Credit Card Debt Management

What will happen to the credit card industry? Is it a giant, over-inflated bubble just waiting to pop and make an even bigger mess than the housing crisis? Some say yes, definitely — you decide whether they’re doomsayers or realists.

Los Angeles CityBeat had an interesting article on the topic recently. Essentially, people are using credit cards to pay their mortgages instead of using HELOCs to pay off credit card debt. Not only that, but more people than ever before are paying their credit card bills late.

Capital One, one of the biggest card issuers, wrote off $1.9 billion in bad credit card debt in the last quarter of 2007 alone. Among other savory morsels, the article points out the following:

“By last fall, the major banks were setting aside billions for loan-loss reserves while anticipating an increase of 20 percent in non-payments over the next two to four quarters.”

Marketing is more aggressive than ever. Credit cards are a more integral part of our economy than ever before. And self-control when it comes to spending is probably at its weakest point in history. Thrifty spending and “rainy day funds” are no longer the basis of our society. Instead, society’s obsession is overspending. Take, for example, this bone-chilling portion from the CityBeat article:

“It’s become habit for many to spend more than they have. As a result, overall U.S. credit card debt grew by 435% from 2002 to year-end 2007, from $211 billion to approximately $915 billion… As recently as the 1980s, the national savings rate was 10 to 11 percent. Since 2005, Americans have saved less than 1 percent of their disposable incomes. In fact, the most recent figures from March show that the savings rate is negative, below zero. And also in March the government reported that for the first time since the Depression, Americans owe more on their homes than they have in equity. Essentially, on average, America is broke and its credit cards played a dominant role in getting there.”

I suppose it’s inevitable that there will be some negative consequence from America’s stubborn chase after foolishness. It’s debatable whether the consequences will be to the completely ruinous extent this article claims is possible. Regardless, in the end, it’s up to each individual consumer to act wisely now (i.e., spend less, save more) and determine how badly they will be affected by the fallout.

Stimulus checks should be rolling in any day now, and those with direct deposit may even have them already. Of course, $600 isn’t a lot of money, but it’s probably the largest amount of free money you’ve received lately (and of course, skeptics would frown upon referring to the stimulus checks as “free money,” because we’ll probably pay for it in the future).

At any rate, a recent article in the local paper suggested more people are using these checks for necessities like food and gas (imagine that). Some are blowing them on “want” items like fish aquariums, vacations, etc. But here’s an idea — what if, instead of stimulating the economy with our stimulus checks, we stimulated our own budgets by paying down debt? Again, $600 may not go far, but if you can use it to eliminate or significantly reduce even one debt, you could open up a little breathing room in your budget.

Of course, there’s a good chance that your debtor will try to apply your extra payment toward future interest. This means your monthly bill for the next several months could be surprisingly low, as little as $0. Instead, apply the payment on the principal amount and then try to continue making monthly minimum payments, plus a little extra toward the principal, if possible. And quit using the card until you are able to pay off the balance each month!

It’s not every day you get free money, so put this to good use and really make it count. That way, six months down the road, you won’t be scratching your head and wondering where it went. The effects of paying down debt will be seen and felt well into the future.

Zero APR offers can be awfully enticing, especially when you’re staring at a frighteningly high APR on your current card. But really think this through before you jump at the offer. There are some pros and cons to consider:

PROS

1) It allows you to pay off your debt faster. Transfer your old debt to the new card, and without throwing all that money at interest, you can pay more toward principal. However, make sure you have a workable plan beforehand to get out of debt, and more importantly, that you stick to the plan!

2) It frees up money to go elsewhere. True, but the wisest use of a zero APR card is to put the extra money toward your credit card’s principal balance and get the thing paid off.

3) It’s a chance for a fresh start. You swear you’re going to do it right this time. Well, it’s going to take an enormous amount of self-discipline and you will need to change your prior spending habits. This new card may offer cashback rewards or frequent flyer miles or some other perk, but don’t go use that as an excuse to go overboard on the spending!

CONS

1) After the introductory period (typically 3 months or more), the interest rate can be relatively high. If possible, you’re probably better off going with a low-APR card. Either way, make sure to pay your bill on time so your interest rate won’t jump up to a high default rate.

2) Having too many open credit cards can hurt your credit score, especially when the cards are newly opened.

Credit card companies are experts in marketing. They will throw in all kinds of perks and gimmicks to draw in applications. So next time you’re staring at an enticing credit card offer, remember to think before you leap.