An estimated 641 million credit cards are in circulation in the U.S. economy today. Credit cards alone account for about $1.5 trillion of consumer spending. This generates more than $30 billion in profits before taxes for the banking industry each year. And each year the credit card industry reports record profits.
The average American household carries about $8,000 in credit card debt. Most of these families carry over debt from month to month. If you count yourself as one of these families, then there are some things you should knowabout credit cards in order to protect yourself.
First, be aware of the “universal default” clause hidden in the fine print of your credit card application. This clause allows the credit card bank to raise your interest rate automatically for any late payments such as your mortgage payment, phone bill, or car loan. This means you can still be on time with your credit card payment and suffer a penalty. Credit card banks easily track your everyday financial activities and monitor your credit score. Therefore, the bank reasons that a raise in interest rate is reasonable if you become a credit risk at any point.
You should also be aware that there is no limit on the amount a credit card bank can charge you for any late payment. Limit restrictions existed on penalty fees before 1996. This changed when the U.S. Supreme Court ruled in favor of Citibank in Smiley vs. Citibank. This ruling lifted the restrictions on late fees causing the fees to soar as high as $30 for each penalty. It could reach $50 according to some analysts. These penalties now generate huge profits for the credit card banks.
Your credit score is a key element in determining how much interest rate the credit card companies charge. Several factors determine your credit score, also called the FICO score. The amount you currently owe and your debt payment history weigh heavily in the calculation of your score. One or more of three credit reporting agencies (CRAs) continually monitor your credit score. Every month your creditors send your credit file to the credit reporting agencies of Equifax, Experion, and TransUnion.
Read the fine print in your credit card application. Sound advice, but most of us don’t take the time from our busy schedules. If you did read the fine print, you would discover a clause that allows the credit card company to change your interest rate (called the APR) at any time, for any reason with only a 15 day notice.
Pay more than the minimum monthly payment. Many Americans pay only the required minimum each month. If you follow this practice, it will take years to pay off the credit card debt. The result will be that you wind up paying more for the item you purchased than what you paid for it in the first place. The required minimum payment is usually 2% of the credit card balance. However, federal regulators now require banks to increase the minimum payment in order to cover all fees and interest incurred during the month. The fees must also cover at least 1% of the principal on the loan. The effect is a doubling of the minimum payment.
You should also know there is no limit to the interest a credit card company can charge. Once upon a time, the federal government legislated national usury laws that determined the cap on the amount of interest that a bank could charge for loans. These laws were repealed after the Great Depression. Some states never replaced them with state usury laws. Therefore, credit card companies established themselves in these states in order to do business
Excessive credit card debt also places you at greater risk of bankruptcy. During times of economic misfortune such as a job loss or medical emergency, families often turn to credit cards to keep them afloat. Paying off the high interest rate credit card debt often becomes a burden that quickly sinks them financially. It can become a never-ending downward spiral.
However, there is help and hope available if you find yourself in a financial bind with credit card debt. There are a number of organizations that will advise you and help you plan a way out of debt. A good place to start your search is the internet. Do your homework and you will find a trustworthy organization with a good track record.