That so many people can’t pinpoint where their charges went illustrates the dangers of credit cards
Margaret from Illinois owed about $30,000 in credit card debt. She told me she’d had her credit card debt for years, but she couldn’t really pinpoint a time when it became unmanageable, or why it did so.
“What originally caused you to consider filing for bankruptcy?” I asked.
“Credit card debt,” she said in a flat voice.
“What caused you to accumulate the credit card debt?”
“We just needed them to pay bills to live.”
“Was there a reduction in your income?”
“Was there a big increase in some monthly expenses?”
“Then how did you accumulate all that debt?”
“I don’t know,” she said helplessly.
There are a great many clients just like Margaret who, when I ask how they ran up their credit card balances, really can’t explain it to me. It’s because they just don’t know how their credit card balances got so high. Usually, in a situation like this, the caller will tell me that he or she had carried and paid on credit card balances for years. The balances grew slowly but steadily, and then one day he or she suddenly had a tough time making a coming payment. And all of a sudden, they realize all their bills are a struggle to make. Hearing these stories, it’s as if the client is trying to remember a dream from the night before, but it only comes back in pieces. What happens to a lot people who get into overwhelming credit card debt is this: You first get the credit cards, and the terms are so easy and carefree. The average card only requires a minimum payment of about 2 to 4 percent of the outstanding balance. By accepting such ridiculously low payments, the credit card company can charge their high interest rates to whatever amount you don’t pay.
Let’s say you sign up for a credit card and you go out the first month and ring up $1,000 in charges. The bill comes and the minimum payment is $20 (2 percent of the balance). If you only pay that minimum amount, the high interest rate gets applied to the other $980 as you go forward. That’s where their huge profits come from. The credit card companies make their enormous profits when you don’t pay your bill.