Credit Card Changes May Break your Back
During January, American consumers could see their minimum payments on their credit cards increase by much as 100%. This increase has the potential to harshly effect many debtors, quite possibly pushing some to the brink of bankruptcy. Read below to learn about what consumers can do to prevent credit card debt from ruining their finances.
By Emily Heffter
Times consumer-affairs Reporter
As Americans have become more comfortable with plastic, consumer groups say, their plastic has become more complicated. And starting this month, new federal rules will raise minimum payments for many credit-card users.
For those already struggling to keep up, higher payments could push them into bankruptcy or some kind of debt-management relief, said Yvonne Starks, vice president of Consumer Counseling Northwest.
About 76 percent of American households had at least one credit card in 2001, according to the Federal Reserve's most recent data.
Using credit cards wisely
Promotional rates: These low introductory rates can come back to haunt you if you make other charges later on the same card. Often, your payments will be applied to the debt with the lowest interest rate first, so you have to pay off the purchase you made with low interest before you can pay off the rest. Meanwhile, the higher-interest-rate debt will be racking up charges.
Universal default: Your card company can change your interest rate if your credit rating changes while you're holding the card. If you borrow more money or are late paying another debt, you might find your rate has shot up.
Two-cycle billing: Increasingly, cards are calculating interest rates with "two-cycle billing." Instead of calculating your interest on your average debt over the past month, the card issuer calculates your interest from the date you purchased the item if you don't pay off your balance in the first month. Cardholders could end up with a bigger interest payment than they expected.
Disputes: If you need to dispute a payment, read carefully to find the right address. Many companies have several addresses, and if you send your complaint to the wrong one, it could be ignored.
Skipping payments: Beware the "skip-a-payment" deals over the holidays.
You'll still have to pay interest on the debt you carry that month.
Courtesy checks: These checks really are cash advances that come with fees and a higher interest rate.
The Federal Trade Commission has tips on credit cards and understanding your terms at www.ftc.gov/bcp/conline/pubs /credit/choose.htm.
Contract advantages are tilting more toward companies than ever, so consumer groups urge credit-card users to be wary of carrying a balance.
Among credit-card disadvantages for consumers: One card can have several interest rates at one time. And terms of your cards can change at any time based on how you pay your other bills.
"Credit cards offer convenience, credit cards offer emergency life preservers," said Ed Mierzwinski, a consumer advocate with WashPIRG's national office. "If you start to use your credit card for daily expenses, and you start paying for pizza at 18 percent interest - do the math."
As part of the bankruptcy law passed by Congress, your credit-card bill soon will include a warning about how long it will take to pay off your balance if you make only the minimum payment. At the same time, several credit-card companies will comply with new federal guidelines that require minimum payments to cover at least 1 percent of the balance, including fees.
Read and heed the fine print
The American Bankers Association, an industry group, said some companies have already increased their monthly minimum payments to comply with the regulations.
Nessa Feddis, senior federal counsel for the association, said credit cards have gotten more complicated because companies are taking a big chance by issuing them.
"The credit-card product is the riskiest of loans," Feddis said. "You're basically giving someone money, without the collateral, based on their performance so far."
Consumer advocates accuse credit-card companies of creating "tricks" to get consumers to pay late, charge more or carry a balance, but Feddis said they're all disclosed in the credit-card solicitations.
For example, if you charge something under a promotional rate and charge something else on the same card later, any payments you make may go toward the low-rate purchase, meaning consumers rack up interest charges from the later purchase.
Mierzwinski, of WashPIRG, said consumers are at such a disadvantage in their credit-card contracts that it doesn't really matter whether they understand their contracts. They're not negotiable. Most include a clause that says the company can change the terms anytime for any reason or no reason with 15 days' notice.
"Understand that the credit-card company is trying to trick you into running up a bigger balance or paying late," Mierzwinski said. "Don't fall for their tricks. Pay on time, as early as possible. Pay right when you get your bill and don't just make the minimum payment."
