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Credit Card Applications » News » Other » The Ups and Downs of Credit Card Use

The Ups and Downs of Credit Card Use

December 13, 2009
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Under the agreement between consumers and credit card companies, account holders are required to make a minimum monthly payment, which is 2%, or $10 at 10 percent interest. If these low and middle class consumers owe approximately $9,827 on their cards, it will take them more than twenty-six years to pay off their balance, including about $6,812 in interest payments.

If the rate was raised higher or tied to the prime rate, which is currently 3.25%, it could take consumers more than a lifetime to pay off their financial obligations.

The US Congress adopted the Credit CARD Act in May 2009 to protect consumers from surging interest rates. This Act requires banks to give account owners at least forty-five days before increasing their fees. Starting February next year, these financial institutions cannot raise fees on existing balances anymore -- unless a card holder is in default.

However, early this month, House Financial Services Committee Chair Barney Frank accused some banks of abusing this "grace period" before the law's effective date.

For one, Wells Fargo recently announced a rate hike on existing balances by up to 3%. Other banks like the Bank of America and JPMorgan Chase are also believed to have raised their rates on some accounts. In June, BofA and Chase switched many card holders from fixed to variable-rate holders. They will not be protected by the Credit CARD act anymore, because fee changes are permitted as the prime rate fluctuates.

Those who rely on their credit cards during their economic downturn are most likely to be affected by higher borrowing rates. Demos, a research and advocacy organization states that most low and middle-income consumers with high debt-stress levels use their cards to cover unavoidable expenses.

Account holders have responded to the fee hikes by reducing their debts. Credit-card borrowing has, in fact, declined last July. For some card users, however, reducing their liabilities during these times is not an option.

Credit availability changes have made it difficult for card holders to protect themselves from fee increases. If in the past, account owners could express their demands by threatening to switch their card providers, today; this option is limited since banks now have stringent approval standards.

With the unpredictable hikes, banks are also putting their business at risk. The more card holders are subjected to increases, the more they are likely to default on debts. Credit card companies will find it difficult to cope with these losses since these consumers are already stretched to their limits.

Bank of America recently promised to stop rate increases before the credit card law takes effect, in response to Rep. Frank's proposal to move up the effective date of the law.

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