Getting Out from Under Debt: Today's Family Challenge
Welcome to the new world of 2009 (and late 2008); more and more of us are struggling with debt. And now, with credit card companies lowering limits, raising rates, and generally clamping down, we find ourselves in a rapidly tightening bind. (Lately George Clooney's voice in the movie Oh Brother, Where Art Thou keeps echoing in my head: "We're in a tight spot, boys, a tight spot.")
I recently heard from several cash-strapped caregivers who managed to pay their credit card balances down by a few thousand dollars, only to have their card issuers immediately lower their credit limits accordingly, to just a bit above their current balance. This process, known in the industry as "balance chasing," has become much more common in the past six months, according to credit experts. And it's a real pain. First off, it traps you without any wiggle room. It's also seriously not fair -- penalizing people for trying to be responsible; what gives? Lastly, it can really hurt your credit score, which is calculated based, in part, on the ratio of how much credit you have available vs. how much you've used. (The excellent blog CreditMatters gives more detail on this.)
Happily, this issue is wending it's way through our hallowed halls of government in the form of the Credit Card Accountability, Responsibility, and Disclosure Act, which was finally passed by the Senate banking and finance committee two days ago. If our elected officials could make it a high priority to get this legislation passed, some of the worst practices, such as "any time, any reason" interest rate hikes, would be banned.
Meanwhile, here are a few steps to take to protect yourself and your family members.
Watch out for the "paydown penalty." To avoid being a victim of balance chasing, talk to your bank about their policy on lowering limits. Knowing this may influence which card you choose to pay down first, for example. If one bank or card issuer lowers your limit until it's close to your balance, ask your other card issuers to raise your balance. That way it'll balance out in terms of your credit score, and you'll have some room in case of unexpected expenses.
Transfer or restructure your debt. Of course, it may be hard to get additional credit if you have high balances, which is what might be triggering the balance chasing in the first place. (Banks do this with customers they perceive as being at "high risk" for not paying off their debts.) In this case, is it possible to do some restructuring, and pay down your credit cards with cash from somewhere else, such as an equity line? Or in the case of senior family members, with a reverse mortgage?
Figure out what it will take to pay off each credit card. Bankrate.com offers a credit card calculator that you can use to figure out how long it will take to pay down a balance at a given interest rate.
Talk to credit experts. If you're really stuck, it may be time for credit counseling or to talk to an attorney about bankruptcy; I'll compare the pros and cons of each of those options in a future post.
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