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Credit card companies feel the squeeze

And they could pass it on to you

Feb. 5, 2009 - 01:39PM   |   Last Updated: Feb. 5, 2009 - 01:39PM  |  

The bills probably have rolled in after the holiday spending spree, possibly adding to balances you've already racked up.

Now is the time to hunker down and pay off as much of those credit card balances as you can.

What would happen to you if your financial institution raised the interest rate on all your credit cards?

It's happening already. In the current economic situation, which has drastically squeezed available credit, some credit card companies are simply raising their rates across the board.

This isn't new; financial institutions have reserved the right to arbitrarily increase credit card rates. So open all correspondence from your financial institution and read it carefully. Also check your bill every month to find out what your interest rate is, and what, if any, fees you've been charged.

And if you have the flexibility to pay off those balances, do it.

Bill Anderson, a certified financial planner on contract for personal financial counseling at the Fort Belvoir, Va., Army Community Service Center, said more service members are showing up with excessive credit card debt on multiple cards.

Typically, they are carrying interest rates of 18 percent to 21 percent. But Anderson said that if they miss payments, don't make a minimum payment or exceed their credit limit, rates skyrocket to as high as 29 percent in some cases.

Anderson said debt troubles are "not just a youth thing."

"I see people in their 30s, 40s and 50s," he said. "Almost everybody that comes in has some sort of debt problem."

Anderson advises troops and families to look at their debt-to-income ratio. Add up your monthly minimum debt payments on credit cards, car loans, personal loans, boat loans, motorcycle loans — everything except mortgage or rent payments. Divide that by your monthly net income from all sources in your household.

The ratio should be 15 percent or less. If it's more than 20 percent, you need to get that debt under control.

To get out of debt, Anderson advises families to first track every dollar they spend for a month. "That's a real eye-opener for a lot of people," he said.

Then he helps them develop a budget, considering net income from all sources, living expenses and debt. He counsels them to live not just within their means but below their means, to allow the buildup of an emergency financial cushion.

There are different opinions about attacking debt. Some experts advise putting all extra cash each month toward the balance with the highest interest rate and making the minimum payment on other debt. Once the first balance is paid off, take that amount and apply it to the balance with the next highest interest rate until it is paid off, and so on. Others recommend paying off the debt with the lowest balance first, to give yourself a sense of accomplishment. However you choose to do it, there's no time like the present.

Anderson advises service members and families to build up an emergency fund equal to three to six months of net income.

"If more people had emergency funds, they would probably avoid expensive credit card interest," he said. "Instead of charging to your card, use the emergency fund."

A lot of people say they can't save that much money, he said, but saving something is better than nothing. That amount can be used as a target.

Always remember to think first before you buy. Is it a "need" or a "want?" If it is a "want" that you can't afford, do you "want" to pay for it for months or years?

The Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration recently approved rules to provide additional protections to credit card holders, but they won't take effect until July 1, 2010.

The Center for Responsible Lending, a consumer advocacy group, said that while the new rules won't go far enough to stop credit card issuers from "capriciously" imposing higher interest rates and hidden fees, the move is a significant first step.

The rules will protect consumers from unexpected interest charges, including rate increases during the first year after an account is opened, and increases in the rate charged on pre-existing credit card balances.

Among other things, they also will prohibit lenders from applying payments to the balance on the card with the cheapest rate first and letting balances with higher interest rates continue to climb.

This happens, for example, when consumers accept a low "teaser" interest rate, perhaps on a balance transfer, and then continue to use the card for new purchases.

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