Who is the Credit CARD Act Trying to Help?

A new survey by the New York-based nonprofit research and advocacy group Demos shows that before the mortgage meltdown got into its full swing and the economy went deep into recession, Americans in low and middle income brackets were using their credit cards to cover basic living expenses, medical costs, and other day to day necessities, building up their balances in the process. Plastic was used to cover basic living expenses like rent or mortgage payments, groceries and utilities by more than one-third of the households in the survey. And three out of four people who took part said they used their cards for essential spending like car repairs, home repairs and college expenses. More than half of those in the survey, which asked questions of people who carried balances for at least three months, said medical expenses contributed to their debt. This was especially true for older Americans, who saw their credit card debt increase by 26% over the previous three years to an average balance of $10,235. ''With just over half of indebted households citing medical expenses as contributing to their credit card debt, this is clearly an issue not only for the uninsured, but the insured as well,'' said Tamara Draut, Demos' vice president of policy and programs. The survey dispels some of the misconceptions on how credit card balances accumulate and how they get out of hand. ''One of the biggest myths about the rise in credit card debt is that it is a result of frivolous spending,'' said researcher Jose Garcia, an associate director for research and policy for Demos. Garcia added that well before the worst of the recession arrived card holders were using their cards as a safety net and to make up for income shortfalls. The Demos study also confirmed what other studies have revealed as well; that low and middle class wage earners pay the highest credit card rates in the country. Almost 25% of card holders surveyed said they paid at least 20% on their outstanding balances. For Black and Latino families, the percentage paying more than 20% on balances rose to 33%. Over 50% of the homeowners in the study had tried to pay down their credit card debt using cash out refi’s, second mortgages, or home equity lines of credit. Thomas Shapiro, a professor at the Brandeis University Heller School for Social Policy and Management, said that finding means that these people used ''their largest reservoir of savings'' to cover past spending. ''That major form of savings for middle and low income families is something that has been disrupted for many Americans,'' he said. ''It's like eating your seed corn, something that you have saved for the future, to pay down past consumption.'' The most troubling aspect of the data relating to these income groups is that the study ended well before the credit card companies started moving aggressively toward hiking rates, fees, and payments on their riskiest categories of borrowers. With the first phase of provisions going into effect on the new Credit CARD bill in late August, card holders like those in the survey will likely be feeling the heat of increased interest rates, lowered credit limits, and increased minimum payments. For those carrying heavy balances, the increases will be an even tougher pill to swallow as, for instance, minimum monthly payments with certain issuers are set to increase by 250%. Anyone looking at those kinds of payment increases has to wonder what the administration had in mind when they set out to protect credit card holders. Outsmarted by the issuers, policymakers can only sit and watch as the loopholes they left wide open are exploited at the expense of the very people they were supposed to help. For card holders that can’t keep up with the increases, the best solution for debt relief will be to engage a law firm to negotiate a debt settlement with their credit card issuers. Other unsecured debts such as medical bills, unpaid utilities, and department store debt can also be rolled in to the settlement. Card holders receive immediate relief with a 50% reduction on monthly payments related to the accounts rolled in to the settlement. The long term benefit of the debt settlement lies in the full payoff of accounts after they have been negotiated down by 40% to 60%, within 48 months. While the credit card issuers were fighting the approval of the Credit CARD bill, they warned that costs would go up across board if they couldn’t increase costs on their riskiest borrowers. It has become apparent that the issuers will hit their high risk borrowers as hard as they can before consumer protections go into effect and then let chips fall where they may. The good news for struggling card holders is that instead of a lifetime of struggling to make minimum payments they now have the power to eliminate their unsecured debt within four years with a debt settlement.