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Types of Credit Card Problems
Credit card problems can be divided into two categories: problems you created yourself and problems that are not your fault. Either way, the problems can cause great concern and a sense that there is no way out.
Late payments and increase in interest rates
You mailed the payment in on time, but, it was recorded as being late. The resulting penalty can be huge. Penalty Annual Percentage Rate (APR) for late accounts can be, on the average 23%, nearly eight percentage points higher than the average APR for purchases. Credit card companies may charge the penalty APR if a single payment is even one day late or arrives later than a specified time on the due date. Credit card companies may also charge a penalty APR if the creditor finds that there is a problem with a cardholder’s payment pattern on other debts. Once a penalty APR is assessed, it may remain in place permanently or for a particular amount of time.
Late payments and penalty fees
Not only will the APR shoot up, but a penalty will also be assessed. In a recent study, the average late payment fee was $27.61, and fees ranged from $15–$35. If you feel trapped, there are several reasons:
1. the average late fee has more than doubled since 1992, when the average was $12.53, and fee amounts continue to grow;
2. companies have decreased the amount of time between when a bill is mailed and payment is due; and
3. nearly two-thirds of companies have eliminated leniency periods, the time after a payment’s due date before a late fee is assessed.
You are in the minimum payment cycle
Minimum payments are decreasing, bringing in more money for credit card companies.
Credit card companies are raising profits by lowering minimum payments from the former industry standard of 5% of the unpaid balance to as low as 2%. As a result, consumers who pay only the minimum each billing cycle stay in debt longer and pay more interest.
You own too many credit cards
An extreme case, but maybe hits closer to home than you would like: During his first semester of college, Jeff applied and was approved for two credit cards. Jeff planned to use his card only if he knew he could pay off the balance right away, but the temptation to spend money for things he couldn’t afford proved to be too great. Within the next year Jeff received eight new credit cards. Soon Jeff had exhausted all his financial resources. Jeff continued to receive credit card offers from new companies, and his current companies increased the credit limits on his cards. Letters notifying him of increases in his limits told him that he had “earned” the increases, giving Jeff the impression that the credit card companies didn’t consider his debts to be too significant. Therefore, Jeff continued to tell himself that his financial situation wasn’t a serious problem, even though he was unable to pay even the minimum on his balances each month. By the end of his junior year, Jeff had 11 bank cards and 5 retail credit cards. In addition to being a residence hall advisor, which paid very little, Jeff started working at least 30 hours per week at two part-time jobs so that he would be able to make the minimum payments on his cards each month. After only three years in college, Jeff faced $20,000 in credit card debt. Jeff believes that the “credit card industry knows exactly what it is doing [by encouraging debt] while taking advantage of students. . . . How can these banks justify giving me 11 credit cards on an annual income of only $9,000?”
—Excerpted from “The Power of Pla$tic: The Costs and Consequences of Student Credit Card Debt.” Robert Manning, Georgetown University, 1998.
Go here for some tips on getting out of the cycle...
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