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Dig out of credit card debt

Alice White • May 11, 2007 at 9:12 AM

Americans owe $798 billion in credit card debt! Breaking that down, we have racked up an average credit card debt of over $9,312 per household, with an average interest rate of 13 percent. And get this. The average number of plastic cards per household is 19.3! That's eight bank cards, such as MasterCard and Visa, eight retail cards such as Macy's and Home Depot, and three debit cards or ATM cards. Talk about plastic you can't recycle! No wonder many Americans are drowning in a sea of debt.

According to the American Bankers Association, the default rate is up to nearly 5 percent on credit card debt. Low minimum payments of 2 percent to 2.5 percent have encouraged lifestyles without limit. Now, as many Americans feel the pinch in their wallets from rising gas prices, insurance rates, and interest rates on equity loans, they are finding it difficult to meet their monthly obligations. For the estimated 40 percent of cardholders who carry a balance from month to month, many are starting to get behind on payments.

But missing payments is extremely costly. If a payment is one day late on a credit card bill, you can expect to be slapped with a late fee. The average late fee is $27. In addition to the late fee, many creditors will increase the interest rate as well, with the average penalty rate being 24 percent.

Additionally, if you are one day late on one credit card, you could experience an increase to the interest rates on additional cards due to the Universal Default Clause.

The Universal Default Clause states that creditors have the right to continually monitor your credit report. If the creditor gets information that you were late on another credit card, all other creditors have the right to increase the interest rates, because when you are late, you are considered a credit risk. This clause can also kick in if you go over your limit, bounce a payment check, or owe too much debt on all credit cards.

Many people have wound up in a revolving debt cycle that they will never escape. At the minimum payment of 2 percent, their debt lasts longer than most marriages. The $1,000 Christmas debt paid back minimum by ever-so-minimum will hang around for 22 years. The average American with the average $9,312 credit card debt will be 32 years older when he breaks free.

With a little push from the government and a recent change in the law, credit card companies are now raising the minimum payments. In fact, they are doubling them. MBNA, Bank of America and Citibank have already announced they are raising the minimum payment to 4 percent. The good news is this change occurred to help consumers get out of debt faster. But the bad news is that to those who are struggling to make minimum payments already, this can be devastating.

So how do you dig out from under? Having a plan and sticking to it is the key to getting out of credit card debt. Let's look at some options:

• Negotiate with the credit card company.

Most creditors would rather you not pay as agreed than not pay at all, so give your credit card company a call. See if they will either reduce your interest rate or agree to a reasonable payment plan.

Make a worksheet listing each credit card by creditor, interest rate, minimum payment, balance, and the actual payment you make each month on average. Pay small balances off first to get the momentum going. Then, using the snowball technique, begin paying off the account with the highest interest, and work your way down the list, adding the payments you have eliminated to the next card's payment.

• Pay less to Uncle Sam.

Some 80 percent of taxpayers got a refund in 2004 to the tune of $2,400 a pop, on average. Adjust your withholdings so you can put that extra $200 a month toward your debt.

Homeowners can accelerate paying off high interest credit card debt by using home equity to create cash flow. With a disciplined financial plan, a good option might be to refinance your mortgage, pay off credit card debt, lower overall monthly payments and invest the savings. The interest on the mortgage is tax deductible and could provide additional savings. Start the move from owing money to owning money.

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