Credit-card debt. It’s easy to get into and hard to get out.
Think of that scene in “Godfather III” when Al Pacino says, “Just when I thought I was out … they pull me back in.” He might as well have been staring down at a stack of credit-card statements.
According to Credit.com’s Charles Phelan, U.S. consumers owe more than $850 billion in credit-card debt.
Phelan, who is a debt-management specialist, wrote in a recent article that credit cards are the “third-largest component of household indebtedness, behind only mortgages and student-loan debt.”
He points to seven warning signs that credit debt could be taking over a consumer’s life.
Maxed out or lowered limits.
Credit-card companies can lower your credit limit even if you have been paying your minimum obligations. Phelan said as debt balances increase, you could tip the scales on the “optimum credit utilization ratio,” which could affect your credit score.
When your credit score is lowered, banks will lower your available balances until you are maxed out on your credit limit, further lowering your score.
20 percent interest rates.
Interest rates might be at at an all-time low, but some credit-card companies charge non-default annual percentage rates of 20 percent or more.
Phelan uses the example of a consumer with $30,000 in credit debt. He said that a consumer would have to pay $750 a month to pay off the debt in 67 months. But most simply pay the minimum amount due, in which case, it would take 44.5 years to pay it off.
Default around the corner.
If it is a struggle each month to pay minimum balances, disaster could strike with an increase in interest rates, which credit-card companies can implement with a 60-day notice. If interest rates climb, so too does the minimum amount due.
“All of this can happen without a single defaulted payment taking place,” Phelan said. “But the new increased minimums are sometimes enough to cause people to default.”
Default rates triggered.
Any unexpected expense at a time when you have no reserves can cause you to skip credit-card payments. Suddenly, you find yourself skipping another credit-card payment to pay the first.
Phelan said those skipped payments will trigger default interest rates of 29 percent on some credit cards. Now, making the $750 monthly payments, it will take about 12 years to pay off $30,000 of debt. The total you will end up paying is $76,838, which is an additional $56,987.
Credit-card payments exceed 15 percent.
“Credit-card debt payments should never exceed 15 percent of your gross monthly income before taxes and ideally should be well under 10 percent,” Phelan said in the article.
He said consumers making $5,000 a month before taxes with $50,000 in credit-card debt might have minimum monthly payments of $1,250. That is 25 percent of your income.
“That leaves you $3,750 per month for taxes, mortgage or rent, car payment, utilities, telephone, food, insurance and other household expenses,” Phelan said. “For most consumers, this would not be a sustainable situation.”
Failure to fund retirement.
Faced with mounting credit-card debt, many consumers will stop funding retirement accounts without thinking of the long-term consequences.
Phelan said consumers could lose more than a quarter-million dollars in potential retirement funds in an effort to pay off that $30,000 in credit-card debt. If you put $750 monthly into a retirement fund for five years, then left it alone for 20 years, it would yield $273,000, based on an 8 percent return. Phelan said 8 percent is less thanhistorical stock-market yields over several decades.
“The long-term cost of carrying ‘only’ $30,000 of debt is simply staggering when you analyze the true impact,” he said.
Stress and anxiety.
Phelan said the emotional factor of debt cannot be underestimated.
“If you’re losing sleep at night worrying about how to cover all your bills, or you are experiencing bouts of anxiety or panic, then your physical health is involved and you need to take action,” he said.
He said stress increases blood pressure and risk of stroke or heart attack. It also reduces your ability to fight infections.
“Your excessive credit-card debt may not only cost you a comfortable retirement in terms of financial resources. It may also actually shorten your life span,” he said.
Phelan said consumers should not delay dealing with credit-card debt. Options include credit-counseling, consolidation plans, debt settlement and, in some cases, bankruptcy. He advises consumers to contact reputable, non-profit credit-counseling agencies.
Nobody wants to end up like Al Pacino’s character Michael Corleone who, when the credits roll on the final installment of the “Godfather” saga, is completely broken.