An attorney with a six-figure salary, Will Chen thought credit card debt was something that only affected people with low-paying jobs. But when the lavish spending inspired by his new job outpaced his paychecks, he quickly fell $100,000 into debt.
Credit-card debt is becoming even more prominent in the struggling state of the economy. The average amount per consumer rose to $6,900 in the last year, a 21 percent increase, according to Experian, a global information services company. The average number of past-due accounts also increased to exceed more than one per consumer.
And it’s not just those with low salaries who are susceptible.
Not Just the Usual Suspects
One common misconception is that credit card debt doesn’t affect upper-income households, said Greg McBride, senior financial analyst for Bankrate.com
"It’s not a function of household income, it’s a function of household spending," he said. "People of all walks of life have been either guilty of overspending or the victim of some misfortune such as a job loss, an illness or a divorce."
Chen’s financial trouble began when he bought a nice house, new cars and joined several country clubs before he finished paying off his student loans, he said.
"When you start working and you’re in an environment when everyone is living the high life, you get caught up in that spending," he said. "People assume if you have a high paying job … they don’t understand why you won’t go to the new, fancy French restaurant that just opened up."
By changing his everyday spending habits – moving closer to work, using public transportation and drastically cutting down on eating out – Chen got himself out of debt in about three and a half years.
Ironically, he found his debt easier to manage once he took on a lower paying job.
"In our culture, frugality is almost a dirty word," he said. "In a way, it’s actually harder for people with good-paying jobs to live frugally."
Chen started a frugal living blog, WiseBread.com, to help those struggling with similar issues.
Of approximately 7,000 readers who responded to the site's demographics survey, 77 percent answered "yes" to having a college degree or higher, and 41 percent declared an annual income of $75,000 or higher. Twenty-three percent of the respondents said their annual salary exceeds $100,000.
Getting Out of Debt
For those struggling to get out of debt, one misunderstanding is that credit counseling services are necessary to negotiate with credit card companies, said Larry Frazen, a volunteer for the government’s Volunteer for Credit Abuse Resistance Education (CARE).
This simply isn’t true, he said.
Any knowledgeable consumer with credit card debt has the same ability to call the company and get the same deal.
It often starts with people sitting down and creating a sensible budget – figuring out how much they need for housing, transportation and food, and coming up with an understanding for how much they can pay, Frazen said.
Once they have a firm grasp on that, they can then make an educated call to their bank and begin negotiations.
The lender will want to know what caused the interruption in pay and may require documentation, such as a layoff letter, said Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling (NFCC), the largest nonprofit credit counseling organization.
It will also want to know what resolution the consumer has in mind, along with a time frame for resuming normal payments.
In-house help programs are usually short-lived, though, and if the payment plan exceeds six months, the consumer is usually better off consulting a counseling service about a debt management plan.
Through these, the creditor often agrees to accept a lower monthly payment, or to reduce or stop interest, she said.
A couple of ways to know it’s time to consult a counseling service are if someone is having trouble staying current on his or her obligations, if he or she is relying on loans to pay off other debts, or if he or she is juggling a number of bills that have late payments, McBride said.
A more subjective way to know is “if you lay awake at night worrying about how you’re going to make the payments on all your obligations,” he said.
Checking Out a Service's Credentials
In 2007, 2.3 million people turned to the NFCC for advice – a 15 percent increase from the previous year.
But with so many advertisements sweeping through television and radio, how can consumers find a trustworthy service? One place to start is the NFCC Web site, which lists its members and their respective contact information by Zip code. Each member of this association is accredited by the Council on Accreditation, a third-party, not-for-profit organization that reviews programs’ operational standards.
Consumers can further check a service’s legitimacy by asking about its approach to their financial options, Cunningham said.
"There are bad actors in any industry, and ours is no exception," she said. "If the agency only wants to discuss a debt management program with you, you hang up the phone immediately."
Instead, the agency should be open to discussing a number of options and help the consumer strategize a method that won’t hurt his or her credit, such as budget counseling and education.
Consumers should also avoid services that charge large, up-front fees, said Rod Griffin, manager of public education at Experian. This is a direct violation of the FCC’s Credit Repair Organizations Act, which specifies that counseling services cannot take any money from a customer before completing what they promised to accomplish.
Late-night television ads promising things that sound too good to be true, like to fully relieve you of debt with no effect on your credit rating, are also a red flag, said Larry Frazen, a volunteer for the government’s Credit Abuse Resistance Education (CARE).
"Consumers need to do research before choosing a credit counselor," he said. "Check with the Better Business Bureau. Check online resources to see if there have been any complaints."
According to the NFCC, approximately 15 million adults are either receiving phone calls from collectors or are considering filing for bankruptcy. With this in mind, all income levels need to familiarize themselves with credit card debt, and its solutions, until the economic outlook improves.
As Cunningham put it: "We had a credit party, and now we’re suffering the hangover."