Guest column/Be wary when you use your credit cards
Using credit cards for holiday spending is neither good nor bad. Buying with credit cards can enable you to take advantage of sales and manage your cash. The danger is that it is very easy to overextend yourself and get into more debt than you can afford to repay. Learning how credit card repayment works will help you avoid paying for this year’s holiday when the next holiday season rolls around.
Advantages, disadvantages of credit cards
The first and most obvious advantage of using a credit card is that it allows you to purchase goods and services without having to pay for them immediately. That feature also may allow you to take advantage of sale prices that may not be available later. Most credit cards allow a grace period within which you may pay for goods and services purchased on a card without paying any interest charges. This feature allows you to defer payment for your purchases and keep your funds in your savings account for an additional 30 days or more. For example, if you take advantage of a 90-days-same-as-cash offer, you can earn interest on money that otherwise would have gone to purchase goods and services. In this way, purchases in December can be paid in January without costing any interest.
The disadvantage of using a credit card is if you do not pay off your credit card balance in full within the grace period, you are charged interest from the purchase date until the day you pay off your balance. Each time you use a credit card, you are getting a loan. Credit card issuers earn interest on the money they loan you when you do not pay off the entire balance of your credit cards each month. The rate of interest charged by credit card issuers varies, but it is usually much higher than other types of loans like car and home loans. If you make only the minimum payment on your outstanding balances, you will pay the maximum in interest while not greatly reducing the principal (purchase price) amount of your debt.
Interest charges could easily be greater than any sales price you obtained. Also, some credit cards require you to pay the balance to $0, and not just pay the amount shown as due on your bill, to stop interest charges for all future purchases. So, once you begin paying interest on a credit card, even if you pay the full amount on the due date of your card, you will be charged interest forever.
If you can’t pay…
If you have charged beyond your ability to pay, the credit card issuer will take action to collect the debt. The action might be limited to reporting the debt to credit bureaus, increasing your interest rate to an even higher penalty rate, or it may involve legal action. If you have incurred debt that you cannot repay, you must realize that you cannot simply ignore the problem.
Most credit card issuers offer an option to make a “minimum monthly payment” on credit card purchases. As long as you make the minimum monthly payment on time, and you have not exceeded your credit limit, the issuer cannot take legal action to collect the amount due.
In addition to the actions a credit card issuer may take listed above, if you are unable to pay your credit card debt, you could lose the goods you purchased. If you purchase goods with a store credit card (jewelry, electronics or hardware stores) and you default on your payments, the credit card issuer could repossess what you purchased.
As a consumer, you have certain rights to access your credit record as well as dispute any information you may feel is incorrect. Make sure you are informed of these rights as you figure out how to pay off credit card debt.
There are consumer protections in place to safeguard you when you use a credit card. These protections are enforced by many federal laws, regulations and agencies. For example, your credit card issuer cannot penalize you for going over your credit limit if they allow you to do so, unless you explicitly agree to it. To learn more about how you are protected when you use a credit card, check out:
¯ The Federal Deposit Insurance Corp. website.
¯ The Consumer Financial Protection Bureau website.
¯ This article on Ohio’s credit laws
How an attorney can help
If you cannot make the minimum monthly payment on your credit cards, or you have made late payments or have exceeded your credit limit, your options are limited. A good first step is to contact creditors directly to try to work out a payment plan. Another alternative if you have multiple credit cards is to seek help from a credit counseling service. A credit counseling service will try to help you devise a plan to pay off the debt and to budget your resources, typically for a small fee.
If consumer credit counseling cannot solve the problem, then it may be time to consult an attorney to determine whether or not bankruptcy is an appropriate solution. You should not take this option lightly. Many attorneys will conduct an initial consultation with you for no charge to determine whether or not you are a candidate for bankruptcy.
(DeGirolamo is a solo practitioner in Canton who represents individuals and businesses in bankruptcy and debt restructuring. This column was written for the Law You Can Use series presented by the Ohio State Bar Association.)