Note: This post was included in the Carnival of Personal Finance Baby Education Edition at Million Dollar Journey. Check this site out!
Oh the heady days of 2003! Credit was easy, living was high. Banks and credit card companies were rolling in the profits as the US was coming out of the economic aftermath of 9-11. Back then, if you found yourself in over your head with credit card debt, most issuers were willing to work with a certified debt management company to help you pay that debt off. Typically, you were able to pay off this debt, interest free, over five years. Those days may be gone.
If you find yourself in over your head with credit card debt, you may not be able to get any assistance from your old friends at the credit card company. In the current issue of Businessweek, authors Jessica Silver-Greenberg and Robert Berner outline how the issuers are no longer willing to reduce rates for strapped consumers. Chief amongst the most unwilling to co-operate is…drum roll please… Discover Financial Services. They hold firm at 17.9 percent. When my wife and I went through credit counseling with CCCS back in 1997, Discover was the only, the only issuer that would not reduce rates to help us overcome the mountain of debt we had. I’ve had a burr in my saddle since then and that’s why I won’t have anything to do with Discover to this day. The amount of interest I had already paid them up to that point already numbered in the thousands of dollars. Other banks and credit issuers were willing to help, GMAC and Citibank, to name a few.
Capital One isn’t much better and refuses to go below 15.9 percent. What’s in my wallet? Cash, a debit card, and an almost paid off Bank of America card (should be paid off in May 2008). Capital One may have some cute commercials, but they’re deadly serious about separating you from your money.
According to the article a few companies are still willing to make concessions to help consumers. Chase and Bank of America are willing to cut rates to 0 percent for those in a formal debt-management plan. Other issuers were not mentioned.
Where this really cuts deeply is for formal debt management firms. These firms have traditionally received up to 15 percent of the total amount of debt paid off but todays banks are capping it at 8 percent. What that means to the cash strapped consumer who finds himself up to his eyeballs in debt is fewer counselors and fewer services. There might not be anyone available to help you create a budget to stay out of debt.
Why are some banks doing this? Because they can. According to the data, most individuals will continue to pay their debts without rate reductions, but credit counselors see things much differently. There has been a 30 percent increase in the number of individuals seeking credit counseling in 2007 (2.7 million people), and without the usual rate decreases, most counselors predict a significant rise in bankruptcies. One study by Visa, Inc discovered that 50 percent of the people who dropped out of a credit counseling program went on to declare bankruptcy.
So, what should you and I do?
1. Pay off those credit cards. Sell unused stuff, get a second job, forgo that vacation, live more frugally, fix things yourself, clip coupons, search the internet for giveaways, to do whatever you can to apply as much cash as possible to your credit card debt. Use Dave Ramsey’s Debt Snowball approach. Even tiny amounts help (think snowflakes!)
2. Pay cash whenever you can and live within a budget.
3. Resolve to never ever again let yourself get into credit card debt. Credit cards were not designed to be tools to make you wealthy, they were designed to be tools to make banks wealthy and to separate you from your money.
[tags]credit cards, banks, Discover, Chase, Bank of America, credit, debt[/tags]