Debt Trap Grows Larger For Consumers Living Paycheck to Paycheck

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While credit card companies are lowering interest rates and discontinuing annual fees, there is a new trend in the credit industry to boost income by increasing penalty fees. These new fees are estimated to bring an additional $1 billion dollars to credit card companies. CreditGUARD of America, non-profit credit counseling agency, offers advice to consumers who have credit card debt and want information on how to handle these penalty changes.

According to “Credit-Card Fees Are Rising Faster” by Ruth Simon in Wall Street Journal on March 31, 2004, the economics of the credit card industry are changing. To be competitive, creditors have had to cut interest rates and discontinue annual fees. Creditors are offering 0% interest rates and waiving balance transfer fees, which is good news for consumers with good credit.

So where are creditors going to get their money?

Credit card companies are seeking a boost in income from penalties. Grace periods are shrinking from an average of 27.8 days to 20.6 days. Late fees are going up from an average of $29 to $35. Rather than deny over-the-limit charges, creditors are authorizing the charges and then charging consumers for going over their credit limit. Simon estimates that these penalties could bring an additional $1 billion dollars to creditors this year, making fees 39% of credit card income.

How to avoid credit card penalties?

Most credit card companies will work with your bank to provide online bill payment. Simon also suggests calling your credit card company and making arrangements to have your billing date coincide with your paycheck. These changes in the credit card industry make paying your bills on time more important than ever. Also, monitor your credit limit and make sure that you don’t exceed your credit limit. CreditGUARD of America recommends that you pay your credit cards in full every month. When you pay in full you will avoid costly interest charges. If you are unable to pay off all your accounts, then it is best to keep partial balances on your cards. Not only will it help you keep a more manageable monthly payment but it will also help improve your credit rating.

How do these penalty changes affect consumers on the brink?

Shorter grace periods mean that consumers that are used to juggling bills, to make ends meet, are going to have less of a window of opportunity to avoid late fees. As late fees pile up, balances will grow closer to the limit and may push consumers over their credit limit, allowing credit card companies to impose even more penalties. Simon notes that for consumers that are late more than once in their monthly payments, credit card companies are raising their interest rates sometimes as high as 30%. These rate changes can double or triple the amount of interest payments consumers owe to the credit card companies.

As grace periods become shorter and penalties get stiffer, the window of opportunity closes and consumers may find themselves struggling to meet their monthly payments with the added penalties. Consumers that are living paycheck to paycheck are now in danger of falling into the debt trap.

CreditGUARD of America is a non-profit credit counseling agency that assists consumers through debt counseling and financial education. Please visit our web site at or call 1-800-867-0406 for a free consultation with a certified credit counselor.

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Kathryn Katz