Credit Card Debt Management

Are you upside down in a loan you can’t afford? If it’s an auto, education, or mortgage loan (or even a utility bill!) you struggle to pay each month, there’s hope. Though not ideal, at least it’s good to know that options exist. ChargeSmart is the latest company to offer consumers the option to pay such bills with a credit card.

In the past, mortgage loans have been particularly difficult (impossible) to pay with credit cards, but ChargeSmart makes it possible through a third-party arrangement. The banks are not affiliated with, nor do they endorse, ChargeSmart, and it may be for good reason. The habit of putting living expenses on the credit card — even if it’s to reap credit card rewards — is a highly treacherous path.

High-balance credit cards can mean high interest rates, higher payments, higher cost of living and higher risk of default. There will inevitably be those ChargeSmart customers who are not doing this to reap rewards, but because they have to. They cannot afford to pay their electric bill, mortgage payment, car loan, etc. Where will those consumers find money to pay off their credit card bills each month? A HELOC? It gives new meaning to a revolving line of credit.

ChargeSmart is particularly dangerous because it adds fees onto each transaction, a flat rate plus a percentage of the payment processed. As MSNBC pointed out, CardIt — ChargeSmart’s like-minded predecessor discussed on this blog previously — is now out of business. We’ll see how long ChargeSmart will float. For consumers trying to stay afloat, it’s probably best not to hitch onto ChargeSmart’s raft. Pick up a second job, sell stuff, eat out less, take public transportation, rent out part of your house — do whatever you must to increase income and decrease cost of living. And that’s truly smart.

Well, we speculated that the credit card industry might be sinking, or at least receding, and that card companies may need to cut back on customer rewards. Guess what — it’s happening.

A recent Newsweek article how American Express and Citibank have cut back their rewards. Specifically, that means no more 5 percent and double-cashback rewards for cardholders who buy groceries and gas. It’s a fine time to yank that reward, given that consumers are increasingly buying only commodities like groceries and gas instead of luxury splurge items. Cardholders trying to navigate the murky waters of credit card rewards nowadays are going to find the ride much bumpier and will probably meet with much more resistance.

One of the cards getting chopped is the Citi Dividend MasterCard, from 5 percent on everyday purchases to only 2 percent (though it’s adding utilities and convenience stores to the list of everyday purchases). HSBC’s Direct Rewards MasterCard is still offering a 5 percent rebate at gas pumps, grocery stores and drugstores, though it is also a potential candidate for a cutback in the future.

The key to making credit card rewards work for you in tough economic times is to go for cashback rewards. Everybody needs a little cash every now and then, right? However, really consider whether it’s wise to put all your gas or groceries on the card just to rack up a relatively paltry cash reward and put yourself at risk for interest charges.

Essentially, by charging “everyday purchases,” you could be flirting with disaster. Is it possible that you might have $150 cash available for gas this week, but choose to use the card instead for its rewards benefit. Then, when the bill comes due, you don’t have that cash to pay it in full (unless you’ve been a savvy saver). By not paying in full, you subject yourself to interest charges that could well exceed any “cashback rewards” you may have earned.

Furthermore, you may not even see the cash rewards for a while, because some companies require it to accumulate to a certain amount. So bottom line, think about it. While these cash rewards are touted by marketing gurus as “discounts” on gas, groceries and utilities, the ultimate discount may just be to go ahead and pay cash to prevent any possible interest charges.

Farnoosh Torabi, one of the foremost financial minds of Generation Y, has posted an interesting article on TheStreet.com about why, exactly, credit limits might be shrinking. Like Torabi, my credit limit was also recently increased, much to my surprise. I have, however, been shopping home loan offers, so this will probably change shortly. Torabi and I, with our credit limit increases, appear to be in the minority if the media reports are true. Credit limits are being slashed, but why? When it happens to you, “It’s the economy, stupid,” isn’t really an adequate answer. So what are the real, nitty-gritty reasons behind the shrinking credit limits? Torabi shares her insight, and here are some of the highlights:

What are you buying? If you are putting minimal, everyday purchases like your Starbucks coffee on your credit card (i.e., things you should be able to cover with cash), that can be a giant red flag to your creditor. Torabi also points out that frequent alcohol purchases could indicate the risk of a health problem that could have financial repercussions.

Are your bills caught up? Thanks to the infamous universal default policy, your creditors are able to keep track of — and punish or reward you for — your bill-paying habits. Late on the cable bill, utilities bill, the car payment or the credit card bill? It could cost you in terms of a lower limit or at least a higher interest rate.

Where are you living? Areas of the country with tanking real estate markets, like Florida, Detroit, and Nevada, can cause problems for local residents in more ways than one. That’s right, these area residents can see their limits lowered simply because the terrible local housing market might lead creditors to believe these customers are at a higher risk of financial distress.

Where are you working Are you a realtor? General contractor? Good luck. Are you an airlines pilot? Your credit limit could see decreasing altitude in the near future. Even if you’re successful, these are currently seen as high-risk occupations and your creditors could lower your limit as a result.

Like Big Brother in George Orwell’s famous novel, these credit card companies are keeping an eye on way more than you could have ever imagined. And for good reason — they themselves are at risk of financial distress due to bad loans. So cross your T’s, dot your I’s, and remember to whip out your debit card — not your credit card — next time you’re in the Starbucks line.