Sunday, October 26, 2008

The Next Wave of The Consumer Finance Crisis


The other shoe is about to drop. Everyone is concentrating on the mortgage debacle and the stock market slide, justifiably so. However, the Next Wave is coming and it might be a mid-level tsunami.

Households, consumers in other words, have been weathering the storm of mortgage payment hikes, jumps in gasoline prices, higher heating bills, and losses is their IRAs and 401Ks etc, by relying on CREDIT. Unfortunately it is not small town bank credit: it is Credit Card Credit.

Now, credit cards are not inherently evil, any more than a car loan or home loan or student loan is inherently evil. However, because of the easy access to money that the borrower doesn't have, and may never be able to pay back despite making payments every month, CREDIT CARDS are the "drug of choice"! And, as always, it is the fine print that "gets you".

Buried in the disclosure information you get when you receive a new or renewed credit card, is language that says the company can raise the rate of interest you pay for nearly any reason, but particularly for 1. a drop in your income 2. the fact that you have too much outstanding credit, even if it is unused credit (a line of credit on which you owe nothing) 3. You have defaulted on any of your credit cards or other credit payments(that means being even one (1) day late in your payment, even if you pay the late fee). This last item is called a 'UNIVERSAL DEFAULT RATE" , and nearly every issuer has a policy that sets a default rate that get charged, without anyone looking to see what really has gone on in the account. Many of the card issuers, including Bank of America which is the largest issuer, have the default rate set at 29.99% or even 30.99%.

Your 9.99% card suddenly is 29.99%, and every other card moves to its default rate as well, just because of being one (1) day late on one (1) card!

To give you an idea of what this means in real terms, assume that you have a $10,000 balance on one (1) card. You pay $250 per month. If you pay ON TIME every month, and you do not charge even $1.00, you can pay the card balance in full in 49 months. If you can pay $275 per month, then it only takes 44 months to pay off the card. But, if you are one day late, and the rate goes to the default rate of 29.99%, with your payment of $250 it will take you forever to pay off the debt -literally!! If you raise the payment to $275 per month, it will still take you 98 months, more than 8 years, to eliminate the balance. Multiply this by the two or three cards that you might have and there is a nightmare because of rate jumps to the UNIVERSAL DEFAULT RATE.

So what does that mean? No more credit cards to use to buy groceries and medications, and pay for doctors' visits? Maybe! And if you have been using the card so that you can make your mortgage payments with your paycheck, you are stuck, really stuck, and it is time to get professional help. To whom do you turn? Well, not to the internet advertisers ("We can cut your payments in half and eliminate your debt") as a general rule.

I suggest that, if you are in a situation like the one I described, you go to a "Consumer Credit Counseling Service of (insert name of city/county/state)". If they can devise a plan and you can make the payments without giving up food and toothpast and..., then try the plan. The CCCS people are generally very good. If you are told that they cannot help, or if you feel that the payments are beyond your ability to continue to make after trying, or even before trying, seek advice from an attorney who handles Debt workout, debt counseling, and bankruptcy: and who gives an initial consultation for free. [ more on this next post]

author's copyright by Richard I. Isacoff, Esq October 2008

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