make money off of consumers who by-pass their services or who declare bankruptcy. Pending federal legislation would require all consumers to enroll in a non-profit consumer credit management service program before they would be allowed to file for bankruptcy.
Avoid Credit Doctors: In contrast to the non-profit consumer credit counseling services mentioned above, be extremely cautious of the many private, for-profit credit doctors that advertise in newspapers, flyers, and send spam to your computer. These credit doctors usually charge an arm and a leg for their services and siphon money away from legitimate repayment activities. Given this, consumers should avoid these agencies. They prey on people experiencing credit problems and offer nothing more than false hope. There is very little likelihood that a credit doctor can assist in the repayment process. Instead of wasting money on the dubious services of a credit doctor, you are better off following the steps outlined above.
Bankruptcy May Or May Not Be An Option: Under federal bankruptcy law, you may be allowed to avoid or alter the amount of money owed to your creditors. Bankruptcy protection is intended to give people with significant credit problems a fresh start so they can resume their lives out from under the cloud of overwhelming indebtedness. The great thing about bankruptcy is that it clears out your debts. This is why many large organizations and weathly individuals choose this option. So, if you've got a stack of debts that you will never be able to repay, bankruptcy may be the correct choice for you.
But, do not rush off to bankrutpcy court just yet. When confronted with a sizable debt load, many people think of bankruptcy as a preferred way of dispensing with their credit problems. Bankruptcy, however, is appropriate for a small percentage of people who are in such dire financial straits that there is no realistic prospect of repayment. As a result, bankruptcy should be viewed as a last resort and should only be turned to after all other attempts to resolve credit problems have failed.
If you are considering filing for bankruptcy, consider the following:
Should you choose to declare bankruptcy, find a competent attorney who is experienced in federal bankruptcy law. Understand that attorneys' fees are additional and can vary widely. Do not rely upon ads placed online, in newspapers, magazines, or telephone directories. Ask friends, relatives, or business associates for their recommendations and advice. Find legal representation that you are comfortable with before proceeding. The only way to get one good lawyer is to interview a dozen.
The Federal Reserve Board has a number of consumer publications online at http://www.federalreserve.gov/consumerinfo/default.htm. Of particular interest is the brochure Shop: The Credit Card You Pick Can Save You Money at http://www.federalreserve.gov/pubs/shop/
The Federal Trade Commission's Bureau of Consumer Protection has a large number of consumer credit publications online at http://www.ftc.gov/bcp/menus/consumer/credit.shtm . The FTC's Knee Deep In Debt at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm contains lots of useful information. If you are unemployed, check out the FTC publication Out Of Work: How To Deal With Creditors that is online at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt086.shtm Other FTC publications that may be of interest include: Getting Credit at http://www.ftc.gov/gettingcredit/; Ads Promising Debt Relief May Be Offering Bankruptcy at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt015.shtm; and Credit Repair: How To Help Yourself at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm
The non-profit consumer group Consumer Action has quite a few credit-related publications in its online library at http://www.consumer-action.org/publications/P125/. Consumer Action's brochure Understanding Credit Card Costs: Tips on Reducing Finance Charges is available online at http://www.consumer-action.org/english/articles/understanding_credit_card_costs_tips_on_reducing_finance
(1) Detailed Sources from above: American Bankruptcy Institute: http://www.abiworld.org//AM/Template.cfm?Section=Home&WebsiteKey=31cadfd9-b130-44b4-af2e-6603cbcc422b;CardFacts.com: http://www.cardtrak.com/cardfacts/Main (media status, user name, & password required);US Department Of Commerce, Bureau of Economic Analysis, National Income & Product Accounts Tables: www.bea.gov/bea/dn/nipaweb/TableViewFixed.asp?SelectedTable=35&FirstYear=2001&LastYear=2002&Freq=Month;Federal Reserve Board: Statistical Release G.19, Consumer Credit, 9.9.2002: http://www.federalreserve.gov/releases/g19/ & Survey of Consumer Finances 1998;www.federalreserve.gov/pubs/oss/oss2/98/scf98home.html.
This report was researched and written by: William Kent Burnette, Writer, Lawyer and Advocate