|CREDIT CARDS: |
BLESSING OR CURSE?
May 30, 1997
Your questions were answered by Independent financial advisor, Dave Ramsey, and by the American Bankers Association.
Should we pay off our debt or declare bankruptcy? How can bad credit be repaired? Should I take out a loan to pay off my credit cards? At what age should parents allow children to have credit cards? Should there be more restrictions on who can get a credit card? How do banks assess who can get credit, and who monitors the banks?
American Bankers Association
Financial advisor Dave Ramsey Victims of Credit Reporting, a non-profit group, has a list of interesting credit related links.
Nerdworld has a library of credit/debt management links.
The convenience and ease of credit cards. How did we ever live without them? Every month there's a handy record of purchases - lost receipts are no longer a burden, and with some cards, we get built-in consumer protection such as damage insurance, and cash back for certain purchases.
But how about paying them off?
Some of us are better than others. Economics correspondent Paul Solman reported last year that consumer debt -- debt that includes credit card charges and auto loans (but not home mortgages)-- rose to 1.4 trillion dollars nationwide. Not much has changed in 1997. The annual rate of consumer debt continues growing twice as fast as wages, and is now roughly 20 percent of annual income. In addition, there were more than 1 million personal bankruptcies in 1996, and 1997 doesn't look better.
Credit extended to those on a fixed income, especially students and seniors, can be particularly problematic.
So, are those handy bits of plastic a blessing or a curse? It depends upon who you talk to.
For those who are able to keep pace with their payments, credit cards are a safe alternative to carrying around lots of cash, especially when big purchases are made. They are also safer than checks in many cases, because if within 30-60 days a purchase has gone awry, credit card companies will investigate the charge and stop payment until a dispute is settled. If a check has already cleared the bank, you're usually out of luck if the vendor where you purchased is unscrupulous.
Also, if a credit card is stolen, usually the holder pays little to nothing on purchases not made by him or her. If a check is forged, the process of recovery is significantly more costly and time consuming.
Nashville, Tennessee financial counselor and radio talk show host Dave Ramsey says credit card use is "a culturalized disease." He believes many Americans will never pay off their credit card debts because of the high interest rates and because "when you use plastic instead of cash, you spend more because you don't register the pain emotionally."
So, who is right? Should we throw away our cards as Ramsey suggests, or can we all learn to use them responsibly?
A question from Karen Crosby,
Ever since my husband and I graduated college seven years ago we have been trying to pay off our credit cards (that, at the time, companies were throwing at us). We are nearly done but this has also left us with a huge chunk of student loans to pay off. As a result we have bad credit and still more debt. Would it have been wiser to file bankruptcy or did we do the right thing? We have one friend who filed bankruptcy and this didn't seem to affect his credit as badly as our late payments.
Financial Advisor Dave Ramsey responds :
No, Karen. You did the right thing. Many times if we are in a bad marriage and we have a fight with our spouse we look at our divorced friends and think, don't they have it made. In reality there is another set of scars and another story that we do not understand, such is the case with your friend who filed bankruptcy and apparently "has it better." They do not have it better. Bankruptcy is not a fun process, and no, your credit is not worse than his after you have paid your bills late over a period of several years. I know you have struggled through this, but not only have you done the right thing to repay your debt, but you have also grown in character and stature as you have done it. Keep up the hard work.
The American Bankers Association responds :
First, and foremost, you should be commended for doing the honorable thing. You signed documents that promised you would repay your debts and you are doing that. Congratulations.
Bankruptcy wouldn't have been the best answer for you. 1. Students loans are not discharged under bankruptcy. So, you would still be responsible for those payments. 2. Bankruptcy stays on your record for at least seven years. That means you would have had trouble getting a mortgage or other type of loan without a cosigner or collateral.
You may want to look into a consolidation loan to help you manage the number of bills you're paying. The rate on a consolidation loan may be less that the rates on some of your current cards and you'll get one bill each month rather than several.
Ask each of the credit bureaus to attach an explanatory letter to your credit report. That way you can explain your reasons for late payments or other problems and emphasize the fact that you didn't file for bankruptcy.
Here are the toll-free numbers for the three major credit bureaus: Experian 800-682-7654, TransUnion 800-851-2674, Equifax 800-685-1111.
You are to be commended, not for getting into trouble, but for working your way out of it.
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