SIZE DOES MATTER: WHEN BIG IS A BAD THING; LEVEL OF DEBT TO INCOME FORMULA IMPOSES PAINFUL PENALTIES FOR AMERICANS WITH HIGH LEVELS OF CREDIT CARD DEBT.

Remember when it was encouraged to borrow more and acquire additional credit cards? Consumers were told that having credit card debt was actually a “plus” as the monthly payments they made demonstrated the willingness to pay as well as established a history of responsible, timeliness. Almost everyone was approved for some type of extended credit by which they could indulge themselves with purchases outside of their immediate financial means. When individuals exceeded their credit limits, typically a simple phone call was all that was required to have the issue resolved and the limit increased. Sometimes, the credit card company would automatically increase the limit as a “courtesy” to the client. Other courtesies extended by credit card companies to their card holders included “skip a payment” coupons and special checks to make use of their credit lines with retailers or service suppliers that did not accept credit cards.
Just like the tech bubble and the housing bubble, the unlimited credit bubble has burst. Suddenly, consumers are feeling the pain of getting too close to their credit card limits as well as the burn of owing to Citibank, Chase, Capital One, Bank of America, American Express, etc, etc, etc….. Debt to Income formulas have overrun the credit card landscape and the results for consumers include massive interest rate increases, over the limit fees, jumps in minimum payments, sudden drop in credit limits and drastic dings to their credit score. Here is an example to illustrate what is happening to many Americans.
Meet Jane. Jane has 7 credit cards with balances on all of them. Jane has been making the minimum payments plus extra whenever she can. Jane’s salary is $50,000 a year, plus bonus, yet her credit card companies have extended to her lines of credit totaling $98,000. On a few of the cards Jane is very close to the credit limit. Jane has two credit cards with several thousand available in credit that she keeps as her “emergency” credit cards. Due to the increased cost of living, Jane has used her credit cards more heavily for daily expenses than in past years.
Jane was planning on paying off some of her credit cards when she receives her annual bonus. Unfortunately for Jane, she learns at a town hall meeting that due to the weak economy and drop in production, there will be no annual bonuses as well as no merit or cost of living salary increases for 2010. Jane is disappointed but tries to be positive and is thankful that she still has a job while so many Americans are unemployed.
Then Jane’s car breaks down. After dealing with the ordeal of getting the car towed to the dealership, calling her employer to let them know she will not be in until later, Jane is presented with a large repair bill. She attempts to pay using her “emergency” credit cards only to discover that the credit limits have been decreased. As Jane must have a can to get back to work, she is forced to write a check. This unexpected expense now puts Jane in the situation where she does not have enough cash to pay her mortgage on time this month and cannot make the minimum payments on her credit cards.
Next month, Jane opens her mail to find that the several credit cards have escalated the interest on her cards to 30% and applied several penalty fees, her minimum payments have doubled in some cases. Jane calls customer service to find out why her credit limits were decreased as well as why her interest rates were increased. She is told that her debt to income level is too high. Jane tries her best to make the new minimum payments, cut back on spending and look for a part time job to supplement her income. Due to the increased interest rates, her debt continues to grow faster and faster, her monthly payments make no difference. Jane attempts to refinance her home but is told that her debt is too high and her credit score has been severely impacted by the late payments and level of debt.
Does Jane’s story ring any bells for you? Many Americans are currently walking in Jane’s shoes and frustrated by the new rules and realities. Clearly, this is not a situation that an individual can solve by themselves. If you are facing similar financial hardship due to reduction in income and soaring unsecured debt, seek the guidance of a licensed attorney or legitimate non-profit credit counselor so that you can change your current path and get back on track towards financial wellness.

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