Having Trouble Trying To Pay Down Debt?
Posted on | May 15, 2009 | 1 Comment
You are as much to blame as the credit card companies. It is time for each of us to examine ourselves and determine how we have contributed to creating our own little mountain of debt.
There is a bill currently pending in Congress that would seriously curtail some of the worst of the credit card companies’ unfair lending practices. President Obama wants to sign the bill into law in the next two weeks. The law would prohibit interest-rate hikes on balances, stop the practice of putting the whole payment against low rate balances while the higher rates compound, and prohibit the practice of rate hikes when the borrower is late on a bill that is unrelated to the credit card company.
But, what about us?
What have we done to contribute to our collective, and individual, mountains of debt? Let’s take a look at a few of the reasons we are, at least, partly to blame for our credit woes.
Impulse Purchases Lead To Bad Decision Making
Americans carry almost a $1 trillion in credit card debt….And it all started with someone, somewhere, automatically pulled out the card and charged something on it.
Studies indicate that consumers are notoriously bad decision makers when they use their credit cards. The impulse to purchase something is harder to resist when it is as painless as signing your electronic signature and walking away. Merchant groups suggest that the average consumer spends 10-20% more when using a credit card than paying with cash or check.
No wonder we need legislation to protect us…..from ourselves.
Teaser Rates Lead To More Debt
A large portion of credit card users select their cards based upon the low introductory rate alone. Nevertheless, studies show that, despite the low rate, they end up paying higher interest rates over time. This is because most people, despite their best intentions, do not pay off the balance by the end of the teaser rate period. The rate increases and all of the interest that was saved is ultimately paid back under the new, permanent, higher rate.
Hidden Fees Take Their Toll
Most consumers miss the laundry list of fees, charges and hidden costs associated with owning a credit card mainly because we delude ourselves into believing that we will never miss a payment or be late in making one. But, often we do and the avalanche of fees and expenses pour onto the statement. The problem is that those fees, even if only a potential problem, have to be weighed into the equation when evaluating a credit card.
We Cannot Make Decisions Where The Consequences Are Substantially Delayed
As a culture, we are notoriously bad at understanding the consequences of costs where those consequences come much later than the decision itself. We tend to look disproportionately at the immediate gratification and assign more value to it.
Credit card companies, and merchants in general, are all too happy to oblige our character flaws.
Indeed, we engage in such irrational behavior as paying more for items even where a discount is offered for cash and there is no need to finance the purchase. It just does not feel like we are spending real money. We incur hundreds and thousands of dollars in interest charges each year while we have money sitting in a savings account earning 1% interest (if we are lucky).
Paying The Minimum Credit Card Payment Will Not Retire The Balance
Here is another psychological trick that the credit card issuers use to increase their profits.
Having a low minimum payment distorts our perception about how much we should be paying off.
As a result, we carry the balances longer and pay more interest.
The Solution to Credit Card Abuse? Different Type Of Disclosure
The problem with the fine print disclosures that we currently get with our credit cards is that it does not relay the type of information we need to properly assess the long term impact of our credit use habits. The current disclosure is not enough because it does not address the way we think about revolving debt.
We read the information, but it does not register.
Instead, the disclosures should be written in a manner that reflects the hidden credit cost in a way that we can process and understand. Legislation has been introduced that would, among other things, forced credit-card issuers to disclose on each statement the number of years it would take to pay off his balance and how much interest would be paid by only paying the minimum payment.
This modified disclosure would not only disclose the nuts and bolts terms of each card, but also how they impact us. Informing consumers of the real cost of using their credit cards, in a way they can comprehend, lets each consumer make an intelligent decision that could result in less impulse purchasing and lower overall balances and obligations.
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May 29th, 2010 @ 6:56 am
Thanks for sharing this important code with us.Keep posting us informative post to us.