We examined the allure and danger of credit card debt and found it was almost as difficult to avoid advertisements of companies claiming to be able to get consumers out of credit card debt, as it was to avoid advertisements for the credit cards themselves. Credit card spending is hailed as a hero of our economic growth and the debt loads resulting from credit card use is sited as the greatest danger our society faces. Although credit cards are almost unavoidable as a payment instrument, the U.S. Consumer revolving credit debt load tops 1.3 trillion dollars.
Credit cards are offered without strict underwriting guidelines. In most cases, only the credit score is used to determine eligibility. Because of this streamlined approval process, credit card banks are unaware of how much credit a consumer has available and can extend credit beyond what is reasonable for a particular consumer (unless the amount of new credit triggers a low credit score). The unwary consumer can charge tens of thousands of dollars in goods and services in a short time-frame.
The consumer using credit cards regularly is a very attractive customer to the credit card banks. As credit card usage continues, credit card account limits are raised and new credit cards are offered and approved. Statistics show consumers using credit cards for purchases are likely to spend more than if they were using cash. The 2% minimum monthly payment is easily managed for a while and more and more credit is offered either by raised spending limits or additional credit card accounts. Eventually the minimum monthly payment reaches the maximum amount the consumer has available each month and no additional money is sent to reduce the balances. If the credit limits are reached, the credit score declines and credit card banks will stop raising the credit limit, and no new credit cards from other credit card banks will be approved.
Making the minimum monthly payment required by most credit cards would require a consumer to make monthly payments for over 30 years and, ultimately, pay 3-4 times the original balance. In cases where the interest rate is higher than 24%, it is possible for the balances to increase and the debt, theoretically, can never be paid off using minimum monthly payments. Because so little is applied to the balance, many consumers believe they are being cheated, they feel powerless and seek alternatives as month after month, and year after year, the balances remain the same.
