Sunday, September 13, 2009

What you stand to lose if you don't pay credit card bills

You could face legal action, wage garnishment and property liens

By Sally Herigstad

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).

Ask a question.

To Her Credit archive

Question for the expert

Dear To Her Credit,
What would be the legal issues if I cannot pay my credit card bill at all, not even the minimum payment? I am concerned about what the credit card company could legally do. Can they take my house or car? I just can't afford my payments.

I talked to the company and agreed to pay a certain amount a month for one year, but I can barely afford that. When the one year is over, my payments will go up, and then what will happen? -- Debbee

Answer for the expert

Dear Debbee,
They can't do much -- at least in the short term. Credit card companies can send letters and call you, but they can't boot you out of your house or anything that drastic when you miss a few payments.

Missing payments is still not something you want to do, however. The bill collection process starts out gently and gets progressively more unpleasant from there. Here's what happens if you just stop paying your credit card bills:

1. You get overdue notices in the mail.

2. You start to receive phone calls. Some may sound helpful or merely inquiring; others may be downright nasty. Collectors may call repeatedly in one day. Some even call employers and relatives, which is illegal, or they lie and tell you they can take your house.

3. The banks report you to the credit bureaus. With even a few missed payments on your credit history, your credit score takes a dive. This makes it harder for you to get additional credit, move into an apartment or sometimes even get a job. If you can get credit with a bad score, it will probably be at a higher rate.

4. Your interest rates will go up, and you will incur late fees. There's also interest on the late fees, and then you have more late fees and over-the-limit fees. You can see how the balance can double or triple very quickly.

5. Eventually, you may face legal action. No, they can't put you in jail or freeze your bank account, but they can garnish your wages or place liens on your property.

People who have been far behind on their bills tell how they reached the point that they jumped whenever the phone rang, or they wished they could crawl out the back window when someone knocked on the front door. That's no way to live!

You need to find some other solution to your debt problem, and soon. You are on the right track in talking to the bank and getting in a reduced-payment hardship program. Next, you need more long-term solutions.

If you have most of a year before your payments go up, there's time for you to do something. Can you take some courses that might qualify you for a higher paying job? Can you increase the hours you work, find a better job or do some moonlighting?

If you're already making as much as you think you will be able to, consider ways to reduce your expenses. Go through your budget, and look for ways to cut back. Could you move someplace where the cost of living is much lower? I'd rather live someplace less desirable and be free of financial stress than live in a pricey area where everyone else seems to spend money like it's free!

I generally advise against selling your house to pay bills. That's because the selling costs are prohibitive, and it may be hard to get back into a home. In a desperate situation, however, you should keep your options open. You could even move into a small apartment and lease out your house. It's better to live in an apartment with peace and quiet than in a nice house with bill collectors calling all the time!

Although you see advertisements for bankruptcy everywhere, try to avoid thinking of it as an option if you can. Bankruptcy is a very, very last resort. It's certainly not the easy way out.

Use this one-year reprieve with the reduced credit card payments to make some changes. Don't give up -- you can take control of your finances and your life.

After a pause, credit card interest rates resume upward march

Increase shows that banks are still making moves in face of economic challenges

By Jeremy M. Simon

A boost in rates by a major card issuer lifted the national average APR on new credit card offers to 12.28 percent, according to the Weekly Credit Card Rate Report.

That decision suggests banks continue to adjust to both ongoing economic challenges and new federal legislation aimed at curbing credit card abuses.'s weekly rate average chart
Avg. APR Last week 6 months ago
National average 12.28% 12.14% 12.84%
Balance transfer 10.32% 10.14% 11.18%
Business 10.49% 11.07% 16.74%
Low interest 11.52% 10.62% 12.38%
Cash back
11.69% 11.77% 13.76%
Rewards 12.16% 12.16% 12.22%
Instant approval 13.32% 12.99% 11.29%
Airline 13.79% 13.48% 12.96%
Bad credit 14.29% 14.29% 12.77%
Student 14.45% 14.45% 15.79%
Methodology: The national average credit card APR is comprised of 95 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed above. (Introductory, or teaser, rates are not included in the calculation.)
Updated: 9-10-2009

"We've definitely seen that slight upward tick" in APRs overall, says Andrew Davidson, senior vice president with Comperemedia in New York. "It's particularly interesting because prime is at such a low rate."

With the Fed content to leave its key lending rate unchanged for the time being, the prime rate remains at 3.25 percent. The central bank's federal funds rate is used to set banks' prime rates, to which the APRs for variable rate credit cards are generally tied.

The Fed has had a hands-off policy on changing rates since December 2008 in an effort to stimulate the economy. Once the economy recovers, the Fed will again begin raising rates, and when it does, it will impact the bulk of credit cards. "Almost all offers are variable-rate these days. The fixed-rate [cards] tend to be subprime," Davidson says.

For the time being, the Fed is expected to leave rates alone. Although there are signs of improvement, economic data continue to suggest challenges lie ahead. That includes a decline in the use of plastic. On Wednesday, the Federal Reserve's "beige book" survey of its regional banks showed consumer spending generally remained soft and lending standards remained tight during July and August.

In July, that combination helped to drive credit card balances down for the 10th straight month, as indicated by the Fed's G.19 report on consumer credit. That report, released Sept. 8, showed revolving credit -- a loan category comprised almost entirely of credit card debt -- declined at an annualized rate of 8.0 percent in July, following a drop of 6.4 percent in June. Overall, revolving debt fell to $905.6 billion from a total of $911.7 billion in June.

APRs advance amid premium card focus
But even with the fed funds rate staying put, APRs are moving higher. Analysts say the increase stems from lenders' reaction to the economy as well as the recently introduced Credit CARD Act, which enacted sweeping credit card industry reforms. "As we've seen the CARD Act come into place, card issuers have been more cautious" in terms of pricing, Davidson says. That means higher APRs for cardholders. This week, it was an increase on a Chase credit card that lifted rates.

Specifically, banks are offering a greater number of premium cards and launching new products in that premium marketplace segment. "Premium cards do tend to have a higher go-to APR," says Davidson. Mintel Comperemedia data released Wednesday shows that in the second quarter, credit card issuers sent 28 percent more direct-mail marketing offers for premium cards than they did in the first three months of 2009, even as issuers reduced overall credit card offers by 8 percent.

Those offers are aimed at that segment of consumers with the highest credit scores and, therefore, the lowest risk of being unable to make payments. "These cards have high associated fees and low risk. Issuers see them as an excellent way to restore profitability in today's economy," Davidson says.

As consumers rely less on credit and focus on saving money, banks will have a tougher time convincing consumers to use their plastic. Against this increasingly competitive backdrop, issuers will push premium cards -- with all their unique perks -- in an effort to become "top of wallet" for consumers, or their first choice for charging. "We will see this 'shrinking national wallet,' and tapping into the premium market is the safe place to start doing that at the moment," he says.

In the longer term, an increase in premium offers could signal an eventual increase in credit offers for all segments of the borrowing public. "If we're starting to see growth in premium cards, the extrapolation is that may trickle down," Davidson says.