Tuesday, May 22, 2007

The Perils of Easy Credit

Over the weekend the New York Times highlighted one couple's struggle to manage their accumulated debt. They both work full time and live modestly by American standards, yet they're buried under mountains of bills, finance charges and late fees. And they're not alone -- many Americans are heavily indebted to credit card and finance companies. And if the credit card companies have their way, that won't be changing any time soon.

When it comes to developing innovative ways of burying consumers in debt, the credit card companies take the cake. According to MSNBC, credit card fees alone have skyrocketed from $2.6 billion to $21.5 billion since 1980. Plus, in addition to late charges, some credit card lenders add insult to injury by applying interest rates, in some cases as high as 31.99%, to an existing balance!

But, of all of the credit card companies' sneaky tricks, the most egregious by far has to the "universal default clause", a provision that allows lenders to tack on an exorbitant "penalty" interest rate even when the borrower's account is paid on time. That's right. The default clause, a common practice among lenders today, allows for an increase to the ridiculous penalty interest rate if a consumer is late on any of his or her bills, including things like utilities. According to the advocacy group Consumer Action, while most default interest rates hover around 30%, it's not uncommon to see a penalty rate of up to 35%. Some analysts have even reported rates in excess of 40%!

Buried in the fine print, the default clause and other terms and conditions of a credit card account can be easily amended by the lender with a simple written notification that usually accompanies the monthly statement. Some reports suggest that many consumers end up trashing the notification, along with the usual pile of unwanted marketing material enclosed in the envelopes, without ever reading it.

If you have large credit card balances and don't think you can handle your monthly credit card payments doubling overnight, a Home Equity Line of Credit (HELOC) could be less expensive than credit card financing, depending on your situation, and it may even be tax deductible.
Of course, that only benefits you if you cut up those cards!


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