Credit Card Debt: Things Will Get Worse Before They Get Worse
George Boelcke CCP
April 17, 2007
Here we are, one and a half years after the revisions of the bankruptcy laws came into effect, and almost the same timeframe since minimum credit card payments were increased to around four percent. (Actually, it’s one percent principal plus fees, interest and all those pile-on charges).
With that much time having passed, perhaps it’s time to see what’s changed for better as Congress promised us – or worse – as millions of families quickly realized.
Bankruptcies: The new rules implemented, after much lobbying by the banking and credit card industry, now make it much harder to file for bankruptcy. At this point, it’s too early to compare any statistics, since the wave of last minute filings before the changes took affect, make any figures quite misleading. So you can ignore the commentary that bankruptcies are down.
But a number of studies over the past year show that about 95% of people filing, are still ending up in bankruptcy, so all the hurdles, hassles and mandatory counseling isn’t having any affect. But then, why did anyone believe that we could legislate our way out of financial problems by targeting individuals, instead of dealing with predatory lending practices, credit card disclosures, kinky mortgage options or anything involving the reasons families got into trouble in the first place?
Credit Card Payments: Part of the “let’s make a deal” of agreeing to tougher bankruptcy rules was that credit card companies had to increase their minimum payments. Of course, card issuers want their customers to make the smallest payment possible on the highest balance. Why? Because that always means the most amount of interest income, the best odds of over-limit fees and the longest time any balance will stay owing.
Prior to the increase in minimum payments, a typical $3,000 balance at 2% payments would have taken more than 24 years to pay off. Yet with 4% payment, the same balance is cleared in less than 10 years. Yes, but… On the surface, it might have seemed like a good idea, but it hasn’t exactly turned out that way.
Something close to double the minimum credit card payments meant the extra money had to come from somewhere. With so many individuals living in a world of debt pain and a straight jacket of monthly payments already, that money came from more debt. It often meant families had no choice but to rob Peter to pay Paul. Put another way: Take a Visa cash advance to pay the MasterCard, or grab the next credit card offer with a temporary low rate, convincing themselves it was just temporarily. Never mind that credit card volume has already been rising 15% a year for the last 20 years, according to a Morgan Stanley report.
In October of 2005, when these changes too affect, total revolving consumer debt was at $826 billion, according to the Federal Reserve. Right now, that total has ballooned to $884 billion. That’s an increase of $58 billion in just 14 months, even though card holder’s monthly payments went way up, which created much higher principal payments.
One in seven families now has 10 or more credit cards, according to an Experian study of 3.2 million consumer credit files, and in the last quarter of 2006, Visa alone had cash advances of over $93 billion!
In the past three years, about 30 million American households also refinanced, or obtained a 2nd mortgage loan. According to a number of studies, over half these families used part of the equity cash-out to pay down their credit cards for an average of $12,000. That’s debt now owing on their home, and when those billions are taken into account, the situation is even more dire, considering credit card debt is still rising rapidly.
All that extra pain through higher payments, all that refinance money used to pay down credit card balances, much tighter bankruptcy laws, and yet we’re still $58 billion worse off than before we got “helped” by banks and credit card companies.
Yes, in the words of Lily Tomlin: Things are going to get worse before they get worse.
With that much time having passed, perhaps it’s time to see what’s changed for better as Congress promised us – or worse – as millions of families quickly realized.
Bankruptcies: The new rules implemented, after much lobbying by the banking and credit card industry, now make it much harder to file for bankruptcy. At this point, it’s too early to compare any statistics, since the wave of last minute filings before the changes took affect, make any figures quite misleading. So you can ignore the commentary that bankruptcies are down.
But a number of studies over the past year show that about 95% of people filing, are still ending up in bankruptcy, so all the hurdles, hassles and mandatory counseling isn’t having any affect. But then, why did anyone believe that we could legislate our way out of financial problems by targeting individuals, instead of dealing with predatory lending practices, credit card disclosures, kinky mortgage options or anything involving the reasons families got into trouble in the first place?
Credit Card Payments: Part of the “let’s make a deal” of agreeing to tougher bankruptcy rules was that credit card companies had to increase their minimum payments. Of course, card issuers want their customers to make the smallest payment possible on the highest balance. Why? Because that always means the most amount of interest income, the best odds of over-limit fees and the longest time any balance will stay owing.
Prior to the increase in minimum payments, a typical $3,000 balance at 2% payments would have taken more than 24 years to pay off. Yet with 4% payment, the same balance is cleared in less than 10 years. Yes, but… On the surface, it might have seemed like a good idea, but it hasn’t exactly turned out that way.
Something close to double the minimum credit card payments meant the extra money had to come from somewhere. With so many individuals living in a world of debt pain and a straight jacket of monthly payments already, that money came from more debt. It often meant families had no choice but to rob Peter to pay Paul. Put another way: Take a Visa cash advance to pay the MasterCard, or grab the next credit card offer with a temporary low rate, convincing themselves it was just temporarily. Never mind that credit card volume has already been rising 15% a year for the last 20 years, according to a Morgan Stanley report.
In October of 2005, when these changes too affect, total revolving consumer debt was at $826 billion, according to the Federal Reserve. Right now, that total has ballooned to $884 billion. That’s an increase of $58 billion in just 14 months, even though card holder’s monthly payments went way up, which created much higher principal payments.
One in seven families now has 10 or more credit cards, according to an Experian study of 3.2 million consumer credit files, and in the last quarter of 2006, Visa alone had cash advances of over $93 billion!
In the past three years, about 30 million American households also refinanced, or obtained a 2nd mortgage loan. According to a number of studies, over half these families used part of the equity cash-out to pay down their credit cards for an average of $12,000. That’s debt now owing on their home, and when those billions are taken into account, the situation is even more dire, considering credit card debt is still rising rapidly.
All that extra pain through higher payments, all that refinance money used to pay down credit card balances, much tighter bankruptcy laws, and yet we’re still $58 billion worse off than before we got “helped” by banks and credit card companies.
Yes, in the words of Lily Tomlin: Things are going to get worse before they get worse.
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