7 red flags of credit-debt overload

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.

Robert Anglen

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IAPDA announces Vendor Partner program for members

IAPDA today announced an innovative vendor partnership program that they know will improve the availability of products and services available to IAPDA members while helping those suppliers more efficiently serve the IAPDA membership and benefit from the relationship.

The new IAPDA Vendor Partner program is designed to:

  • increase the value that vendors to the IAPDA membership can achieve through their professional relationship with IAPDA members
  • ensure that those values reflect the support shown by vendors to IAPDA and its members
  • assist the vendor community in developing and marketing products and services that are of direct benefit to IAPDA professionals and their companies
  • help ensure clear and effective controls and ethical standards in dealings between IAPDA members and participating industry vendors

Visit IAPDA at: www.iapda.org


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Major internet portals confirm the importance of IAPDA training and certifications

Two major internet portals are featuring many articles which confirm the importance of IAPDA training and certification to both consumers and debt relief professionals.

Bills.com helps consumers struggling under the burden of debt to find the best program for their needs so they can get back on the path to financial freedom. Their award winning and much heralded “Debt Coach” tool brings transparency and empowerment directly to consumers, so that they can make the best financial decisions for their personal situation.  Bills.com also has thousands of articles and consumer guides to empower consumers to take control of their finances. They compare various debt relief alternatives, including debt consolidation, credit counseling, and debt resolution, Bills.com helps consumers find qualified debt help service providers that meet their individual needs.On the Bills.com website there are over 20 separate articles which advise consumers to work only with companies whose consultants are trained and certified by the IAPDA.

eHow.com is an online community dedicated to providing visitors the ability  to research, share, and discuss instructional solutions that help complete  day-to-day tasks and projects. They combine the experiential knowledge of  certified experts with the practical knowledge of everyday people to help discuss, plan, and complete tasks and jobs.

The eHow.com library has more than 600,000 articles and 160,000 high-quality  videos, written and produced by experts –  people who’ve figured out how to complete a variety of tasks, simple and  complex, and are willing to share their knowledge. The eHow.com website includes several articles written by experts advising those seeking a career as a debt relief professional to obtain IAPDA training and certifications.

Visit the IAPDA main website.


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Consumer sentiment at year low; fiscal debate weighs

Consumer sentiment unexpectedly deteriorated for a second straight month to its lowest in over a year in January, with many consumers citing fallout from the recent “fiscal cliff” debate in Washington, a survey released on Friday showed.

The sharp drop in sentiment over the last two months coincides with rancorous federal budget negotiations that have led to higher taxes for many Americans.

Just weeks after that deal, President Barack Obama and Republican lawmakers are expected to enter another tough round of negotiations over spending cuts, which could dent consumer confidence still further.

“The handling of the fiscal cliff talks and the realization that paychecks are going to be smaller due to the sunset of the payroll tax holiday are probably weighing on consumer attitudes at the moment,” said Thomas Simons, a money market economist at Jefferies & Co. in New York.

While most of the scheduled tax hikes and spending cuts forming the fiscal cliff were avoided when Congress struck a deal on January 1, most U.S. workers saw their take-home salary diminished by the expiry of two percentage-point cut in payroll taxes.

“With the debt ceiling yet to be tackled and more political acrimony on the way, we suspect that confidence has room to deteriorate further,” Simons said.

The Thomson Reuters/University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 71.3, down from 72.9 the month before. The index was at its lowest since December 2011. It was also below the median forecast of 75 among economists polled by Reuters.

“The most unique aspect of the early January data was that an all-time record number of consumers – 35 percent – negatively referred to the fiscal cliff negotiations,” survey director Richard Curtin said in a statement.

“Importantly, the debt ceiling debate is still upcoming and could further weaken confidence,” he said.

House Republicans have signaled they might support a short-term extension of U.S. borrowing authority when the government exhausts that capacity sometime between mid-February and early March. A failure by Congress to raise this debt ceiling could result in a market-rattling government default.

On Friday, Republican House Majority Leader Eric Cantor said the House would consider a bill next week to extend the debt limit by three months in order to force the Senate to pass a budget.

U.S. stocks remained little changed after the data. The S&P 500 .SPX hit a five-year high in the last session. But on Friday, a weak outlook from Intel (INTC.O) offset encouraging data out of China and a fourth-quarter profit at Morgan Stanley (MS.N).

So far there has been a disconnect between what consumers say and do. U.S. retail sales increased a better-than-expected 0.5 percent in December. But given the recent weakening in sentiment investors will be watching for any signs that spending is starting to slip.

“The impact on consumers will be from the hike in the social security tax. That is undoubtedly going to hit discretionary spending. So this may be a signal of things to come,” said Michael Woolfolk, a senior currency strategist at BNY Mellon in New York.

The consumer survey’s barometer of current economic conditions fell to 84.8 from 87.0 and was below a forecast of 88.0. The gauge hit its lowest since July.

The survey’s gauge of consumer expectations also slipped, hitting its lowest since November 2011 at 62.7 from 63.8, and was below an expected 65.2.

The survey’s one-year inflation expectations rose to 3.4 percent from 3.2 percent, while the survey’s five-to-10-year inflation outlook was unchanged at 2.9 percent.

Edward Krudy

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3 Tips to Kick Holiday Debt Quickly

As the first post-holiday credit card bills hit mailboxes and email inboxes nationwide, paying back holiday debt is officially a priority for consumers.

According to the American Research Group, Inc. the average American spent $854 on holiday gifts alone in 2012, up a full 32% from the previous year. That means holiday debt is a real concern for those consumers that opted to splurge last December.

With that in mind, Creditnet.com, a leading online authority for credit repair and debt management advice, came up with three ways to help shoppers kick holiday debt quickly.

“The worst thing consumers can do is to procrastinate on paying back holiday credit card bills,” Jason Bushey, Vice President of Operations at Creditnet, said. “The longer it takes to pay back holiday purchases made on a credit card, the more interest will accrue, and that’s where shoppers can run into that snowball effect of increased credit debt that we always warn against.”

To help expedite the elimination of holiday credit debt for the average shopper., Creditnet today announced three tips to kick holiday debt quickly:

1.) Consider a balance transfer

0% interest balance transfer credit cards give consumers the opportunity to move debt from an old credit card with high interest to a new, 0 interest credit card.

The best balance transfer cards apply 0% interest during the intro period to balance transfers, allowing consumers to take the credit debt accrued on one card and move it to another. This is perfect for consumers struggling with holiday debt because it can eliminate some or all interest fees, which could add up to anywhere from 11% to 30% of the total minimum payment owed each month.

Eliminating interest will allow consumers down the balance owed on a credit card directly, and helps to erase the possibility of snowballing debt; this is a primary consequence of interest fees, according to Creditnet.

Consumers with exceptional holiday credit debt should consider balance transfer cards with the longest intro periods. The Discover it™ – 18 Month Balance Transfer Card is the newest balance transfer card on the market to offer consumers 18 months to pay zero interest on purchases and balance transfers. The fee to transfer debt is 3% of the total balance transfer being made – the standard rate for credit card balance transfers.

2.) Use tax returns to pay down debt

American consumers that receive a tax return in the upcoming weeks should use that return to pay back holiday debt, says Creditnet.

According to the IRS, the average tax return in 2012 was $2,289. Unfortunately, the average credit card debt per borrower in Q3 was close to $5,000, that according to a report from the credit bureau TransUnion. So while the average tax return wouldn’t pay back the average credit debt, it could go a long way towards paying back holiday debt for the average consumer.

Creditnet.com says that the only con to this strategy is that it could take a while to actually receive a tax return; perhaps longer than initially hoped when attempting to pay back credit debt quickly. However, since consumers will have a good estimate on an expected return and the comfort of knowing a free check is eventually on the way, Creditnet encourages making paying back holiday debt a priority, then enjoying the fruits of the tax season later on.

Essentially, pay up front to alleviate holiday debt, then use a tax return later on to make up the difference in checking and savings accounts.

3.) Stop charging, start saving

Finally, Creditnet.com recommends that the average consumer take a break from charging and put a new priority on saving in the new year.

After all, adding debt surely won’t help to pay back holiday debt. In order to make a concerted effort to pay down holiday debt in 2013, credit experts like Creditnet stress the importance of paying back debt and building up savings as a priority in the post-holiday months.

Consumers are encouraged to hold off on credit card purchases for as long as it takes to pay back respective holiday debts, and Creditnet urges consumers to make credit card payments a No. 1 priority since even one credit card default can be a credit score killer.

Overall, Creditnet recommends transferring debt to a new, 0% interest credit card or using a tax return to pay back holiday debt, and to make paying back holiday debt the number one priority to maintain a high credit score in the post-holiday months.


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Americans in 20’s and 30’s have more credit card debt

American credit card holders in their late 20s and early 30s have  more debt than older consumers, repay it more slowly and risk dying in debt if  they don’t curb their spending habits, a new study showed on Monday.

Researchers that people born between 1980 and 1984 have on average  $5,689 more debt than their parents had at the same stage of their lives, and  $8,156 more than their grandparents.

“If what we found continues to hold  true, we may have more elderly people with substantial financial problems in the  future,” said Lucia Dunn, a co-author of the study and a professor of economics  at Ohio State University.

“Our projections are that the typical credit  card holder among younger Americans who keep a balance will die still owning  money on their cards,” she added in a statement.

Dunn, and Sarah Jiany,  of Capital One Financial in McLean, Va., and a co-author of the study,  analyzed two large monthly surveys which included data on borrowing and  repayment, enabling them to estimate when Americans will be able to repay their  credit cards.

The findings were published in the journal Economic  Inquiry.

“We have data on how they pay off credit cards as well, which  gives us a more complete picture of their debt situation,” Dunn said. “This  allows us to estimate more precisely when Americans will be able to pay off  their credit card debts.”

Working with data from 1997 to 2009, the  researchers studied how 32,542 people aged 18 to 85 accumulated and repaid their  credit card bills. They compared 15 five-year-period birth groups, such as  people born from 1915 to 1919, the oldest group. People born between 1985 to  1989 were the youngest studied.

The researchers also compared people in  different age groups but with similar educations, incomes and marital status,  and estimated that the payoff rate of younger credit card holders was 24  percentage points lower than their parents, and 77 points lower than their  grandparents’ rates.

“Credit is more readily available now, and there  have been changes in interest rates and less stigma attached to having credit  card debt, which may all make younger people today more willing to go into  debt,” Dunn explained.

The study also showed that credit card holders  react to higher minimum payments by paying more than they have to.

But  Dunn said the results were a cautionary tale.

“If our findings persist,  we may be faced with a financial crisis among elderly people who can’t pay off  their credit cards.”

Patricia Reaney

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Minnesota looks to toughen laws for pugnacious bill collectors

A proposed law would make debt collectors show evidence they’re going after the right person.

Minnesota is stepping up efforts to combat overly aggressive debt collectors, with new rules that aim to prevent firms from going after money a person doesn’t actually owe.

Collectors would need to show evidence they’re pursuing the right person for the correct bill under bipartisan legislation introduced Monday that would make it harder to get a court order requiring a debtor to pay up.

Minnesota Attorney General Lori Swanson said at a Capitol news conference that it’s only fair that collections companies using the courts should have to file some proof that they have the basic facts in order.

“The law hasn’t really kept up with the nature of the industry,” Swanson said in an interview.

Minnesota is among a growing number of states that, either through new laws or other measures, are cracking down on collection abuses. Problems in the industry were the focus of a yearlong Star Tribune investigation in 2010.

The business has boomed in the wake of the Great Recession, with debt buyers and sellers dealing in electronic portfolios of consumers’ past-due bills that can be purchased for pennies on the dollar. But the Federal Trade Commission in 2010 concluded that the collection system is “broken.”

Swanson said debt portfolios that buyers purchase can be flimsy and unreliable, noting that the companies selling the data often won’t vouch for its accuracy or completeness, and include such disclaimers in their contracts with buyers.

Default judgments, or court orders for debtors to pay, are frequently issued because people don’t show up in court, sometimes not realizing they’ve been sued or thinking the notification is a prank.

When mistakes occur, consumers often must go to court and prove it. Their money already taken, they typically cannot afford an attorney and must navigate the court system alone. Cases get bogged down while checks bounce and bills go unpaid.

Ron Elwood, supervising attorney at the St. Paul-based Legal Services Advocacy Project, which represents the interests of low-income Minnesotans, called the legislation “incredibly important.”

“Many, many people don’t even know they’re defendants in these cases … until their wages get garnished,” he said. “The burden has been shifted to the defendant, which is wrong.”

Swanson was joined at the news conference by House Judiciary Chair Debra Hilstrom, DFL-Brooklyn Park, Senate Judiciary Chair Ron Latz, DFL-St. Louis Park, and state Rep. Jim Abeler, R-Anoka, all co-authors of the bill.

A number of victims shared stories of being unfairly harassed by collectors.

Scrutiny of the industry has increased on several fronts. As of Jan. 2, any company with more than $10 million in annual receipts from consumer debt collection is under the supervision of the Consumer Financial Protection Bureau, the government watchdog. That covers about 175 debt collectors, the agency said.

Last month Midland Funding LLC, one of the country’s largest debt buyers, agreed to overhaul its practices and pay $500,000 to Minnesota to settle a lawsuit Swanson filed over robo-signing paperwork in collections lawsuits that frequently targeted the wrong person.

Tom Gavinski, president of the Minnesota Association of Collectors, which represents about 80 companies in the state, said his group has spoken with the authors of the proposed legislation and is combing through the language.

“There may be a few things in there we want to clarify, but on the surface it looks like something that we would certainly work with the authors [on],” he said.

Gavinski said that raising the standard of proof in court may be more cumbersome and slow down collections, “but it’s probably the right thing to do.”

He said that in his opinion, debt buyers, and not collections companies that get their work directly from the companies originally owed the money, are to blame for many of the worst abuses in the industry. Most of his organization’s members are not debt buyers, he said.

Jennifer Bjorhus

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Tighter regulations coming for debt settlement firms

Consumer debtThe Ontario government is proposing new measures aimed at better regulating  debt settlement companies.

The draft rules would ban debt settlement firms from charging up-front fees  and limit the amount of fees consumers are charged.

Debt settlement companies would be required to offer clear, transparent  contracts and implement a 10-day cooling-off period.

The proposed regulations — which have been posted for public comment — are  similar to ones introduced in other provinces such as Alberta, Manitoba and Nova  Scotia.

More than 20 debt settlement companies currently operate in Ontario.

The governing Liberals say the Ontario Association of Credit Counselling  Services receives over 100 complaints about debt settlement companies a  month.

“There is evidence of harmful practices used by some debt settlement  companies and that is why our government is taking steps to protect consumers,”  Consumer Services Minister Margarett Best said in a statement Friday.

“Consumers should know their rights before they sign contracts and they  should not make any payments until they get results.”

The Canadian Press

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Times Are Tough for Many Consumers

The collapsed housing bubble, high unemployment and the high cost of health care have left consumers with not enough money to go around.  More debt collectors than ever are trying to collect on past due debts.  One gets a mental image of the carcass of a gazelle on the plains of Africa, with vultures fussing and scrambling to get their bite of that carcass before it is completely consumed by the other vultures.

In these modern times, it is not so much that consumers cannot pay any of their debts but that they cannot pay all of their debts.  Thus, debt collectors are pitted against each other; each wanting to collect their debt ahead of the others.  With the mentality of a vulture, the competitive debt collector looks constantly for ways to increase his share of what funds the consumer has.  Consequently, there is a disincentive for a debt collector to work within the budgetary limits of a consumer because he knows he is only ceding territory to his competitors. The result is an environment where basic rules of conduct are ignored, where corners are cut, illegal late-night phone calls, arrest threats and other abuse, where more aggressive behavior results in a “larger bite of the carcass.”

This coming year about 10 millions lawsuits will be filed to collect old debt — mostly credit card debt — and almost universally the person sued will have been someone who fell behind because something tragic happened in their life.  They may have lost their job when the company shut down to find lower wage workers in China.  Someone in the family may have gotten sick and there was inadequate health insurance or perhaps none at all.

This is just not fair.  I remember as a child my grandfather telling me that “fair is a place where you take a pig to win a prize.”  I know that he was trying to tell me that life is not fair.  He’s right.  It isn’t.  But, sometimes there is something we can do to level the playing field just a little.

Last month I met with Brian Deese, the Deputy Director of the White House National Economic Council, to discuss the impact of a moratorium, and recently, I meet with political leadership and made a presentation to former Minnesota Gov. Tim Pawlenty, the newly named CEO of the Financial Services Roundtable, about a moratorium and the need for reform in the debt buyer industry.

A moratorium should be enacted because what is the point in suing someone for not paying a bill that they can’t pay anyway?  What is to be gained by driving someone’s credit score so low that it kills their ability to get a decent job?  Where is the honor in a wage garnishment by a debt collector that means your family goes hungry or you can’t put gas in the car to get to work?

Those are the reasons I suggest putting a freeze on those debt collector lawsuits until unemployment falls to some more reasonable level — 6 percent. That would give millions of Americans the breathing space to get back to work — and then they can catch up on all those old past due debts.

There are many debt collectors who believe consumers “get what they deserve” when they are sued over an unpaid credit card debt.  I concede that a few may have been irresponsible — but most consumers just had bad luck and got caught up in economic events outside their control.  A temporary moratorium is not a free ride for anyone.  The consumer will still owe the debt and will face his responsibility.  But, it will happen in a time when overall economic conditions are much better than they are today.

The elimination of a lawsuit against a struggling family can make a difference between a lifetime of debt and the accumulation of real wealth in the form of a home and savings.

 Bill Bartmann

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Consumer Debt Rises on Cars and Education

American consumers borrowed more in November to buy cars and attend school, but they stayed cautious about using their credit cards.

The Federal Reserve said Tuesday that consumers increased their borrowing in November by $16 billion from October to a seasonally adjusted record of $2.77 trillion.

Borrowing that covers autos and student loans increased $15.2 billion. A category that measures credit card debt rose just $817 million.

The sharp difference in the borrowing gains illustrates a broader trend that began after the recession. Four years ago, Americans carried $1.03 trillion in credit card debt, a high. In November, that figure was 16.5 percent lower.

At the same time, student loan debt has increased significantly. The category that includes auto and student loans is 22.8 percent higher than in July 2008. Many Americans who have lost jobs have gone back to school to get training for new careers.

The November increase also reflected further gains in auto sales, which rose 13.4 percent in 2012 to top 14 million units for the first time in five years. The need to replace vehicles lost to Hurricane Sandy may have helped.

New York Times

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