Charge Ahead

Published 9:59 am Monday, December 15, 2008

Get offered a loan at an interest rate of 18 or 22 percent and few, if any, would take a bank up on that.

Yet that is exactly what hundreds of thousands of Americans have done and are doing each day. But they don’t call it getting a loan at a usurious rate. They call it using their credit card.

This time last year the Associated Press took a survey of 17 prominent credit card companies to discover that $17.3 billion in credit card debt was already 30 days past due. Debts that were 90 days past due and deemed uncollectible reached $961 million.

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With the economic crisis seemingly spiraling out of control, despite government bailouts, and a rush of layoffs threatened weekly, a credit card may seem like a key to short-term survival. But with excessive interest rates and the failure of users to pay off debt, a credit card can cause its user to self-destruct fiscally.

However, there are ways out of credit card debt. Much like taking off weight, remedies can be quick fixes. But for there to be lasting results, a consumer, like a dieter, must undergo a spending transformation.

A home equity loan, at a lower rate, could be an option to get out of credit card debt, if the consumer is willing to revamp his spending habits. If not, it could simply compound the problem.

“One of the worst things people can do is take a home equity line to pay off a credit card,” Jerri Compton of Creative Financial Services, said. “You put a band-aid on the problem. The problem is spending, spending on things you may not have needed or couldn’t afford.”

If spending isn’t reined in, a consumer could end up with a double source of debt — from the home equity loan and new debt on the credit card, Compton said.

“It is a behavior issue that has to be corrected,” she said. “We have to sit down and say anything over and above (a budgeted amount) is going to wreck my budget. When we live on debt on credit cards, there is going to be a part of life we owe to someone else when we stretch ourselves beyond our budget.”

When a consumer is ready to take the hard look at his spending, what credit card does he try to liquidate first? Local experts offer differing answers.

Jason Stephens of Stephens & Sons recommends consumers pay off the card with the lowest balance first.

“To get a positive feeling,” he said. “Money is an emotional thing. Credit cards can get (a consumer) in trouble really quickly. It is hard. The different things come into play. … What will happen is if you have a lot of credit cards, it will affect your credit score.”

A credit score can affect such things as insurance rates.

“A credit score is how well are you able to pay back your debt,” Stephens said. “I would encourage them to limit to one credit card. Get it down to one card.”

In fact, switching to using a debit card, with overdraft protection, is an option Stephens suggests.

However, Compton takes a different tack when working out a plan to reduce or eliminate total credit card debt. She suggests paying off the card with the highest interest rate, even if it is not the one with largest amount owed.

“Maybe if you have $4,000 at 12 percent and $800 at 22 percent. Obviously that (latter one) will multiply very quickly with the higher interest rate,” she said.

Another option is to see if a family member can offer a temporary loan to help out. Often times, those loans will be at no interest or a low rate. Also credit card companies may agreed to reduce the amount of interest on existing cards. All that takes is a call to the customer service.

“I have seen they are willing to go down pretty significantly,” Compton said. “I don’t know there is a magic number. … It never hurts to call.”

One thing the credit cards do require, Compton said, is that the consumer have a clean record of making payments on time for a period of six consecutive months.

No matter what path you take to reduce credit card debt, efforts will be short-lived, if a clean card is simply used to rack up more debt, experts say.

“We have sort of let that availability of credit get out of hand,” Compton said. “I have seen a lot of people buying things they can’t afford.”