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Super low interest rates aimed at getting consumers to buy mortgages, cars, computers
and skinny, big-screen TVs are encouraging a lot of people who really can’t afford those
slick TVs to whip out their credit cards.

“Low rates make you want to put more purchases on your card. It makes it seem like you have more money,” says Sister Veronica Catherine Ann George of Westin, Mo.
Yep. Even people you might not suspect of running around racking up debt have their moment of weakness. Or, in Sister Veronica’s case, many moments.

“The bottom line was I had too many credit cards. They were easy to get and came whether I ordered them or not. Before I knew it I had almost $18,000 in credit card debt.”

Sister Veronica cut up those cards a few years ago, but millions of other Americans, lured by low-interest-rate credit cards, are still saying, “Charge it!” Others are signing financing contracts for $3,000 TVs, home improvements and appliances.

The Federal Reserve reports some astounding consumer debt figures: the outstanding credit card debt at the end of 2004 was $796 billion, over three times higher than in 1993. Plus there are over 1.5 billion credit cards in circulation — that’s an average of a dozen credit cards per household.

Kay Worden, a certified financial counselor with Consumer Credit Counseling Service, a credit counseling network agency, says that kind of increase is a huge red flag.

“People use credit cards to enhance their lifestyle and increase their level of living. That’s not what credit cards are for; they’re not to keep up with the neighbors,” Worden says.

“Wise use of credit is fine. Does it fit my budget? What’s my goal for paying it off? Will I just pay the minimum? No. I’ll pay $100 per month and get it paid off in six months.”

Chris Viale, general manager of Cambridge Credit Counseling, the outfit that helped Sister Veronica shake her credit card habit, says his business has doubled since 2001. His company gets 40,000 calls a month for credit or budget counseling vs. 20,000 two years ago. But the growing trend is in the number of consumers having to file bankruptcy.

“Right now, we’re seeing double the number of consumers who are contacting us too late — they’re already at the point where they must file bankruptcy.”

What’s the cause of this growing trend?

“We’re seeing the results of promos that started a couple years ago and are ongoing. Many lenders have incredible offers on credit cards and financing contracts: zero-percent interest; six months, no payments due. People assume they can pay it when the time comes. People are completely overextending themselves with unsecured debt. It’s a lack of personal finance knowledge. They don’t have an understanding of how credit works.”

Squandering equity
Another area where something good can turn into something bad is home equity loans. Low interest rates have a record number of homeowners spending the hard-earned equity they’ve built up in their homes.

That’s fine, says Mark Blomquist, director of counseling at Auriton Solutions in Roseville, Minn., if the money is being used wisely instead of financing a Maui vacation and a new home entertainment center.

“A lot of people take equity out of the home, pay off the credit cards and that makes great sense. Take debt at 21 percent and drop it down to 6 percent. But too many people go out and acquire more debt. They max out their credit cards again. Now they have no options; they miss a paycheck and they’re in trouble.”

Worden understands the temptation to use a home equity loan to clear up credit card debt, but she says homeowners need to think hard before doing it.

“They’re putting their house on the line and they’re turning short-term debt into long-term debt. People need to learn to live within their means before they consider tapping home equity.”

If you’re in the market for a new car or truck, don’t let the purchase put you deeper into debt than is necessary. Car dealerships with ads that scream, “Super low interest! or “$2,000 cash back!”, can make folks salivating over the thought of a new vehicle forget about exploring other options that might be a better deal.

“Educate yourself on the fine print,” says Worden. “Why are they offering a super low interest rate or cash rebate? Where are they making their money? It can’t all be for the consumer. Maybe they don’t come down on the sticker price. Calculate the difference. What will it cost me with the cash rebate vs. paying a low interest rate and a lower sticker price? Also, what did you get for the car you traded? Did you lose money there?”

Teased to debt

Viale says credit card issuers need to take some of the blame for the credit problems so many people are having.

“The subprime market that was created a few years ago literally extends credit to just about anybody. When you get pre-approved for a credit card you feel good about yourself, it gives you a sense of self-confidence. But they have teaser rates, 5.9 percent for six months and then it goes up to 29 percent.”

Viale cautions consumers to research the details of anything they’re considering buying on credit. Make sure it’s not a promotion with flexible rates or payments that can rise. And don’t assume that in a year from now you’ll have more income and can pay for it.

Worden says leave plenty of room in your budget for the unexpected.

“Of the clients coming into CCCS for help, we’re seeing an average credit card debt between $8,000 and $11,000. Some counselors have seen credit card debt as high as $100,000. If he’s making the minimum payment, that’s about $200. He sees a big-screen TV and figures he can pay another $100 a month, so he buys it.

“Now he has a visit to the emergency room and a $500 deductible. He puts it on a card. Suppose he’s paying $200 a month for gas and the price of gas shoots up and he has to pay $300 a month. Now, he can’t breathe.”

Sister Veronica is breathing easier. She’s learned a hard lesson, but she’ll soon have her creditors paid off.

“I feel more in control now. I realize credit cards aren’t for me, and when I get through with this mess I’ll never get another one. If they don’t take cash, I don’t need it.