Reduce Your Credit Card Debt

Cutting the chains that bind your financial future

Are you one of the millions of Americans who carry a balance on your credit cards? If so, your debt can cost you much more than you bargained for.

Americans have consumer indebtedness that exceeds $2 trillion dollars. About 40 percent of all credit card users pay their bills in full every month, which means that there is a majority who pay interest.

So what? you might say. If you expect to pay off a large expense—let's say a refrigerator—over the course of a couple months, the interest may be manageable. But if you are one of the "revolvers", that is, you carry a balance from month to month, you could be on the receiving end of what might be considered "unfair practices" depending on your lender. In fact, some of the evolving lending practices are just a step away from loan sharking.

If you borrow on credit and pay more than the minimum, but maintain a balance, you might think you are the kind of customer your credit card company would cherish. It's true that borrowers like you are the "sweet spot" on whom lenders rely to make a profit. However, despite that dubious place of honor, you could easily find yourself the target of a few recent practices calculated to part you from more of your hard-earned cash.

Universal Default

Even if you pay your credit card on time, stay under your balance, and don't write bogus checks to the credit card company, they may still raise your interest rate substantially using universal default as a reason. Let's say you have been scrupulous about paying your Visa account, but paid a little late on your car payment one month. Under universal default, your credit card company can double or triple your interest rates. This practice started during the upsurge of bankruptcy filings during the late 1990s, but has proliferated in the last few years throughout the industry. The event that can trip this economic hair trigger may be a single isolated incident, and at least one lender, Discover, was able to look back through records for the previous 11 months to find the late payment that would justify the rate hike.

To protect themselves from loss and to maximize their profit, lenders are keeping a closer eye than ever on your individual spending patterns and indebtedness. If they see even subtle changes in your spending or credit usage, they may raise your rates precipitously if they think you could be a greater credit risk.

But what about interest rate caps?

Usury. The word now looks quaint in these days of plastic and instant gratification. Usury laws limit how much a lender can charge on a loan and have earned a connotation for excessive interest charges. During the Middle Ages, European Christians were prohibited from money lending and turned that profession over to Jews. That's a whole different history lesson, but suffice it to say loaning money for profit has for centuries been a mixed blessing for both borrower and lender. Early Americans had strict limitations on loans; for example, limiting the rate in colonial Massachusetts to 6%. Despite a culture that saved and eschewed borrowing whenever possible, there were inevitable occasions when borrowing was necessary. As back room loan sharking became common, many of the current laws on the books were enacted to provide an avenue for borrowers to get money they needed at tolerable, if not reasonable, rates.

During the late 1970s and early 1980s, banks suffered substantial losses. To offset some of the damage during this period of very high interest rates and extremely tight credit, restrictions were loosened. Since then, several significant decisions have been handed down by the US Supreme Court that have further reduced limitations on what credit card lenders could charge, both in interest and fees.

If you check your next bill, you'll probably notice that the return address is Delaware or South Dakota. Neither state has limits on credit card lenders so many players in the market have set up shop in Sioux Falls and Wilmington. Essentially, the current constraints are whatever the market will bear.

Credit card companies are seeing huge profits, gathering more economic clout with Congress, but giving customers minimal rights. They will provide. a fifteen day notice of a change in terms to the agreement, but using your credit card constitutes agreement on your part whether you read the fine print or not. Chances are, unless you have a degree in contract law, the terms won't make much sense anyway.

So who's looking out for you?

For all intents and purposes, consumer banking protections are thin and getting thinner. The Number One complaint to the Better Business Bureau is credit card companies, interest rates, and fees for a variety of infractions.

The states’ Attorneys General seek consumer protections, but the federal Office of the Comptroller of the Currency, which has jurisdiction over the banking industry, has put obstacles in the way of effective controls. The net result is that there is only one person who can look out for your financial health and that's you.

What you can do

There are a number of things you can do to prevent getting taken to the cleaners.

Resisting temptation is tough. There are dozens of industries that depend on you to spend money you don't have and hundreds of people dedicated to inventing new and clever ways to entice you with must-have products and services. The only way to win the game is to take back control and decide what you need and when you need it.

Take back your economic power. Voting with your dollars is fun!

Additional sources

For more information, see Frontline's "Secret History of the Credit Card" .

Books

The Motley Fool Personal Finance Workbook: A Foolproof Guide to Organizing Your Cash and Building Wealth

Credit Card Debt: : Reduce Your Financial Burden In Three Easy Steps

Pay It Down! From Debt to Wealth on $10 a Day


Are your mortgage interest rates too high? You may be able to refinance at a lower rate through Diamond Peak Mortgage .

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