What are the dangers of too much credit card debt for consumers?
It's simple really. More Americans will end up in bankruptcy. It's not just because Americans have racked up too much debt, although with the average American carrying $13,000 in total debt liability, they certainly have. But it's also because of rising interest rates. In addition to carrying a load of credit card debt, many people with adjustable-rate mortgages have seen their house payments skyrocket with the increase in rates. These same people may already have a home equity loan (perhaps to consolidate previous credit card debt) and may also see that interest rate rise. Add to that the fact that credit cards have no interest rate caps and you can see that there's no protection for consumers who are already struggling.
Credit cards have also taken away the notion of an emergency fund. For people who can't handle that lack of cushion, it's a real problem. Now if the car breaks down, they just put the repair on the card. Sure it gets them out of a jam, but chances are they can't afford to pay the whole balance at the end of the month. That means they're paying for that emergency -- plus interest -- for months and months. When little and big catastrophes happen, Americans end up financing them at huge costs on their credit cards.
Even more scary, Americans are simply deferring the consequences of all this until they retire 20 or 30 years from now. That's what I learned when I conducted the Living with Debt study with LendingTree two years back. When you look at the numbers, the coming generation of retirees is about to enter their golden years heavily in debt. That means they'll have to rely even more on government programs and their own children to make ends meet.
Surveys show consumers don't always understand how credit cards work. What are the consequences for uninformed consumers?
Banks are playing a cat-and-mouse game with Americans, and consumers are losing. The worst move is universal default. The credit card industry has access to all financial liabilities on your credit report. So now if they don't like something you've done -- say you paid off your student loans on a low-interest rate card, or you missed a payment on another card -- they can arbitrarily raise your interest rate, sometimes to as much as 30 percent. What's more, the credit card companies won't tell you what it was that made them decide to raise your rate, and they also won't tell you what to do to make it lower again.
These days with credit cards, the consumer is reduced to working with a set of terms that almost always benefits the lender. Once consumers realize that, they'll naturally start using credit cards more wisely and become more skeptical of the terms of agreement.
What's the one piece of advice you would give to consumers to help them take control of credit card debt?
Make a budget and stick to it. A budget will tell you immediately if you're using your credit card for real needs or if you're using it to finance your wants and desires. In other words, are you using your credit cards to live above your means? If the answer is yes, a budget will bring you back to reality and help you get control of your credit card spending.
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