Credit Card Debtors in For Shock
By JUSTIN KRUSE Special correspondent
"Sam" liked to spend money. He spent it on himself; he spent it on his family; he even spent it on his friends. It wasn't that he made a lot of money, but he liked to buy things that would make him or the people around him happy. This all happened three years ago, but Sam is still paying for it today.
"I guess I went a little bit crazy with my credit cards," the 20-year-old Onalaska native said. "It didn't feel like I was spending my money. It was too easy to use."
Now Sam, who agreed to talk on condition of anonymity, is $6,000 in debt and barely making his minimum payments as a UW-La Crosse student working part time.
He received his first credit card when he graduated from high school. Half a year later he had maxed out his credit card and opened a new card to transfer his old balance. He saw "0 percent interest for six months" as a blessing. He thought he would just pay off his old balance on his new card with no interest charges and be out of debt.
But somehow it didn't work out that way. Instead of paying off the new card and cutting it up he fell back into his old ways and started charging again. Pretty soon his new card, which was used to pay off the old card's debt, began to acquire its own debt. Sam had another maxed out card, and again, he signed up for a new card at "0 percent interest."
"I couldn't really stop," Sam said about his spending habits. "If I saw something that I liked I would buy it with my credit card."
Sam now has two maxed out credit cards and $6,000 of debt to worry about, which is still less than the average American's credit-card debt, which hovers around $10,000.
What worries Sam, even more than his large debt, is that all credit card companies will soon be doubling the minimum payment on every credit card statement. Some companies have already implemented a higher minimum payment, but all companies will increase their minimum payments, some as much as doubling them.
The Office of Comptroller of Currency is a watchdog group that oversees all national banks. As a result of record-setting profits for the credit card industry, a large percentage generated by late fees and over-limit charges, the OCC is requiring the higher minimum payments as a way for credit card holders to reduce their credit card debt.
The move will help a large number of Americans control their credit card debt. But for those struggling with their minimum payments right now, the increase will be seen more as a burden than as a blessing.
"I don't know what I'm going to do," Sam said. "I do know that it is going to be a struggle, though."
Not everyone sees the increase in minimum payments as a burden, though. Ken Smith, founder of Customer Credit Counseling Service in La Crosse, sees it as a way for credit card holders to get out of debt.
Smith has been involved with credit card counseling in the Coulee Region for 17 years and believes that for some credit card holders, this is the only way out of debt.
"I've seen cases where, unless Ed McMahon shows up at their door, these people are going to die in debt," he said. "What this new law will try to do is make it so every credit card holder, even if he only makes the minimum payment, will be out of debt in seven to 10 years."
He said the only two ways to achieve this goal is to lower the interest rates on credit cards or raise the minimum payment. Doubling the minimum payment will make that seven- to 10-year goal a reality.
The first few months will be a trial period to test the effectiveness of the new plan. In spite of the trial period, the government is preparing for an abnormally large number of bankruptcy claims that might be filed due to the increase of the minimum payment. Smith said some of the major credit card companies already are preparing for billions of dollars to be lost to bankruptcy claims.
"It will be difficult at first, of course," Smith stated. "Some card holders are already struggling now with their minimum payments."
Smith also warned against trying to sign-up for a new credit card to take advantage of a "0 percent interest for 12 month" plan. Smith said that credit card companies will use a "bait and switch" tactic to entice would-be credit card holders by offering 12 months interest free, with a catch in the small print. Due to "universal default," if a person has two credit cards and is late on a payment to one of his cards, the other credit card company can raise the interest on his card, even if all of its payments are on time. This also applies in the case of interest-free offers.
"What isn't generally known with the 0 percent for 12 months is that the holder must qualify for the 0 percent incentive," Smith explained. "So if he is late on a payment to a completely different credit card company, the card that offers 0 percent can jack up the interest rates because of that late payment fee on the other card. This is because of universal default."
Another recent development regarding credit cards is the Bankruptcy Reform Act that went into effect on Oct. 17. This law puts new stipulations on how and when a person may declare bankruptcy. Thirty days prior to the enactment of the Bankruptcy Reform Act, a record number of bankruptcy claims were filed. Credit card companies and the Federal Reserve are all preparing for that same kind of result with the increase in minimum payments.
Another change the Bankruptcy Reform Act put into effect is what Smith describes as the "surgeon general sarning for credit cards." Some card holders might have noticed their statements now contain a note informing them how long it would take the card holder to pay off the credit card by making just the minimum payments.
A factor that makes the law an even bigger burden for some card holders is the timing. The holidays are a time when credit cards are used heavily.
"Any change in December is bad," Smith said. "This is a time when people spend their money on things that they never would buy at any other time of the year."
Smith's advice for the holiday season is that, whatever a person charges on his or her credit card, he or she should have a plan to pay it off in 90 days.
