credit card problems

 

Chapter 7 Bankruptcy:  Should You Dump Your Credit Card Debt?




In the past a consumer with a good payment record and solid financial history would be just the person large financial institutions love to work with.  If you paid more than the minimum on revolving charge accounts, paid on time and had a good rating with the credit bureaus, card issuers competed for your business.

That's no longer true.  In the current economy, credit providers are raising interest rates with little warning and for no reason.  Credit limits are being slashed and those reduced limits raise the numbers on the debt ratios required for the best interest rates.

A consumer with $25k of credit line available on his credit cards who owes $10k in revolving credit is considered a good risk as he is using less than 50% of his available credit.   When that credit line is reduced by the bank to $12,500, the immediate result is a consumer who appears to be near his credit limit and may place him in a higher risk category though he has done nothing wrong.

Reducing credit limits for consumers is the first of a one-two punch being broadly applied by large credit card issuers.  The reduced credit limit is quickly followed by a huge increase in the interest rate of the credit account.  The bank who reduced the credit line thereby placing that consumer in a higher risk category (through no fault of the consumer's) now demands higher interest payments.

Worse, due to the cross default provisions still allowed by the law, other banks where the customer has a credit card account will also raise the interest rates.   The consumer has no way out of this.  In the space of 60 days, a consumer with $25k in credit available and a $10 balance may see his interest rate go from 11-12% to over 30% on all the revolving credit accounts he carries.

Your monthly minimum payments bills by credit card companies double or even triple.  Though in the past you've always paid more than the minimum, you may now struggle to meet those higher minimum payments.  Making minimum payments lowers your credit rating further. 

Through no fault of your own you may find yourself in a precarious financial position, unable to meet monthly payments that have wildly increased and unable to qualify for loans to pay off those revolving credit accounts.  This is predatory lending at its worst and it is being condoned for now in an attempt to strengthen those same large financial institutions that are creating this problem.

When you are faced with this credit crisis, the best option is to use savings to pay off the largest of your credit accounts.  Stop using your cards for day to day purchases and use them only for emergencies.  If you cannot pay the larger payments being demanded and you do not have the ability to pay off at least some of the accounts, you might consider defaulting on your credit card balanced by filing for Chapter 7 bankruptcy.

This is a drastic step to take - but is increasingly becoming an option for consumers facing intractable credit card issuers. It is preferable to default on credit card debt than to damage your family's financial well-being and potentially risk losing your home.  It is possible to regain your credit footing after bankruptcy and regain your good credit much quicker than you would think.

Guilt and embarrassment are listed as the two main reasons for not considering filing for bankruptcy to dismiss credit debt.  The reality is the large credit card issuers feel no guilt about changing your credit accounts in a way that harms your personal financial status.  If your payments increase above your ability to pay, you may need to file for cancellation of those debts and guilt or embarrassment should not factor into your decision.