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Tuesday, April 15, 2008
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A house of cards? More moving debt to make ends meet Senior Reporter Credit card debt can be like a snowball rolling downhill.
For some, the financial problems come as they live beyond their means. Others are victims of timing. Like the couple who finally built their dream home, only to have the housing market meltdown mean they couldn't sell their old home. With two mortgages to pay, their credit cards were being used for everything else.
Sandi Kleist, certified credit counselor at Lutheran Social Service in Brainerd, has seen it all.
"With rising gas prices and everything else it's a been a real financial struggle," Kleist said, noting people are moving more debt to credit cards to make ends meet. The self-employed, like carpenters and mortgage brokers out of work with the housing crunch, have recently come through the doors. Kleist wishes more people would seek help before their backs are against the wall.
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Sandi Kleist, certified credit counselor at Lutheran Social Service Financial Counseling Service, said tracking expenses on a simple worksheet is one way to be able to judge where the money is going each month.
Brainerd Dispatch/Renee Richardson
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"I feel like I'm seeing more people dipping into their retirement to make ends meet," she said.
The majority of Americans do not have credit card debt, the Federal Reserve reported in statistics on personal debt for 2006 and 2007. But 8.3 percent of households owe $9,000 or more on their credit cards. Kleist said the average client who comes to LSS has $14,000 in credit card debt.
A credit card debt of $6,000 at 6 percent interest and with $100 monthly installments will take six years to pay off. And if credit cards woes have taken hold, with cards near the maximum credit allowed or with late payments, interest rates may climb to 20 percent or more on all the cards you have. Owing $10,000 at 20 percent interest over four years will mean paying back $22,000.
The American Bankers Association reported one in six families with credit cards only pays the minimum due every month. That just leaves a mountain to climb, Kleist said.
Individuals are not the only ones using credit cards to make ends meet as small business owners may find themselves doing that as well.
"I've seen a bunch of people get into trouble using (credit cards to fund their business) because the interest rates are awful," said Julie Anderholm, financial consultant for the Small Business Development Center at Central Lakes College in Brainerd. "Instead of managing their business, they are managing their credit cards."
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Credit card bills can snowball quickly with one missed or late payment on one card having the potential to raise the interest rates on every card consumers have in their wallet. Brainerd Dispatch/Renee Richardson
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The SBDC offers counseling and can help a business compare its expenses to industry averages. In some cases, Anderholm said using a piece of equipment as collateral for a bank loan is a better option with reasonable interest and a payment plan.
"It's never too late to get things in order," Anderholm said. "It might take six months to a year, but by the end of that time frame they might be relieved as well."
The first step to being free from debt is finding out just where your money is going, Kleist said. Tracking expenses on a worksheet helps pinpoint problems and make them easier to fix. For some, tracking expenses has the appeal of counting calories. But fighting the battle of the depleted checking account boils down to two things - earn more or spend less.
"You really spend a lot of money you are not aware of," Kleist said.
An envelope system is one budget method as income is split between categories each month like socking $25 away each month for auto repairs so you aren't left with a need to use a credit card when something breaks down.
While debt is an attention grabber, the wallflower in the room is a savings plan. Financial experts advise putting money toward savings while cutting into debt, even it if means $20 a paycheck.
Debt help
Lutheran Social Service offers help in budget counseling, debt management, housing counseling and financial education. LSS offers a free and confidential service to help people create a realistic spending plan and workable budget. Services are available in person or online. LSS also has a debt management plan to help people prepay debt faster, which comes with a charge. More information is available online at www.lssmn.org/debt.
The National Foundation for Credit Counseling, online at www.debtadvice.org, offers a number of consumer tips from teaching financial skills to children and avoiding debt trouble to saving money on summer vacations. The site also has an instant budget maker and a debt test.
The American Savings Education Council has educational segments online at www.choosetosave.org.
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Is it better to take money from savings and apply that to high interest credit cards? That depends. Bart Taylor, president at First Federal Savings Bank in Crosslake, recommends having 90 days of cash reserves to pay bills as an emergency fund.
"The first thing is to build the cushion," he said before recommending people pay credit cards with savings reserves. Money can be set aside automatically from each paycheck into a separate savings account.
Taylor said a lot of people look at paying off the credit card with the lowest payment instead of the highest interest. Consolidating debt can work if people are disciplined not to repeat the pattern of charging, Taylor said.
And no matter what, Taylor said people need to make sure they keep their mortgage payments current. Falling late just one 30-day period in a year may move a borrower into the subprime or higher risk category and opportunities to refinance will be slim and expensive, Taylor said.
Credit cards with shortened pay periods of 20 to 25 days mean people just making ends meet will have an added cycle in a year they need to budget for. If they miss the grace period, interest rates climb. Taylor said another item to watch is the offer giving a consumer 10 percent off the purchase if they get a store credit card. There may be an expensive catch.
If the purchase is $480, but the credit card limit is $500 it's nearly maxed out immediately. Having one card charged nearly to the limit is a tremendous negative on a credit rating, Taylor said, noting a credit score below 720 will cost people as they are deemed a higher lending risk.
Another one to watch is the fine print on zero-interest payment for items like furniture that may say if the total isn't paid off prior to the due date, 18 percent interest is retroactive to the purchase date.
Credit card use is not all bad and there are attractive features. Taylor said it hinges on the wise use of credit not the total lack of it.
RENEE RICHARDSON may be reached at renee.richardson@brainerddispatch.com or 855-5852.
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