|
"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.
|
StartRemodeling.com 