Citizen Staff Writer
INTEREST RATE CHANGES QUESTIONED
B. POOLE
bpoole@tucsoncitizen.com
When Barbara Sotelo’s husband died in an accident two years ago, her life began to spiral downward.
Faced with raising three children on her paycheck from the state Department of Corrections, Sotelo scraped by for most of a year. Then her adjustable-rate mortgage payment jumped to $1,500.
“That made me use my credit cards so I could keep up,” said the 38-year-old single mother.
Leaning on credit cards for school clothes and sometimes food soon led to higher card balances and payments, and the mortgage burden led to late card payments that sparked higher interest rates.
Credit fees and penalties quickly spun out of control. Sotelo has paid more than $1,000 in card fees in the past year, and all of her interest rates have jumped above 20 percent.
Now she is struggling to keep her home, and credit card companies won’t lower rates or forgive fees that stack on top of existing balances, which total about $8,000, she said.
A bill passed by the U.S. House of Representatives and one pending in the Senate would shelter consumers from some credit card practices that hurt people like Sotelo.
The House’s Credit Cardholders’ Bill of Rights (HR 627) would prevent punitive interest rate increases unless an account was more than 30 days late and require credit card companies to give 45 days’ notice for interest rate increases. It would limit late and over-limit fees and allow consumers to set “hard” limits so purchases would not go through if they push cards over the limit.
U.S. Reps. Gabrielle Giffords and Raúl Grijalva, Democrats from Tucson, co-sponsored the bill.
A companion bill in the Senate would ban punitive interest rate hikes unless payments were 60 days behind, let consumers regain low interest rates after six months of paying on time and require anyone 21 or younger to prove ability to repay before a card could be issued.
The legislation is likely to change before a compromise version is sent to President Obama, and credit provider lobbyists are sure to fight to dilute the bill.
Obama has signaled he would sign such legislation if it passed.
Card debt increasing
About 46 percent of American families had credit card balances in 2007, with an average of $3,000 outstanding – a 25 percent balance increase in three years, according to a Federal Reserve survey report in February.
From 2000 to 2003, the average balance increased just 9 percent, the report said.
Nonhousing debt payments accounted for an average 14 percent of disposable income among survey respondents in 2007 – virtually unchanged from 2004.
But the number of families with debt payments totaling 40 percent or more of their income rose 2.5 percent from 2004 to 2007, which hints at an increase in families with burdensome debt, the report said.
The debt Sotelo is carrying puts knots in her stomach with every ring of the telephone.
“You go through anxiety, and you’re afraid to answer the phone,” Sotelo said. “My phone is always ringing. Sometimes at 7 o’clock on Saturday, they start calling.”
When she needed advice, she turned to the nonprofit Primavera Foundation, which offers free financial counseling and education. Primavera can help people avert disaster, but that’s usually not the case, said counselor Lisa Peregrina.
“A lot of people don’t learn about credit until they’re in a credit card crisis,” Peregrina said.
Primavera sees walk-in clients and gets referrals, often from banks trying to help people qualify for home or other loans. The number of clients seeking help has risen dramatically in recent months, Peregrina said.
“And the numbers keep going up,” she said.
Consumer Credit Counseling Services, a nonprofit funded largely by credit card issuers, offers free counseling. And for $25 a month, it will manage your debt for you. The company has also seen a sharp increase in clients, said counselor Maria Grijalva.
High interest rates hurt
Interest rates are a common route to higher credit card bills, according to Grijalva and Peregrina.
Many card companies offer low or no interest for new accounts, then slip a policy into the fine print that says interest rates rise if payments are late. Sotelo has been hit by this numerous times, and Peregrina sees it all too often.
“The rate may be zero percent, but if you miss one payment, it might go up suddenly to 29 percent,” Peregrina said.
The House bill would prohibit such rate changes unless a payment were more than 30 days late. The Senate version would extend that to 60 days.
Over-limit fees that often top $30 also snare consumers. Again, credit card companies’ fine print often lets them change limits at will and allows the card holder to freely charge beyond limits.
Card companies are increasingly lowering credit limits, even for customers who always pay on time, and a lack of hard limits means many consumers unwittingly exceed limits and get stung by fees.
Both bills would force credit card companies to notify you at least 45 days before contract changes, such as lowered credit limits.
Avoiding disaster
A key reason people get trapped is a lack of information, even a little bit of which can steer you clear of fees and skyrocketing interest rates, Grijalva said.
“A majority of people don’t even know what their interest rates are,” she said.
Above all, Grijalva urged consumers to read the fine print in credit applications and terms.
“You always have to read the fine print, and it’s always, always in the very fine print where the most important information is,” she said.
Both Grijalva and Peregrina suggest calling credit card companies to negotiate lower interest – even if you have a high rate because of late payments.
“You do have a right to call that credit card company and ask them to negotiate,” Peregrina said. She also suggests self-imposed balance limits. Keeping your outstanding balance at half or less of your available balance helps your credit score and lowers the chance you will charge over the card limit, she said.
Always review statements, limit yourself to one or two cards for emergencies only and keep those cards at home to avoid temptation, Grijalva said.
“Don’t keep it in your wallet,” she said.
Vigilance and education are your best weapons – whether you are already in trouble with debt or have always been able to pay on time, the counselors said.
And be patient, Peregrina said. “It took some time to get this debt up. It’s going to take some time to pay it down.”
Where to get help
• Primavera Foundation, 623-5111
• Chicanos por la Causa, 253-0838
• Consumer Credit Counseling Services, 795-1121
• Catholic Community Services of Southern Arizona, 623-0344
• Family Housing Foundation, 318-0993
• TMM Family Services, 322-9557
• Tucson Urban League, 791-9522
• Old Pueblo Community Services, 445-7085
Avoiding credit woes
• Have one or two credit cards, and use them only for emergencies.
• Don’t carry credit cards with you; leave them at home so they won’t tempt you.
• Review statements carefully. Interest rates and card limits can change unexpectedly, even for people who pay on time.
• Ask questions of your credit card companies.
• Know what actions can trigger higher interest rates such as late payments or over-limit charges.
• Don’t just blame your credit card company when problems arise; you are at fault, too.
• Negotiate with card companies to get lower interest rates. Sometimes they listen.
• Start negotiating with creditors before you have trouble.
Sources: Primavera Foundation, Consumer Credit Counseling
DID YOU KNOW?
46 percent of American families had credit card balances in 2007, with an average $3,000 outstanding balance, a 25 percent balance increase in three years, according to a Federal Reserve survey released in February. Over the previous three years, the average outstanding balance increased 9 percent.
MORE
DID YOU KNOW?
Nonhousing-related debt payments accounted for an average of 14 percent of disposable income among respondents to a 2007 Federal Reserve survey, virtually unchanged from 2004.
But the number of families with debt payments totaling 40 percent or more of their income rose 2.5 percent from 2004-07, which hints at an increase in families with burdensome debt, the survey said.