I just got done talking to a friend at a local cafe near Charlotte, North Carolina. He was telling me about how he got a Discover card 20 years ago that almost did him in. How he got into this predicament isn’t such an unusual situation. In fact you probably know someone who has fallen into the same trap he did. One day he saw he was about to get married and decided he would use his credit card to pay for the wedding which took his balance to around $20,000. Since he was 30 and still relatively young he wasn’t aware that credit card companies can jack up their rates when they believe you’re saddled with too much debt.
When he first got the card he had the low tiered rate of around 12%. But after he aggressively charged his expenses, Discover jacked the rate up to 15%, then 18% and ultimately 21%! He says he knew better than to overuse his card because in college he had studied the nuances of how the credit card game is played. Because revolving credit accrues monthly, there is a true interest rate that people REALLY have which is much higher than the rate they believe they have. If we do the math of what people are paying on a jacked up card rate of 21%, people actually have a rate of around 50% to 70%. This slight of hand card game seems sinister but unfortunately, it’s perfectly legal.
Anyway, back to my friend. He realized that with his balance of $20,000, he would have been under long term financial bondage had he not done something drastic. He doesn’t remember how he got the money but after 2 years of struggling, he was able to pay the debt back in one lump sum. It goes without saying that he tore up his card and never used it again.
As I said before, this is a common story of how people fall into the snare of the fowler. It’s important to note that my friend had other small debts like most others do. In his case these debts took his overall debt to about $30,000. If a bank sees this kind of situation, they become doubtful that a customer will be able to pay his balance back. So jacking up a card rate is a method that’s used to get a bigger portion of their money back before a possible bankruptcy.
A lot of people in my friend’s situation just sort of slide from one year to another while accruing more debt. And I find it funny that his new wife was the one that put her foot down. She was the catalyst that pushed him out of a hopeless mindset and into high gear. Others aren’t as fortunate to have a wife like that and so they slowly drift into a black hole. To those people I say that there is hope. If your overall debt is under $20,000 you can simply try consolidating it into one or two credit cards with low introductory rates. It’s probably best that you do this with 2 cards as a safety measure because missing a payment on one consolidated account makes your interest jump up again on your ENTIRE BALANCE.
For those of you who are over $20,000 in debt, it might be time for you to contact a debt management program that is officially designated as a consumer credit counseling service. When you make the commitment to pay your debts through them, they will talk to your credit card companies directly and negotiate a lower interest rate. By going down this route as opposed to debt settlement or bankruptcy, your FICO score won’t be hurt. Going forward with a good FICO score is essential because you need good rates for your mortgage and car insurance. You don’t want the financial system to be tapping exorbitant amounts of money from you all over again.
Moving forward with a plan is key. If you’re way over your head in debt, now is the time to determine your plan of attack and move into freedom.