Another Way Credit Card Companies Will Stab You in the Back

by Ron Haynes

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]

About the author

Ron Haynes has written 1001 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 6 comments }

Frugal Dad

Not surprised to learn Discover was the least cooperative of the bunch. I’ve experienced similar results from them in the past, and found them terribly difficult to work with (along with Bank of America). The days I paid off both of those cards and closed them was a happy day in our household!

Ron

@Frugal Dad:
They were impossible to work with. I’m just glad to be rid of them. What’s funny is that they sent me an offer in the mail a few weeks ago. I just had to laugh as I slowly fed it into my shredder…it was an evil laugh too. :evil:

Daniel@young

Once they are paid off it really puts you in a catch-22. If you close the accounts it can ding your credit report, but if you keep them open they keep sending you offers and they don’t stop. I got 4 offers, all from citi, in the same day last week. I think it’s gotten worse since I wrote on it!

P.S. Thanks for adding me to the blogroll Ron!

Ron

@Daniel@young:
You’re welcome Daniel. I agree with you on the catch 22. I just keep my cards in a drawer and don’t use them. What blows me away is that my available credit is over $50,000 on two cards. Are these people insane?

FFB

I’m no big fan of credit cards but what obligation does a credit card company have to a consumer to lower their rates? It’s great that some do but it doesn’t mean they have to. People like yourself can take their credit experience and grow from it but there are many out there who don’t learn and continue to get into credit debt. When a credit company lowers their rates is that a little like when the fed lowers theirs to help home buyers?

Credit cards can indeed be evil but maybe it needs to be a difficult process for a person in debt so they know never to get into that situation again?

Keep in mind I say this having been in CC debt for thousands already. You advice at the end is sound.

Ron

@FFB:
They have zero obligation to lower their rates, but it is just good business sense. I have nothing but ill will toward Discover and I tell everyone about it. I think that when a customer goes into a managed debt plan, the credit card companies should lower their rates. Just my opinion. If I had gone into Chapter 13, they would have lowered them to zero, so what was the difference? About 60% of the people who don’t get their rates lowered go bankrupt anyway.

When the fed lowers rates, that isn’t to just help borrowers. There are huge macro-economic concerns that factor into that decision, not just a single borrower trying to get themselves out of a financial bind. When the fed lowers rates, it is to speed up a dying economy.

When non-profits are worried that the decisions by banks are going to hurt consumers, I think a credit card company should at least take notice.

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