Consumer Tips for Dealing with Debt

In the last few weeks, there have been many stories about a consumer debt crisis. This is a major issue in our country, and it is time for consumers to take action and do what they can to help themselves. It is easy to say that there is a debt problem without actually acknowledging that you have one yourself.

Here are nine signs that you have a debt problem:

1. You have to use credit cards in order to pay for necessities such as gas and groceries.
2. Your credit card interest rates are over 20%.
3. Your unpaid credit card balance is four or five figures.
4. You have paid only the minimum balance on your credit card for the last six months.
5. You are juggling debt payments on more than three credit cards.
6. Your credit utilization ratio is over 50% (your debt is over 50% of your total credit limit) on any or all of your credit cards.
7. You feel like you are living on the edge, struggling to make minimum payments for all of your debts.
8. You have used your credit card for a cash advance to help you survive from one month to the next.
9. You have not put any cash into savings during the past 12 months.

"If you are in debt, it is not something you can ignore or deny, and hope it goes away. Debt is not something that time will take care of. You must make a plan to deal with it now. The longer you ignore your debt, the worse your problem will
be," says Bill Hardekopf, CEO of LowCards.com.

Here are several tips for getting out of credit card debt:
1. Be honest with yourself; don't deny that you have a problem. Pull out all of your bills and make a list of every outstanding debt and the amount due.
2. If you are behind on your bills and repayment seems overwhelming, contact your issuers, explain your situation, and ask to set up a payment plan. If you have late payment or over-the-limit fees, ask that they waive these.
3. Find a credit card with a rate that is less than 15%. If your current rate is much higher than this, and you have a good payment history, start by asking your issuer to lower your rate to 15%. If you carry a balance, you should only
look for a card with a low rate and no annual fee. Don't worry about the rewards; get the card with the lowest interest rate.
4. If you can't pay off your balance each month, then keep your credit card in your wallet. Do not use your credit card for everyday expenses. If you can't afford to pay with cash, you certainly can't afford to pay an extra 15% interest on a pizza, groceries, or a tank of gasoline.
5. Ignore the monthly minimum when paying your credit card balance. You will never get out of debt by paying just 2% of your balance. Make it your goal to pay twice your monthly minimum each month, even if you have to reduce your cable or cellular packages, or reduce your entertainment and dining out to do this.
6. Pay attention to loans and credit that you apply for. Avoid subprime loans that charge exorbitant fees with little benefit for you. If you need an emergency loan, start with a personal loan from your bank or credit union. They tend to have lower rates and fees.
7. Get a part-time job for extra income to pay off your debt. This will be difficult, but the more you pay off, the faster you will be out of debt.
8. Make your payment before the due date. Each month look at your payment due date and set up an email reminder to help you make your payment in time. Do everything you can to avoid late fees that could set up penalties and default rates.
9. Calculate how long it will take to pay off your balance with the payment you make each month. You may be shocked at the length of time it will take to pay off your balance and large amount you will pay for interest payments. It helps to have a realistic understanding of your debt to the credit card issuer.

How Fed Rate Cut Will Affect Credit Cards

The Fed cut the federal funds rate by three-quarters of a percent on Tuesday. This key interest rate has now declined six times in exactly six months. The rate is now 2.25%, a decline of 3% since September 18, 2007.

What impact will the Fed's move have on credit card customers?

"Anytime we see a cut by the Fed, it should help credit card customers that have a variable rate card," said Bill Hardekopf, CEO of LowCards.com. "Over half the credit cards in the marketplace have variable rates, so those customers could eventually see another slight decrease in their bill. But we do mean a 'slight' decline."

Interest rates have dropped due to these Fed cuts by 3.0 points since September. If you have a $5,000 credit card balance, a 3.0 point drop will now save you about $150 per year, or $12.50 per month.

"We have seen some major credit cards finally lower their rates," said Hardekopf. Here are a few examples of credit cards with lower rates:

* The rates for Blue from American Express dropped from 12.24% in September 2007, to 10.99% in March.

* The rates for Citi Platinum Select dropped from 10.24% in September 2007, to 7.99% in March.

* The rates for Chase Freedom dropped from 14.24% in September 2007, increased to 17.24% in January, then dropped to 15.99% in March.

"While this is good news for many households, unfortunately, some consumers may not experience a significant drop in rates," says Hardekopf. "While the lower rates are advertised in their terms and conditions, they also say that they can increase your rate at any time for any reason.

"It is imperative for credit card consumers to maintain their credit scores and pay their credit card bills on time or this could give the issuers a reason to increase the interest rates. Banks are in a difficult cycle right now, and are using credit card rates and fees to generate as much revenue as possible."

This is a good time to look at the terms and conditions of your credit card.

"Some credit cards have floor rates. This limits the interest rate to a certain minimum amount. Check your terms and conditions to see if your card has this floor rate. If it does, call the issuer and try to negotiate a different rate. If that doesn't work, shop around for a credit card with a better rate.

"If you have a variable interest rate, a good credit score and a good payment history, many cards should have dropped your rate by at least two
points in the last six months. If your rate is above 15% for a general
purchase card, call your issuer and ask for a lower rate."

Take advantage of lower rates to pay down your debt. After you get a lower rate, do not reduce the amount you pay per month. Pay as much as you can over your minimum balance and you will pay off your credit card debt much faster. If you choose to just pay the minimum balance each month, it could take two decades to pay off your credit card debt.

"Even if your rate is lower now, don't assume that it will be that way forever, or even in the next year," says Hardekopf. "Pay attention to those notices you receive from your credit card issuer. Some are now telling you that they are increasing your rates and you can basically take it, or leave it. You can close the account, but continue to pay off the balance at the old rate. If you don't accept the rate increase, it is up to to you to let them know."

Paying Taxes by Credit Card: Typically a Bad Move

Tax time is here and credit card issuers are using tax payments as an opportunity to appeal to new customers as well as increase usage among their current cardholders.
For the past few years, taxpayers have been able to pay for taxes with a credit card but convenience was the only benefit. The IRS uses third-party service providers to
process these credit card payments. They typically charge a 2.49% fee, which makes paying your taxes by credit card a poor financial move. However, this year some issuers are providing a cashback offer that makes it attractive for
cardholders.

"The best offer we have found is the Citi CashReturns card. It currently offers 5% cash back for three months and there is no limit to the cash you can earn," says Bill Hardekopf, CEO of LowCards.com. "This is the one time where paying your taxes with your credit card is a good idea because you will make an extra 2.63% on the amount that you owe." Using the Citi CashReturns card on a tax bill of $10,000, you will be assessed a fee of $249. But you will receive a 5% cash rebate on this $10,249 or $512.45. After the $249 credit card fee, you will make $263.45.

"American Express also advertises that you can earn up to 5% cash back by using the Blue Cash card. However, this is based on tiered rewards and the 5% only applies after you have made over $6,500 in eligible purchases this year," says Hardekopf. "Consumers need to be careful because these offers sound so good, but you must read the Terms and Conditions of the card to see the entire offer. There is no
tier on the Citi card; the 5% cash back offer begins right away. That's what makes this card so attractive for paying your taxes."

Most reward cards offer the standard one point per $1 spent on taxes. In most cases, this is not worth the 2.49% fee you will be charged using a credit card. It certainly is not worth the interest you will pay.

"In 2006, almost two million households used a credit card to pay taxes, a 36% increase over 2005. We expect that number to increase this year. For a household in financial trouble, it may seem like a relief to simply pay your taxes with a credit card, take care of the IRS and then forget about it as the taxes are rolled in to your balance," says Hardekopf. "Unfortunately, the fees and interest make this a
very bad financial decision." Most third party service providers charge a service fee of 2.49% for credit card payment. If your tax bill is $5,000, you will pay $124.50 in fees. However, if you only pay your minimum balance each month, the cost will be much more. If your APR is 15% and you just pay the minimum payment every
month, you will pay an additional $4,757.98 in interest and it will take 257 months (21 years) to pay off your taxes.

Confusing Credit Card Terms Still Exist

Almost everything about credit cards can be confusing forconsumers. Congress is attempting to create legislation thatwill make the terms and conditions easier to understand. However, it is not just the interest rates and fine print that are difficult to understand. Getting a correct, clear answer from a customer service agent can be just as difficult and frustrating.

A story by the Jane J. Kim in the Feb. 5 edition of the Wall Street Journal said, "American Express, which raised its late fees last year, plans in May to change the minimum payments calculation across its consumer credit cards, which
is likely to increase the minimum amounts due for some cardholders."

Since this could increase payments for some consumers, staff members at Lowcards.com made four phone calls to American Express to find further information about the minimum payment increase. We received four different answers.

Representative #1 said that the minimum payment will increase to 5% effective in May. She stated the current minimum payment is 2.5%.

Representative #2 said that there will not be an increase. If there is ever a change like this, they will let cardholders know.

Representative #3 said there will be an increase to 5% for those who have paid only the minimum balance for the past six months, or who have been late on any payment during this time period.

Finally, an American Express spokeswoman said that there will be an increase for those who have made only the minimum payment for six consecutive months. She said that American Express sent a letter last fall about this to cardholders, explaining the changes that will go into effect six months later, on the April or May monthly statement. The increase will be based on the following "easy-to-understand" formula:

"To calculate the minimum amount due, we first determine the
greatest of:

* 2% of the balance (excluding any over-limit amount and any late fees or over-limit fees);

* the lesser of either:
Current billed finance charges plus 1% of the balance
(excluding from the balance any over-limit amount, any late
fees or overlimit fees, and finance charges); or 4% of the
balance; or $15.

"We then take the greatest value above and add to it any
over- limit fees, any late fees, 1/24th of any over-limit
amount, and any amount past due."

"This is incredibly complex and another example of the confusion the credit card issuers create with their product. Consumers have a lot at risk financially with their credit cards, and issuers must do their part to make all terms clear and easy for cardholders to understand. These shouldn't be a puzzle where you need a PhD in math to calculate what your minimum payment might be," says Bill
Hardekopf, CEO of LowCards.com.

"There are many cardholders who are going to be quite surprised and confused by a higher minimum payment in April or May.

"We are supportive of the higher minimums because this forces consumers to pay off more of their balance and saves them money in the long run by decreasing the interest
payments. We applaud American Express for this move, but are very concerned that consumers don't know what their minimum payments will be with this very complex formula."