Dr Boyce Money: Credit Card Companies Secretly Raising Interest Rates

14 Feb

By Dr. Boyce Watkins


In case you weren’t sure, credit card companies are not out to help you. If you are financially illiterate and uninformed, they are going to exploit you. If you are worried about the financial crisis, they are going to prey on your fear to get money out of you. They are also doing exactly what the rest of us are doing: trying to remain protected in a fragile economy.

The stimulus is stymied. The bailout is a failout. The stock market has consistently given a “thumbs down” to every piece of legislation passed in response to this crisis. Our economy is like the sick man who won’t respond to antibiotics. While the results of the latest package are yet to be seen, the truth is that no one is sure what will work. Every company is out to protect their assets and hold on to their cash, which means they no longer have much interest in loaning money to you.

Yes, this is true even if you have a good credit score, which is the ironic part.

Customers are opening their monthly statements to find that credit card companies have started to either ration credit (give less of it) or raise the interest rate being paid on outstanding debt. This doesn’t even count all the dirty tactics used, like using your payments to pay off low interest debt first, quietly getting rid of the grace period or charging interest on your balance from the prior two months vs. the current one. Even when you’ve been making payments on time for years, banks keep raising the bar to maximize shareholder wealth. When liquidity is scarce, those giving out water demand a higher cost per bottle. Additionally, higher default rates have justified the increase in interest rates, but higher interest rates increase the likelihood of default. It’s a nasty cycle, really.

Lawmakers are trying to intervene. Congressional hearings have taken place. Banks are being scolded by senators who keep telling them that this form of business practice is unethical and that they are gouging the American consumer. All this might be true, but what is also true is that you can’t force banks to loan you money. Also, it is very difficult, if not impossible, to legislate a strong economy.

If you have a less than stellar financial history, there is an even greater opportunity for your credit card company to raise your interest rates. If you have defaulted on other loans or are a slow payer in other areas, then they have no problem telling you to pay up or ship out. The days of easy money are long behind us, and companies are dramatically shifting their business practices.

The bottom line is that THEY’VE GOT YOU. They know that you’ve become addicted to the debt they so readily offered in the past, and this debt has become the lifeblood for the lifestyle to which you’ve chosen to become accustomed. They know that they can charge you a higher interest rate because you can’t do anything about it. Like a drug addict who is angry about paying more for his product, you really don’t have any other choice.

Well, maybe you do.

Here is one solution: tighten your economic belt. That means putting together a financial fitness plan today that consists of getting rid of as much debt as possible. I’ve mentioned in prior articles and on our website that paying off debt can be one of the best investments you make with your money. This is especially true if you have a stable job and are paying a high rate of interest to your credit card company.

So, the Dr. Boyce Challenge for this month is simple: Create a budget which includes the steady elimination of credit card debt. That means you should list every single expense you have for the entire month on one piece of paper or a spreadsheet. Don’t leave anything out. Count the money you want to use for getting your hair done, your nails, paying your mortgage, car note, whatever. Count everything. That will be your first step toward obtaining financial fitness.

As you create the budget, allocate at least 10% of your monthly after tax income toward reducing credit card debt. So, if you earn $3,000 per month after taxes,$300 per month should be allocated toward removing credit card debt, not including interest. So, if you owe $5,000 in credit card debt, you can remove this debt in roughly a year and a half. While $300 may seem like a lot of money to find in your budget, it’s there if you look hard enough. In fact, if you spend $10 per day on lunch and/or coffee, you can find the bulk of the money by taking your lunch to work. Make this one of the first bills you pay, not the last. The last bill is the one that only gets paid half the time. It’s easier to negotiate with creditors if you don’t need them so much. Take small steps toward finding your financial freedom.

Next month, we will move to step 2 of the Dr. Boyce Financial Challenge. While I confess that this change won’t be easy, I can promise that it will be worth it in the end. Be strong and remain focused, this is your opportunity to shine.

Dr Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lipo 101: From financial fat to fitness”, to be released in April, 2009. For more information, please visit www.DrBoyceMoney.com.


One Response to “Dr Boyce Money: Credit Card Companies Secretly Raising Interest Rates”

  1. worldventureonline February 14, 2009 at 5:58 pm #

    Dealing with Debt Collectors

    The Fair Debt Collection Practices Act (FDCPA) gives debtors the right to stop collection agencies from contacting them. You need only write a letter to the collection agency telling them to stop contacting you.

    Once the collection agency receives your letter, they can only contact you to tell you they are taking some specific action. Nonetheless, even if a collection agency stops contacting you, the debt continues to exist and you can still be sued for non-payment.

    The Fair Debt Collection Practices Act only applies to collection agencies, which are in the business of collecting debt. The Act does not apply to the original creditor who may have an in-house collection department. The original creditor can continue to contact you.

    How to Negotiate Credit Card Debt

    Secured creditors finance things like homes and automobiles. If you default on your loan, a secured creditor will put your home in foreclosure or repossess your automobile. Secured creditors expect to be paid in full, and there is little room for negotiation.

    Unsecured creditors issue things like credit cards. If you default on your credit card, a credit card company will turn your account over to collections. A bill collector will then call you until the account is paid up.

    Credit card companies rarely sue their customers for non-payment because it is too expensive and time consuming. Nonetheless, not paying your credit card bill will have a negative impact on your credit. A “charge off” will stay on your credit report for seven (7) years.

    Most credit card companies will accept a settlement. The more delinquent your account, the better your chances are of getting a good settlement. A settlement of 50 cents on the dollar is not unusual. Credit card companies would rather receive something than nothing at all. Nonetheless, a severely delinquent account exposes you to the risk of being sued for non-payment.

    Credit card companies do not want you to file for bankruptcy because it reduces their chances of ever getting paid. If a credit card company believes that you are about to file for bankruptcy, they will want to settle with you. Again, credit card companies would rather receive something than nothing at all.

    A credit card company may agree to settle for 50 cents on the dollar if the debtor agrees to pay the reduced balance off in full. Unfortunately, many debtors are not able to pay their debt off in full, even at 50 cents on the dollar. A debtor could offer to make a large lump sum payment followed by smaller regular payments until the reduced balance is paid off in full.

    Credit card companies want you to make regular payments. Most will agree to an affordable payment plan in order to avoid the expense of collections. They may agree to drop late fees and penalties, and/or reduce the annual percentage rate (APR).

    Credit card companies act in their own interest. However, sympathy can be a factor in their decision making. If you are unable to make your credit card payments due to a loss of income or illness, it is generally a good idea to share this with the credit card companies.

    50 Tips for Re-establishing Credit

    Get a job (even a part-time job) and establish a steady employment record.

    If needed, got a second job to help you pay off any debt you owe.

    Reside in one place for six months or longer.

    Listed in your utilities, such as your telephone, in your name.

    Prioritize your bills.

    Pay off or settle outstanding debt.

    Create a budget and stick to it.

    Minimize your expenses. For instance, bring your lunch to work instead of buying it.

    Do not repeat bad spending habits.

    If necessary, seek credit counseling.

    Order a copy of your credit report from each of the three credit bureaus: Experian, Trans Union, and Equifax. The Fair Credit Reporting Act (FCRA) requires credit bureaus to remove inaccurate and unverifiable credit items from your credit report.

    Dispute derogatory items on your credit report if they are inaccurate or unverifiable. Demand that the credit bureaus remove these items.

    Dispute unauthorized and unverifiable inquiries on your credit report. Demand that the credit bureaus remove these inquiries.

    Ask your creditors to remove derogatory items. Creditors have the authority to remove derogatory items from your credit report at any time.

    Ask your creditors to remove inquiries.

    Add a short statement to your credit report to explain derogatory items that could not be removed.

    Check your credit report regularly for errors.

    If necessary, hire a credit repair company.

    Open a savings account and make systematic deposits.

    Open a checking account. Do not bounce any checks.

    Pay all bills on time.

    Never pay bills later than 30 days after they are due. Paying 30 days or later will result in a late payment on your credit report.

    Do not apply for more credit than you need. Each time you apply for credit, a new credit inquiry will appear on your credit report.

    Avoid excessive credit inquiries. Excessive inquiries reduce your credit score. Excessive inquiries indicate that you are shopping for credit and probably in financial trouble.

    Open a secured credit card account, if you are unable to obtain a regular credit card.

    Apply for a credit card at a department store.

    Apply for a gasoline credit card.

    Apply for a credit card at a bank.

    Continue to use your credit cards, this builds a good credit history if you pay on time.

    Do not close credit card accounts. Closing credit card accounts can lower your credit score because it reduces your available credit and may shortens your credit history.

    Use one or two credit cards at a time.

    Pay off outstanding balances each month.

    Only use credit cards for items you need. Learn to distinguish between items you need and items you want.

    Stay below 30% of the credit limit.

    As your credit improves, ask your creditors for better term and conditions. You will benefit from a lower interest rate.

    Establish an emergency fund so that you do not have to rely on your credit cards in an emergency.

    Do not use a credit card for daily expenses. Using credit cards to pay for food and gasoline can get you in trouble.

    If you expect to be applying for a mortgage or car loan, pay off your credit card balances.

    Learn and apply credit building techniques.

    Obtain a small loan from your bank or credit union and pay it back ahead of time.

    Pledge your savings account as collateral, if necessary.

    Obtain larger loans and pay them back ahead of time.

    Take out loans at other banks and pay them back ahead of time.

    Ask a relative or friend to co-sign a loan.

    Become an authorized user on someone’s account.

    Secure different types of credit: credit cards, auto loans, mortgages, etc. Having different types of credit improves your credit score.

    Confirm that your new credit is being reported to the credit bureaus.

    Contact your creditor if you are going to be late.

    Bad credit will improve with time. Derogatory items carry less weight with time. Accounts in good standing carry more weight with time.

    If you pay your bills on time, it should take 12 to 18 months to reestablish your credit.

    World Venture Consulting

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