Credit Basics
Buried in credit card debt? ‘Dig out’ with a little expert advice
By Dennis Richardson
Special Sections Senior Writer
Sunday, March 23, 2008
Let’s face it: We’re a credit card nation. That slim, wallet-size piece of plastic originally intended as a convenience has become indispensable.
“You can’t do without a credit card and live a normal life,” said Howard S. Dvorkin, founder of the non-profit Consolidated Credit Counseling Services Inc., and author of Credit Hell: How to Dig Out of Debt. “We are becoming a cashless society.”
To plan a vacation – book a flight, reserve hotel accommodations, or rent a car – you need a credit card. To shop online or via phone: Have your credit card handy. Need a coffee-and-bagel pick-me-up in the morning? No problem: just scan that credit card. Or maybe you simply have to have that plasma TV, but don’t have the money right now. Just put it on your card.
Last year alone, Dvorkin noted, Americans purchased $2.2 trillion in goods and services, big and small, important and not so important. “When credit cards first came out, they were a convenience,” he observed. “Now, they’re a form of supplemental income. People use them to live on.”
Nearly two out of three Americans – about 190 million people – have credit cards, but they have enough of them to account for every man, woman and child in the country, four times over, Dvorkin said. Yet, financial institutions and other companies continue offer us more cards. And they know we can’t say no. If addiction is too strong of a word, perhaps you could call our relationship with credit cards a serious love affair.
“What is frightening,” Dvorkin said, “is that studies have shown that people would default first on their mortgages, then on their credit cards. People are willing to let their house go before they’d let their lifestyle go.” In doing so, we’re proving that it isn’t just our government that’s adept at deficit spending. The average credit card debt in this country is more than $9,800, according to CardTrak LLC, a private company headquartered in Port Charlotte, Fla., that provides information on credit cards and other payment cards at www.cardtrak.com. That amount of debt is more than three times what the average credit card debt was in 1990.
“On average, Americans spend $1.22 for every $1 they make,” Dvorkin said. “So, on average, we are in the hole 22 percent each year. That means a person with a $30,000 income goes $6,600 into debt at the end of the year. And, they add on to it each year.” And about 65 percent of all Americans who have credit cards carry a balance on those cards, he said. “At an average interest rate of 18 percent [per card] that’s an astronomical amount of money,” Dvorkin said.
Consider the case of a person with $7,000 in debt on a credit card:
“On a card that charges 18 percent interest, if the individual makes only the minimum monthly payment and makes no other charges on that card, it will take over 10 years to pay off that [$7,000] debt, and it will cost more than $15,000,” Dvorkin said.
Left unchecked, credit card debt is a big problem that will only grow bigger over time. That’s why many people are turning to credit card debt consolidation as a solution. This involves a plan to combine the debt from a number of cards into one manageable monthly payment. Plans are available through a bank or financial institution, or a credit counseling company, such as Consolidated Credit Counseling Services.
Credit card debt consolidation offers several potential benefits:
- Pay just one bill each month.
- Get a lower interest rate.
- Improve your credit score by reducing your debt and paying bills on time.
- Put an end to those annoying calls from creditors.
Dvorkin said that consumers have four options in credit card debt consolidation. Two involve loans: a secured debt consolidation loan and an unsecured loan. A secured loan uses collateral such as a home as a guarantee. But if you default on the loan, you could lose your home. An unsecured loan carries no such risk, but often comes with a higher interest rate than a secured loan.
A third option is to transfer the balance of all credit cards onto one card for the express purpose of paying down the debt. For this option, make sure you transfer your debt to a card with the lowest possible interest rate.
A fourth option is to use Consolidated Credit Counseling Services or a similar company. Consolidated Credit Counseling Services, located at 5301 W. Sunrise Blvd. in Fort Lauderdale helps consumers with credit card debt, household budgeting, and personal finances. For more information, call 1-800-693-0245 or visit www.consolidatedcredit.org.
Consolidated Credit Counseling Services, operates in 50 states, offers a way out of “credit hell,” as Dvorkin’s book title suggests. Options may include financial counseling, education on budgeting and handling money, or a Debt Management Program. With the latter program, counselors perform a budget analysis by examining the client’s income, expenses, credit cards and other factors, Dvorkin said. In this way, the counselor finds ways to help pay the credit card debt and comes up with an agreed-upon payment plan. Then, the counselor acts as an intermediary and negotiates a plan, at better terms, to pay back the credit card companies. The consumer makes one monthly payment to Consolidated Credit Counseling Services, which then pays the creditors.
Consolidated Credit is a non-profit organization providing all of their educational materials, workshops, and counseling sessions free of charge; in accordance with national standards, they charge a nominal monthly fee for people to join the debt management program. “Typically, there is a lot of fat that people can cut out of their budgets and not feel it,” Dvorkin said. “Do they really need 250 channels on their cable TV? Do they really need to spend $4 every morning for a cup of coffee? Think about it; that’s $1,500 a year spent just on coffee.”
He explained that the Debt Management Program is effective because, unlike the standard credit card payment where 75 percent goes to pay interest and 25 percent toward the principle, 75 percent of the program’s payment goes toward principle and the remainder toward interest.
Consolidated Credit’s Debt Management Program is not for everyone, Dvorkin cautioned. “Every situation is different. If someone is just looking for a lower interest rate [on a card], this is not for them,” he said. “It is for someone who is struggling with making the minimum payments or feel that they will struggle in the future. You have to look at each situation. Sometimes people just need a little guidance on which direction to go, or some hand-holding.”
Either way, education is an essential part of the debt consolidation process. It’s important, he noted, because budgeting and disciplined spending require work and information. “The thing is, we’ve never been taught how to budget [money],” Dvorkin said. “As a society, we’ve never been taught how to use credit cards.”
Instead, he continued, we’ve just been handed these little plastic cards and told to go buy.
“The message from marketers is: Spend, spend, spend. We’re told, ‘You deserve to drive a fancy car. You deserve to go on vacation every year.’ We’ve been told that we need to live a better life than our parents,” he said. “But the reality is, our parents lived a better life. They had money in the bank. Today’s parents don’t: We’re 22 percent in the hole each year.”
