Credit card companies love to offer low interest rates in exchange for cash funds. Or, they offer low interest rates to transfer a credit card balance. The low interest rates can sometimes be as low as 0%. It may seem like you aren’t paying for your purchases for a while by using these amazing offers. These promotional offers are credit traps.
How Does the Trap Work?
In a prosperous economy, creditors make it easy for customers to rack up as much debt as possible. A low minimum payment entices someone to feel secure enough to make a big-ticket purchase. Of course, this purchaser of this expensive item will not immediately feel the impact. When consumer confidence is high, credit card companies benefit by gaining lifelong customers. Many will carry a hefty credit card balance with them for many years to come.
The credit card companies will make their money from interest payments in the long run. Using a credit card with a compound interest rate and a very small minimum payment allows your balance to grow. This happens regardless if you are paying the monthly minimum payment amount and keeping the account from going into default. As you make monthly payments, the interest compounds and the amount that the interest is calculated from continues to grow. For example, if interest on your balance is $1250 and you are only paying a minimum amount of $70, an extra $55 will be added to the next month as the basis for calculating interest for the next period.
See how much interest you will pay on your credit card debt over 60 months if you don’t file for relief verses 0% interest if you make those payments through a Chapter 13 plan of reorganization.
In short, as the balance goes up exponentially, and so do the monthly payments.
But Wait… There Is Another Way That Credit Cards Are Hoping To Make Money
It’s not just from interest that credit card companies are hoping to earn your hard-earned money. They also want to sprinkle in some late payment fees. The more balances you have on credit cards, it is likely that you will miss or forget a payment. They hope that your email inbox is full with a ton of other junk email. This way, the late payment warning goes unnoticed, if they even send an email for that. Once you miss a payment, a late fee shows up on your next credit card balance. This, if you miss another one, fees will add up. There are several imaginable scenarios that could cause you to miss a payment even though you are a responsible person.
In Tough Times, Your Credit Cards Will Be There
The previous strategies can work when customers are employed and making payments. However, when times go bad, that is when credit card companies will really strike! The promotional offers get even more enticing when funds are short. They can help you postpone payments from other cards at a rate of 0%. Well why not? You might ask. You can postpone payments until times get better and you get that better paying job.
But what if that better paying job doesn’t come around and the promotional 0% APR expires. Now you are left with late payments which cause additional fees to be added to your credit card balance. In addition, interest compounds on those higher balances. Just when you think it can’t get any worse, credit card companies will increase your interest rate. They will also reduce your balance limit on your card. So now you can’t spend any more money on the card, but the actual balance has grown significantly. It continues to add up more and more every month just from high interest rates.
Happy Credit Card Companies
This is the ideal scenario for credit card companies. At this point, your balance is growing and you cannot afford the minimum payment because you are unemployed or underemployed. Unemployment rates are currently 4.6% in New Jersey according to The Bureau of Labor Statistics. Happily, the unemployment rate in New Jersey has been steadily decreasing. But for Northern New Jersey residents, that does not tell the whole story. Even if you are not unemployed, chances are you are making less money than before.
In 2007 and 2008, many Northern New Jersey residents found themselves suddenly out of work when the markets crashed. Many people spent years trying to transition to jobs paying what they had been making. Eventually they had to settle for lower paying jobs. For many of us, that’s almost as bad as being unemployed. After struggling through difficult job searches, the transition to lower income without a commensurate reduction in fixed expenses, meant more reliance on credit.
Building Frustration
This looks like the end for the credit card company getting any more of your money. Now you are so angry that they have increased the interest and added fees that you won’t pay them anything. You will live with the late payments because what they are doing to you does not deserve any more payment for their unethical business practices. The only problem is that this is again another favorable situation for a credit card company.
Now they can take you to court and sue you for the balance. After they get a judgment, they can intercept your paycheck in a wage garnishment. They can also add a lien to your home. It still does not end there. Even after a judgment in court, a creditor can still continue to charge you interest and fees.
This credit card trap is a trap that has worked on people year after year. Some people even fall into the trap multiple times. When in the trap, take a step back and find information to eliminate the debt as soon as you can.
Contact Us Today
Dealing with financial complications can be overwhelming. We can help you manage your unique circumstances and help you break this pattern of debt. With Lucid Law, you can eliminate credit card debt in a Chapter 7 bankruptcy filing. Please contact us by calling 908-350-7505 to schedule your personal consultation.
