Credit Card Customers Face Debt Trap

[Sep 13, 2007.]

A New York think tank has determined that many credit card customers are trapped in what is being described as a "dangerous cycle of debt." As a result, their financial security has been seriously compromised.

Approximately 1/3 of credit cardholders pay interest of more than 20%, according to a study released by the think thank known as Demos. A customer who makes even one late payment can end up facing a "cascade" of charges that are difficult to overcome.

One of the study's authors, Tamara Draut, was quoted as saying, "The excuse of risk-based pricing is used to justify everything. These prices go far beyond pricing for risk. Some of these interest rates and payment fees seem to not accurately reflect the risk."

Demos has called into question such procedures as retroactive rate increases, which can create a double-whammy for consumers. In fact, there may be few limits to the amount of fees that credit card customers can be charged, meaning that consumers are at a distinct disadvantage.

The authors of the study noted, "As a result, cardholders often borrow money under one set of conditions and end up paying it back under a different set of conditions."

Interestingly enough, consumers with the lowest household incomes are likely to pay high interest rates. The situation has led to calls for legislation that would put the brakes on penalty interest rate hikes. Typically, cardholders who have a balance on their credit accounts owe in excess of $13,000—a sizeable sum, by any calculation. Single females, African-Americans, and Latinos are the demographic groups most likely to shoulder the burden of significant credit card costs.

If you find yourself carrying more credit card debt than you can handle, experts recommend talking directly with the credit card issuer and seeing if you can negotiate a lower interest rate.

Julie Ann Amos

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