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Credit Card Debt

Counseling reveals a common consumer trend when dealing with credit card debt.

If there is one thing that our experiences with credit card debt counseling have been telling us lately, it is that the issues faced by today's consumer are radically different from those faced in generations past. Are you one of the millions of consumers overburdened with personal debt? Maybe you have a friend or a family member that is struggling with large payments on credit cards, unsecured loans, medical bills, or even collection bills.

Financial burdens can place unneeded strain on families and affect emotional and mental health. Consumer debt, especially credit card debt, has reached all time highs in the last 20 years. It is clear that the help GFM can provide through our credit card debt counseling is more necessary than ever before. Learn more about GFM and our debt management program by calling 1.866.467.1259.

While many factors can lead to excessive debt, the most common are the loss of a job, divorce, illness, and poor money management. In addition, changes in the financial world, including deregulation of the banking industry, smart advertising on the part of the credit card industry, and the unlikely extension of credit to those among us who have the least ability to pay, have led to an epidemic level of debt - more than $2.4 trillion total debt and $920 billion in revolving debt as of last year!

To understand how credit card debt can rapidly spiral out of control, it is important to understand the basics of how credit cards work:

Compound Interest
With credit cards, compound interest is the principal reason minimum payments are the financial equivalent of entering a black hole. In essence, compound interest is where you are charged interest on top of more interest. For example, if you choose to pay only the minimum amount due, then next month's interest charge on your credit card statement will include the interest charged on your balance for that month, plus interest charged on any interest you didn't pay last month. Just as compound interest can work in your favor when you have money invested - it can cause you to lose control of your debt quickly when paying only the minimum payment. See what we mean by trying our credit card payment calculator.

Minimum Payment
Most credit card issuers require their members to make a minimum payment of between 2% and 5% of the outstanding balance on the account as of the issue date of the statement. Credit card counseling teaches that the minimum due is specifically geared to maximize profits for the credit card issuer.

The Financial Hail Storm
If you are making only minimum monthly payments, typically you are covering little more than the interest that is being charged on your credit card account each month. Rarely will you be paying down any significant portion of the principal outstanding debt amount. This results in two major contributing factors to increasing debt:

Effectively, you will be throwing your money away on interest payments that won't become any less because the principal debt is never reduced.
You will be at the mercy of interest rate fluctuations. This is of particular concern because interest rates can be affected by many factors, including both the economy and the fine print in your lender's agreement (see the Universal Default Rate information below).

Here's just one example - A $50 dinner at a restaurant on a 22.8% APR card could end up costing you $4,579.04 over 20 years.

Universal Default Rate Clause

Most people who carry major credit cards are well aware that the interest rates associated with them tend to be higher than they are for other types of lending like home or auto loans. Anyone who has paid their credit card bill late more than once is probably aware that doing so will cause the interest rate on their card to go up - usually by a significant amount. Many credit cards carry interest rates of as much as 22% or 30% annually. Credit card debt counseling always recommends that customers who want to avoid these punitive interest rates make an effort to pay their bills on time, every time.

What many people do not realize is that up to one third of all credit card issuers now include what is known as a "universal default clause" in their bills. This information, usually disclosed in the tiny print on the bill that few people bother to read, indicates that the interest rate on your credit card may be increased if you pay bills late to other lenders, even if you pay that specific credit card bill on time.

This means that paying even one bill late that could show up on your credit report, such as an auto payment or a utility bill, could cause your credit card interest rates to go up. There is currently nothing in Federal law that prohibits this practice; the law only requires that lenders disclose it in writing. Credit card companies justify this by saying that customers that make late payments to anyone increase the risk for all lenders. Nevertheless, many, if not most credit card customers are unaware that such policies even exist.

Not all credit card companies have such a policy; in fact, many do not. Customers who are not interested in having the interest rates of their credit card tied to their ability to pay their phone bill on time would be advised to read the fine print in their credit card statement. Credit card debt counseling advisors will often tell you that if such a policy exists, you could either complain to your credit card issuer about it or shop around for another credit card. The lesson to be learned here is a valuable one - when you receive your credit card bill or a notification that your credit card billing terms have changed, take a moment to read the fine print.

So, What Is The Solution? GFM!
The first step to solving any problem is realizing you have one. If you are beginning to have difficulty keeping up with your household bills, get help! You can call GFM at 1.866.467.1259 and discuss your situation with one of our accredited credit card debt counseling experts. They will be happy to assist with creating a household budget, as well as explaining the options available to you to get back on track financially once and for all.