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February 27, 2010

MARK BENNETT: Those little pieces of plastic can create debt heavier than many Americans can shoulder

By Mark Bennett

TERRE HAUTE — It’s hard to fear something so tiny, so shiny.

A mere sliver of plastic, 2 inches tall, 31⁄2 inches wide, weighing less than a quarter of a ounce. Kittens look more dangerous.

But a credit card can create debt heavier than many Americans can shoulder. A comic on the “Bob & Tom Show” once lamented to a panhandler begging for money, “Hey, at least you’re even. I’m still paying for groceries I bought in 1984 on a credit card.”

It’s true. We slide our Visa or MasterCard or Discovery card, and magically that new laptop is ours. Meanwhile, that $399.95 bargain (the suggested retail price was $449.95) climbs on top of the cough syrup your 7-year-old needed a few weeks ago, lunch at the Chinese buffet on the day before payday, and brake repairs to your Ford F-150 — all on your credit-card balance. And that stack of I-owe-you’s gets 13.6-percent fatter through the years, thanks to the interest rate charged by the card issuer.

Most people, though, don’t realize the true depth of their debt pit.

Card-holding Americans are about to get a tape measurement of that hole. That ice-water splash of reality comes in the provisions of the Credit Card Accountability Responsibility and Disclosure (or CARD) Act of 2009, which took effect last Monday. The law is intended to protect cardholders against deceptive and unfair practices by credit-card companies, such as retroactive rate increases and “hair-trigger” penalty interest rates.

It also supplies consumers with the sobering details of their debt. Folks who maintain a monthly balance on their cards must get an explanation of how long it will take them to pay off that balance by making minimum monthly payments.

A $3,000 balance with a 14-percent interest rate may take longer than a decade.

A decade.

“That’s a teachable moment,” Nick Bourke, manager of the Pew Charitable Trusts Safe Credit Cards Project, said by telephone from Washington, D.C.

That revelation may now cause the consumer in that aforementioned case to bypass the laptop and Chinese food purchases, and limit the credit-card buys to the kid’s cough syrup and the brake job.

Spending decisions will be changed by that pay-off timeline on their credit-card statements.

“Consumers will begin to say, ‘Oh, this is costing me X-amount of dollars, and it’s going to take me 11 years to pay it off.’ And I think they will change their habits,” said Sharon Burns, clinical associate professor of financial planning at Purdue University.

The action by President Obama and Washington lawmakers comes with plusses and minuses for average Americans.

Card companies can no longer raise interest rates on existing balances (unless an introductory rate has ended, or unless the account is at least 60 days overdue), or raise the rate on a new account for one year. Customers must be warned 45 days in advance of any interest-rate changes on future balances. That payoff timeline also must indicate how much a cardholder would have to pay monthly to erase that balance in three years.

That’s all good.

In the past, if your water heater died two weeks before Christmas, you might have to buy a new one with a credit card at 4.9-percent interest. But … “A few weeks or months down the road, a credit-card company could send you a letter and say, ‘We’re raising it to 14 or 17 percent,’” Bourke explained. Not anymore.

But, as most cardholders have discovered during the nine months since Obama signed the law, the card companies didn’t meekly absorb the new restrictions. The reforms will save consumers $10 billion a year, Bourke said, which means the lenders will lose that much. And the issuers are already being hit by a retraction in consumer spending as a result of the recession and high unemployment. Thus, during the nine-month run-up to last Monday, the firms ballooned their interest rates, resurrected annual fees, slashed lines of credit and dropped some cardholders completely. College students — those under 21 and without big personal savings accounts — will have a hard time getting a credit card without a co-signer.

“Everything they’re doing is certainly legal, but I question the ethics,” said Steve Songer, financial adviser at Steven Songer and Associates in Terre Haute.

One week into the reforms, it’s hard to tell whether John and Jane Doe are better off.

Increases in interest rates and new fees will eventually drop as the more-educated consumers start shopping around for their credit cards, Bourke said. They’ll compare the new, detailed information required by the CARD Act and get the best deal. Companies will have to adjust. “We’re going to see a lot more transparency in the credit-card markets,” Bourke said, “and that transparency is going to lead to more competitiveness.”

The mystery and hidden, unpredictable costs of holding a credit card might give way to wisdom, at least a little.

Credit cards, as Songer explained, aren’t inherently bad, if used properly. Many people keep them in case of an emergency — the furnace blows, or the car’s transmission slips. Songer advises folks to work on accumulating a cash balance over time, enough to maintain their standard of living for a year. Thus, “their cash becomes their credit card,” he said. If they’re forced to make a purchase with a card, they can pay it off immediately and avoid all of those fees.

“People need to plan as best they can to be their own creditor, and build up that cash reserve,” Songer said.

A wad of cash weighs more than a piece of plastic, but most Americans would gladly accept that tradeoff.



Mark Bennett can be reached at (812) 231-4377 or mark.bennett@tribstar.com.

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