Credit Cards » Credit Card News » Getting Out Of Debt Is Now Imperative
Date July 6, 2009

Getting Out Of Debt Is Now Imperative

One of the biggest drawbacks of using credit cards for purchases is the high risk of getting yourself into debt. If you are a smart consumer, then you are probably keen on keeping up to date with your monthly balances and you probably pay it off every month.

Getting Out Of Debt Is Now ImperativeHowever, emergencies and sudden financial disasters, such as the current economic crisis and high unemployment, can easily destroy your monthly credit card payment schedule. As a result, you have probably found yourself in deep debt now. Unfortunately, now is the worst time to carry any balance on your credit card.

Credit card companies have been trying to recover from several financial setbacks that have happened to them in the past few months. The economic collapse which led to a consumer buying slowdown meant that credit card spending slowed down as well. Consumers, now faced with a weak economy and an increasing unemployment rate began to hold on to their cash more. The result was an increase in debt delinquencies and write offs which cost credit card companies billions of losses. While trying to stem the tide, credit card companies were recently hit with the credit card bill, a set of legislations which will cut off the more predatory practices of credit companies and attempt to balance the field for consumers. This has led to a panic among credit companies as they foresee a slow down in earnings once the credit card bill becomes active which should be on the first quarter of next year.

Due to the many financial problems and profit threats that credit companies are facing, they are now aggressively doing everything they can to earn as much as possible and to change their business models so that they are positioned favorably when the government activates the credit card bill. It is well known that any problems that credit card companies face will ultimately be passed to the consumers and the situation is no different now.

Currently, credit card holders are seeing rapid increases in their interest rates and credit card fees. More and more banks are also introducing fees into their credit cards such as yearly membership fees. They are also cutting available credit as fast as they can. The end result of all these changes is that credit card holders are finding it more and more difficult, not to mention expensive, to pay off their debts and to use their credit cards. Even worse is that these changes are having very negative effects on the credit scores of many credit card holders.

These days, if you are carrying any balance, you are certainly in a world of trouble. The best move is to pay it off as soon as you can and, once you’ve done so, avoid using your credit cards in the meantime.

Date June 20, 2009

Loan Payments Using Credit Cards A Bad Move But Getting Popular

As the economic crisis continues, more and more American consumers are finding themselves barely able to pay for basic utilities. Mortgages, car loans and student loans are becoming more difficult to pay off as less and less cash is available. Many American consumers are turning to paying off these loans using credit cards and the service is getting even more convenient as it has just gotten online.

Loan Payments Using Credit Cards A Bad Move But Getting PopularCurrently, there are a few online companies that are offering credit cardholders the chance to payoff their loans and bills online using their credit cards. These companies offer cardholders who pay their bills every month many attractive incentives. One such company, ChargeSmart, allows cardholders to pay for auto loans, auto leases, mortgages, student loans and utilities online using their credit cards.

Philip Mikal, Chief Operating Officer of ChargeSmart said that the company is not targeting borrowers having debt problems. According to him, while the company has processed more than 1,000 transactions since its launching, only 1% to 2% have been for delinquent accounts. He stressed that the majority of their customers were smart spenders who wanted to maximize their rewards program by using ChargeSmart’s service.

Major credit companies are also seeing that loan and utilities payment are an untapped source of income for credit card transactions. American Express was one of the first companies to see this opportunity and embrace it. In 2003, the company allowed luxury rental payments and, in 2006, it allowed luxury condominium down payments. In May of 2007, American Express introduced its Express Rewards Mortgage program to encourage even more cardholders.

IndyMac Bank and American Home Mortgage were the first lenders to offer American Express’ service. When these two companies collapsed during the sub-prime mortgage crisis, American Express found itself highly exposed. However, it may have not given up on the idea just yet. Sarah Beron, spokeswoman for American Express stated that the company is evaluating the Express Rewards Mortgage program to determine what it will do next.

The problem with these kinds of practices is that it violates a long held rule in finance: Never borrow from Peter to Pay Paul. There is wisdom in this rule. When credit cardholders use their credit cards to pay their loans and mortgages, they are only digging themselves deeper into debt. If the practice continues, it could endanger not only the credit cardholders but it could bring the sub prime loan crisis into the credit card industry, further worsening the credit crisis.

Date June 18, 2009

Debit Card Gaining Popularity, Now Includes Rewards

As more and more American consumers see the risks of using credit cards for their purchases, debit cards are fast becoming the plastic of choice in the U.S. As a matter of fact, the switch from credit cards to debit cards has been a growing trend among consumers for a few years now.

Debit Card Gaining Popularity, Now Includes RewardsIn most cases, debit cards have many similarities to credit cards. They are essentially similar in form. They are supported by Mastercard and Visa. They also offer the same convenience of paying with plastic instead of cash and allowing cardholders to withdraw money when needed. The main difference between the two is that, when a cardholder completes a purchase using a credit card, he or she is taking out a loan to pay for that purchase while, when a cardholder uses a debit card for that same transaction, he or she is using his or her own money to pay for the purchase.

With credit cards, accumulating debts is virtually inevitable. With debit cards, its impossible because, unless you opt for an overcharge feature, once you’ve zeroed your account, you cannot make anymore purchases unless you deposit more money into it. Debit cards have therefore become the preference for people who want to have the convenience of credit card transactions while still keeping a tight control in their finances.

Debt card usage is definitely on the rise. Statistics from CardData show that while purchases from Mastercard and Visa credit cards increased to 40% since 2004, debit card purchases increased to 120%. Attempting to cash in on the trend, credit card companies are doing their best to attract more customers through the traditional hook they use for credit cards: rewards programs. These days, debit cards, much like credit cards also offer reward points and cash back programs for cardholders. However, there is a difference.

Debit cards generally have a weaker rewards points program compared to credit cards. For example, instead of earning 1 point per $1 spending, debit cardholders need to spend $2 to earn 1 point. Debit cards that offer rewards also come with an annual fee which increase as much better benefits are added. Also, while debit cardholders use a PIN to execute regular transactions, for reward transactions they have to opt for a signature transaction to get the reward.

Although debit cards present a great way for consumers to keep their finances in check, for the credit savvy, it can mean losing out on the attractive rewards programs of credit cards. Therefore the choice is between losing control of your finances and getting rewards points for purchasing with plastic. Consumers will have to choose which one is more important for them.

Date June 7, 2009

Interchange Fees Finally Getting Some Attention From Legislators

When the credit card bill was released, merchants were less than pleased that they had been left out.

Interchange Fees Finally Getting Some Attention From LegislatorsWhile addressing many unfair credit industry practices such as unfairly high interest rates and fees and obfuscated business practices, the credit car bill left out merchant’s pet credit industry peeve: interchange fees.

Merchants pay an interchange fee every time their customers buy from them using credit cards. These fees average at about 1.75 percent of a credit cardholder’s purchase fees. Depending on the credit card company, interchange fees can range from 1.6 percent to more than 2 percent. Interchange fees end up being quite a burden for merchants. Part of the fees also are also being passed on to consumers which end up increasing merchandise prices.

A new measure being focused on in Washington called the Credit Card Fair Fee Act is expected to address the issue of interchange fees. The legislation will focus on giving negotiation powers to merchants so that they can arrange for reduced costs with their banks regarding credit card purchases. Currently, the legislation has just been introduced in the House of Representatives of the U.S. If it turns out to be successful, it will lighten the burden of interchange fees from a whole range of merchants such as restaurants, shops and service stations.

Currently, Mastercard and Visa, the two major payment networks, have power over setting the fee structure for credit card payments. They also control around three fourths of the total number of transactions for general purpose cards. American Express and Discover use their own system.

Complaints about the system have been coming from merchants for a long time and lawmakers have recently joined in. The major complaint is that merchants are blocked from negotiating a more advantageous fee structure for themselves with the Mastercard and Visa payment networks. There have also been complaints about collusion among banks to control the fee structure to their advantage and to block negotiations for lower fees from merchants.

If this new interchange fee bill is enacted, merchants will have more power to negotiate with banks for terms and rates. The Department of Justice will also have an antitrust attorney present during these negotiations.

When the credit card bill was passed recently, the credit industry heaved a sigh of relief over the fact that did not touch interchange fees, at least. However, with this new Credit Card Fair Fee Act making the rounds in the House, the industry may be facing another challenge as credit card companies seek to minimize their losses and restore profits amidst increasing defaults and declining spending.

Date May 29, 2009

College Students and Credit Cards

According to a recent study, college students comprise one of the many groups of cardholders that have been hit the hardest by credit card debt.

College Students and Credit CardsAccording to a survey by Sallie Mae, a lender focusing on student borrowers, this April of 2009, college students on the average own four credit cards or more. Most college cardholders are also not very good at keeping up with their monthly payments. A majority of college cardholders regularly get hit by large monthly finance charges because they can’t pay their monthly credit card bills, according to the survey.

Most worrying of all is the steep rise in the median credit card debt amount of freshmen college students. Whereas the median amount was at $373 during 2004, now it is at $939. This means that even while they are still starting out in college, students are already getting buried in debt. If they are not able to recover, these college students will most likely carry large debts once they graduate. This could be a heavy burden for them, especially when they are just starting out with their careers.

College students are often one of the most active consumers that credit cards have. Although most of them rarely charge big ticket items, smaller purchases do add up to become large debts. The availability of student loans has also recently dried up, forcing many students to use their credit cards for many college expenses. Credit cards are also readily available for college students. They also offer many attractive incentives and freebies. Some credit cards even have arrangements with a few colleges for marketing purposes.

Many observers see that the lack of essential financial education among college students is the root cause of the problem. College students are also not the only sector of the overall population of credit cardholders who need some financial education, judging by what recently happened with the economy.

Using credit cards is not problematic, per se. It only becomes a problem when cardholders do not keep up with their monthly payments. There are many reasons why this may happen. One of the most common is cardholders charging items on their credit cards without really considering if they can pay them off or not when the monthly bill comes.

Because of the bad press that credit cards are getting, some people are turning to debit cards. However, debit cards also have pitfalls. One of the worst pertains to overdraft charges. Overdraft charges happen only with debit cards that include overdraft protection, usually debit cards connected with credit cards. Banks charge $34 on the average for debit card overdrafts.