The American Express ‘invitation’ I wrote about yesterday to as they said “a relatively small number of card members who have sizable balances and little spending and payment activity” may just the tip of the iceberg. Why are they doing this? It is not out of the goodness of their heart. It is very likely because when they see a large balance with only minimal monthly payments and no new purchases, they are probably right to be concerned that the borrower may have fallen on hard times and may soon be unable to make the monthly payments. If that happens, then the credit card obligation will become a bad debt.
So American Express is trying right now to strengthen its own balance sheet, and that is fine, but what is important for credit card holders is that you take care of YOUR OWN balance sheet.
What the banks devise as their solution is not necessarily the best solution for you.
If you have seemingly unmanageable credit card balances, you must develop a disciplined approach to managing your personal spending. As a first step, simply put, stop spending!!
You don’t need that new pair of shoes or that extra bathing suit. Get a debit card, and for all your new purchases, use ONLY your debit card. Then when there is no more money in your bank account, you won’t buy anything. Don’t worry about what that will do to the economy. It is only your very own economy – the economy of your personal household – that must matter to you now in this time of crisis.
Renouncing your credit cards in favor of a debit card won’t eradicate the horrific interest rates being charged on your credit balances, but it will limit the growth of that indebtedness.
Look at each of your credit cards that has a balance on it and find out what interest rate you are paying. You will be shocked. If you have a perfect credit score, and only one credit card, the interest will still very likely be over 15%. If your payment history is anything less than perfect, chances are that you are paying interest rates of well over 20% and yes even possibly over 30%. As long as you make new purchases on your card and also pay the minimum each month, the banks are making a fortune on you. This is their most (maybe only?) profitable business these days, and they don’t want it to end.
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There are lots of ads on radio and television indicating that you don’t have to pay those high rates of interest on your credit card and that you can negotiate the rate down with the credit card company. I have tried to speak to those representatives in an effort to share with consumers what they might do to lower their rates. However, as soon as they find out that I paid off my balance, they hang up on me (Really – not even a respectful ‘good-bye’) so I have been unable to test the system.
What is the solution for you?
Most importantly, after you bite the bullet and stop buying on your credit card, you need to besiege your Congressmen and Senators and tell them that the rates on credit card debt must be lowered. Be honest and tell them how much credit card debt you have and how much income you make. Shock them into realizing how serious the problem has become.
If Congress does not tackle this issue head on, it will be the next crisis of this already serious recession.
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.