Credit cards can be a financial slippery slope
Editor’s note: Fifth in a series about helping the middle class deal with the struggles of today’s economy.
You have options
Options for those who think they may be in financial trouble:
Take these steps
Create a realistic budget. Write down your income and all expenditures so you know where your money is going and you may be able to make some changes that will make a difference.
Talk to creditors to work out a repayment plan. Many are often willing to work with consumers.
Seek credit counseling from a reputable organization. The only local agency listed with the U.S. Department of Justice (www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm) as an approved credit counseling agency is Family Services Inc. (www.fsisc.org, 744-1348), 4925 Lacross Road, Suite 215, North Charleston. There are also several out-of-state agencies on the list for South Carolina.
Think carefully before taking these steps
Get a debt consolidation loan. While this might help you lower your monthly payments, they can also be risky because they are often in the form of home equity lines, which require your house as collateral.
Enroll in a debt management plan. Run by credit counseling agencies, these require you to deposit money each month to pay your unsecured debts, like credit card bills, student loans, and medical bills.
The last resort
Bankruptcy. It’s considered the last resort because results are long-lasting and far reaching. People who follow the bankruptcy rules receive a court order that says they don’t have to repay certain debts, but the information can stay on your credit report for 10 years, making it hard to get credit, buy a home, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start.
Avoid doing business with companies that promise to settle your debt if the company:
charges fees before it settles your debts
touts a “new government program” to bail out personal credit card debt
guarantees it can make your unsecured debt go away
tells you to stop communicating with your creditors
tells you it can stop all debt collection calls and lawsuits
guarantees that your unsecured debts can be paid off for just pennies on the dollar.
Source: Federal Trade Commission (ftc.gov or 1-877-FTC-HELP)
BY BRENDA RINDGE
By the numbers
Percent of people who said they have a budget and keep close track of their expenditures.
Percent of adults who do not pay all of their bills on time, an increase from 28 percent in 2011. This is one-third of adults in the U.S., or 77 million.
Percent who do not have any non-retirement savings.
Percent who said they are spending more than last year.
Percent who said they are spending less than last year.
Percent who carry credit card debt from month to month.
Percent who think it’s acceptable to default on a mortgage if the borrower can no longer afford the payment.
Percent of adults that give themselves a grade of C, D or F on their knowledge of personal finance
Average credit card debt per household with credit card debt
Credit cards held by U.S. consumers.
Percent who said they did not have a credit card.
Average number of credit cards per cardholder. Including both cardholders and non-cardholders, the average consumer has 2.7 cards each.
Average number of credit obligations consumers have on record at a credit bureau. These include credit cards and installment loans.
Percent of Americans under age 35 who have more than $5,000 in personal debt. School loans (42 percent), credit cards (35 percent), and medical bills (27 percent) are the most common kinds of debt, according to the 2012 “The Economic State of Young America.”
Sources: Federal Reserve; demos.org; 2012 Consumer Financial Literacy Survey prepared for the National Foundation for Credit.
Kay Smith always believed she would catch up one day.
While raising her two children as a single parent, the Goose Creek private-duty nurse, 51, sometimes turned to credit when she needed to bridge the gap between paychecks.
“I always thought that I would be able to pay them off when the kids were grown and on their own,” she said. “I was wrong.”
She’s still using those cards — three of them — on a fairly regular basis to make ends meet, she said. She estimates that she has about $10,000 in credit card debt.
“I make payments, and then run them back up,” she said. “I’m just trying to stay one step ahead of the debt collectors.”
The average credit card holder has 3.5 cards and owes almost $5,000, credit reporting agency TransUnion said. The Federal Reserve says the average debt for households with credit card debt is $16,000.
Smith knows she teeters on a precarious perch. “If I got really sick or had some other emergency, I don’t know what I would do,” she said. “I don’t know where I would turn.”
As one of the 25 percent of Americans with more credit card debt than emergency savings, she said she lives just a step away from true disaster.
Arnold and Bobbi Jo O’Neal of Mount Pleasant are glad they got their spending under control before they got into serious trouble.
Their wake-up call came 17 years ago, when many people were still spending willy-nilly.
They were too, until the night their infant son needed diapers and formula and they realized their credit cards were at their limits and there was no money in their checking or savings accounts.
“We had to break a piggy bank to buy formula,” Arnold O’Neal said. “Here we were in a new house with new cars, but we had all these payments and no cash. That was the night things changed for us.”
The O’Neals lived in Nashville, where their Sunday school teacher was Dave Ramsey, who has since become a financial guru with books, a radio show and video courses. He helped them come up with a plan.
They now live debt-free, except for the mortgage on their home. Since 2000, Arnold O’Neal has been a counselor for Ramsey’s Financial Peace University classes.
“There’s lots of stuff I want, but that’s what got us into trouble to begin with,” he said. “Now we either save for it or we don’t get it. We don’t even have a credit card.”
More than 70 percent of American adults have credit cards, according to the Federal Reserve.
But the good news is that most people’s financial situation seems to be improving. The Federal Reserve reported recently that Americans cut back on borrowing in July for the first time in 11 months, and credit card use fell for the second month straight.
“I do believe that because of this economy, people’s habits have changed,” said Emory Ware, South Carolina Coastal Regional President for ParkSterling Bank and another Ramsey follower. “The mindset for money has definitely changed. People have come to realize that debt is not necessarily a good thing.”
Consumers have used credit cards less since the 2008, according to the Associated Press. Four years ago, Americans had $1.03 trillion in credit card debt. In July, it was $850.7 billion, 17 percent lower.
“Since the economic fallout in 2008, enrollment in debt-management programs has slowed up tremendously,” said Michaele Pena, director of Consumer Credit Counseling Services Division at Family Service Inc. in North Charleston. “People put the skids on using their plastic. They are not charging like they used to. When the bottom fell out, a lot of people woke up and smelled the coffee and started working to pay down what they already owe without adding to it.”
Pena said she has seen an increase in “people who would have never envisioned in their lifetime that they would have to come in and look for this type of help.”
When they run out of credit options, many people turn to payday or cash advance loans.
Twelve million American adults — 5.5 percent of adults nationally — use payday loans each year, spending about $7.4 billion annually, according to the July 2012 survey “Payday Lending in America” by The Pew Charitable Trust.
Nearly 70 percent use the loans to pay recurring expenses instead of unexpected emergencies.
Intended to help solve temporary cash-flow problems, the loans are controversial because borrowers find fast relief but often struggle for months to repay loans marketed as lasting only weeks, according to the survey.
On average, a payday loan borrower takes out eight loans of $375 each and spends $520 on interest annually, according to the survey. It takes an average of five months to pay the money back.
The Federal Trade Commission warns people to be careful of companies that seem like they have a magic answer.
It recently sued several online payday lenders for violating federal laws, such as lying about how much the loans cost, requiring borrowers to allow automatic withdrawals from their bank accounts, and threatening to sue borrowers or have them arrested for nonpayment, according to an FTC release from April.
Pena said recent changes in South Carolina laws have led many payday lenders to switch to consumer loans, but the terms are often just as bad as payday loans, with sky-high interest rates.
“Unfortunately for those people who get consumer loans, the companies will ask them to put up household items as collateral, and then if you don’t pay, they will take you to court and come get your TV or lawnmower, and if you don’t have that anymore, they can take things of equal value,” she said.
Folks in the most dire circumstances can find themselves filing for bankruptcy in an attempt to solve their financial issues, but experts say that should be a last resort because it can have long-lasting effects on credit.
In South Carolina, there were 8,000 bankruptcies in the 12-month period that ended June 30, according to the U.S. Courts. That was nearly 10 percent less than the year before.
“There are very few cases where I believe people need to file for bankruptcy,” Ware said. “Creditors are usually willing to work with people when they believe they are being transparent about their situation. I think sometimes people think bankruptcy is the easy way out.”
Overall, fewer bankruptcies and less credit card debt are signs that many people have put their free-spending ways behind them and made some difficult choices to deal with incomes that have been outpaced by inflation, experts said.
“Anytime you have to make behavior changes, it’s hard,” Ware said. “Most people can live within their means, but they have to change their behavior, give things up and learn to delay gratification. It’s OK not to take care of every want and to tell our children ‘no.’”
Reach Brenda Rindge at 937-5713 or www.facebook.com/brindge.