| High Rate Credit Card Debt |
| By Credit Federal |
Published
01/14/2009
|
Debt Help
|
|
|
|
|
High Credit Card Debt Plus High Interest Equals Higher Risk and Lower Credit Limits
Retail prices may be dropping, but credit card interest rates are increasing. The rising rates is fueling home foreclosures and the nation's decline into recession.
Who is likely to get hit with higher rates? People who appear to banks to be high risks.
Many people hit with higher credit card rates are struggling to pay other debt obligations, including mortgages. Not only are some credit card companies raising rates, but many are also reducing credit limits (the total amount that can be charged to the card). Borrowers who don't realize their credit limit has been lowered may end up spending above their limit, triggering an over-limit fee and an even higher interest rate. A growing number of consumers and financial experts are complaining that sudden credit card limit reductions and sharp interest rate increases are triggering a domino effect that makes it harder for consumers to juggle bills, stay in homes and avoid going broke. No official data are available on how many people are being pushed into financial distress by credit cards rather than mortgages. But credit counselors, bankruptcy lawyers and legislators say banks increasingly are pummeling consumers for making even the slightest payment error. Making a late payment to another creditor or even to another credit card company; for example, could result in getting hit with a higher credit card interest rate and/or a lower credit limit.
Credit cards (and the issuing companies) encourage spending versus saving, and have played a significant role in loading up consumers with unaffordable debt whose rates and terms can change at any time.
The Federal Reserve is expected to release a rule shortly aimed at cracking down on hair-trigger jumps in card rates and fees, but consumer advocates worry it won't go far enough in reforming credit card practices.
Viscious cycle of debt: During the housing boom, banks raised caps on card limits since home equity values were on the rise, and they advised borrowers to use their equity to pay off card balances (so they can max them out again). The series also found that banks' practice of packaging and selling credit card debt to Wall Street has given them a powerful incentive to raise card rates and fees.
Credit counselors, bankruptcy lawyers and other financial experts claim banks are aggressively raising rates and fees, even as debt burdened consumers struggle just to stay afloat and are placing a further stranglehold on the economy. Consumer spending makes up more than two-thirds of U.S. economic activity.
Interest rate increases and dramatic reductions in credit limits can push borrowers deeper into financial distress, rather than encourage them to pay their bills.
Too late to gauge risk?
Sure, it's reasonable to expect credit card companies to gauge risk, but perhaps they should have done that back during the mortgage boom and then they could have avoided the defaults they are now experiencing. Instead, they extended large lines of credit to high risk, bad credit people and hoped for the best.
Although consumers typically carry far less credit card debt than mortgage debt, credit card debt often is more punitive because banks have significant leeway to change terms.
Get your personal finances under control with our expense tracking software.
Before you file bankruptcy or chargeoff credit card debt, consider credit counseling, debt consolidation or perhaps negotiate a debt settlement.
|
