Credit Card Chaos – The Result of Believing in Zero Interest!

“The only reason I made a commercial for American Express was to pay for my American Express Bill!” – Peter Ustinov

When I first saw the quote above by Peter Ustinov (The English Actor, 1921-2004) I started to chuckle, until I realized that he probably wasn’t kidding. Our love/hate relationship with credit cards (love the convenience, available credit, promises of zero percent balance transfers – hate the fees, surprise rate increases, negative credit score consequences) continues like a roller coaster ride with no beginning and no end. American Express can’t be blamed for the credit predicament that so many Americans (Europeans, Australians, Canadians, etc.) find themselves in, but they, like other credit card companies contribute to our communal delinquency–or delinquencies as the case may be.  The real culprits of the credit game is the lack of consistency and regulation that leaves even the most credit savvy consumers reading the fine print in bewilderment.

Dear Jan; I am a mother, a professional with several college degrees and consider myself to an informed consumer. However, like many other Americans my family hit a brief dry patch financially and the small print of our credit cards reared their ugly heads and a year later we are still paying the price.

My husband was laid off from his job for eight weeks and fortunately was brought back just as quickly as he was let go. However, he was laid off without pay, without severance, without any cumulative sick pay and this put the brakes on our family cash flow. I was always good at juggling our budget, mortgage, credit cards, etc. until this happened.

He was let go on a cold January day with no notice and we had spent some of November and December making what we thought were prudent holiday purchases–on credit. We had four credit cards that all carried low balances as well as low interest rates. However, when my husband was laid off and I didn’t make my payment within the seven – 10 day period following the receipt of my statement I learned the hard way that a three percent card can to to a 30 percent card in the blink of an eye. My questions are; How can this happen and do I have recourse?  I was never 30 days late on anything the entire time he was laid off.  I am furious.  Sincerely, Linda Z

Dear Linda; I can personally relate to your predicament but that is a story for another day. I hesitate to name credit card companies as the Simon Legree’s of the world (The brutal taskmaster who lures you in and then takes your home when you can’t make the mortgage) because of course it is the credit card company that extends us the credit that we are searching for. To be furious at the lender who wants to be paid back seems unfair to the card companies, however, luring consumers in with promises of zero percent interest and then hitting them with double digit interest when the payment isn’t made within an unrealistic window of time is just plain wrong.

How can this happen? Well, it happens because most consumers aren’t attorneys and we don’t always read the fine print–but even attorneys get caught in the credit trap so don’t feel like the Lone Ranger. Basically (this happened to me and I knew better), credit card payments, unlike your car payment, a student loan or even your mortgage, can have repayment plans that are less than uniform. If you pay your bills on the first of the month for example and your mortgage, car payment and student loan are all due on the first, get hit with a penalty after the 15th and hit your credit report with a penalty after 30 days, that is standard and fairly easy to remember.  However, they call it “revolving credit” for a reason.

“Revolving credit” (usually credit cards) require you to pay interest on the amount you owe if you don’t pay the balance each month. Part of the problem is that if you have multiple “revolving” accounts, all with different due dates, it is easy to miss the penalty free payment zone. If your cash flow is marginal (money coming in) or erratic and you miss the tiny payment window that qualifies you to retain a zero percent interest card, your interest rate can zoom from zero to 30 faster than a Ferrari on crack. Once you miss that payment window and your interest rate soars it becomes almost impossible to repay the debt as the interest compounds. So you can see how this can happen easily and you can end up in credit trouble without every actually having a late payment on your credit report.

What to do about it is far more complicated.  Although it may be too late to have a residual effect for you Linda, in May of 2009 a Federal Bill was passed that will make credit card companies more accountable. Bills will have to be easier to read and understand and guidelines and fees and increases in interest rates will have to be clearly spelled out. However, that is going forward so what do we do if we are in credit trouble now?

The best answer, although probably not a realistic one for most readers is to pay off all of the credit cards down to zero with savings, a loan from a trusted friend or relative to whom you would pay lesser interest or even a loan from a retirement fund that offers loans of your own money back to you at zero or a low interest rate.  You can close the culprit cards, but remember if you do it could lower your credit score.

If you can’t pay the cards off and you owe a substantial sum (at 20 – 30 percent interest it will be difficult or impossible to pay the cards off making the minimum payments) you might look into debt consolidation. Your local bank or credit union might offer a program if you have good credit and a good payment history. They may or may not want collateral.

If debt consolidation is not a possibility you can try to negotiate with your creditor to close the credit line, lower the interest rate and give you a chance to pay the debt like a traditional loan at simple interest.

If the card holders won’t work with you all is not lost. You can try credit counseling and debt consolidation. However, do your homework and make sure you are dealing with a responsible debt consolidation company. Ask for references and check them out, possibly at creditcards.com or the AICCCA (Association of Independent Consumer Credit Counseling Agencies). Always check to make sure the debt consolidation company is a non-profit.

I might mention here that if you do get into a debt consolidation program and you are considering a home purchase, all lenders look at debt consolidation repayment programs the same as they view a Chapter 13 Bankruptcy. This means that you will not qualify for a home loan until you have made 12 consecutive on time payments. The best way to do this is either payroll deduction or auto withdrawals.

If none of the above solutions works for you, you might be one of the more than one million Americans who unfortunately will or have declared bankruptcy in 2009. A Chapter 13 bankruptcy lumps all of your debts (this is a very simplified answer and you should consult an attorney) together and the bankruptcy trustee, your attorney and you work out a repayment plan with your debtors. The escalating interest stops and you pay back less than the full balances on the accounts.

If a Chapter 13 bankruptcy is not a good fit for you then a Chapter 7 bankruptcy that wipes out all of your debt and gives you a new start might be the final alternative.  Debt consolidation companies and all forms of bankruptcy put a very hard hit on your credit report and it takes time to rebuild your credit.  it can take two – six years to qualify to make a major purchase like a house, but it puts an end to the fear of bill paying.

Or, if your credit card company will give you a gig like they gave Peter Ustinov back in the day, do the commercial, and barter your salary for a zero credit card balance...but then cut the card up!