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Ever Faster Ways to Get into Debt

There's an easy solution for anyone who wants a guaranteed road straight to pauperdom: keep building up credit card debt.

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There's an easy solution for anyone who wants a guaranteed road straight to pauperdom: keep building up credit card debt. Whether you get sucked in by low introductory rates that magically jump up to 21 percent after six months, or, like most Americans, you simply live and die by plastic, you can pretty much count on credit cards for one thing: to help keep your debt growing. Kind of like trying to shovel your way out of a hole while a dump truck keeps inundating you with more.

Americans typically charge over $1.5 trillion on their cards every year. Which means that billions in finance charges are being paid annually by mostly not-so-rich working Americans that get suckered into the myth that if you they can't actually see the cash flying out of their bank accounts, then maybe it's not. No wonder the average American family carries a credit card balance of $7,000 (spread out on 14.7 different cards!) and pays $1,000 annually in interest alone, according to a recent study by Ram Research. Data from the Federal Reserve tells us why: because approximately 40 percent of Americans spend more than they earn. The temptation is always there, as the average citizen receives over seven credit card solicitations a year, regardless of credit history.

Which brings us to some recent developments almost sure to lure millions farther down the road to insurmountable debt: Americans can now simply wish away state taxes by charging them to a major credit card. And many are grateful for this privilege, thinking how great it is that they can now pay their taxes in full without having to live on peanut butter and crackers for the next three months. However, in two years, when these same people are paying off the interest on their 2001 taxes, we imagine that their gratitude might lessen considerably. After all, the average credit card purchase ends up costing 112 percent more than it would have if paid for in cash.

And make no mistake: the credit card companies just love this. Having consumers put large ticket items--like taxes!--on their charge cards only means even more billions in finance charges. More for them, less for you. Those who already feel they're getting screwed by Uncle Sam can be sure that by charging their taxes they're only making Uncle Sam wait in line behind their credit card companies.

As if you're not paying enough for taxes already. Consider the following example of Joe Schmo, an aspiring artist: Joe doesn't work a steady job, and therefore, instead of having taxes taken out by his employer, he's got a big chunk to pay at the end of the year, $1500, let's say. Joe hears about this great new law that will allow him to defer this debt by simply charging it on his Visa. He does so happily. However, Joe was already carrying $5,000 on his Visa, and despite making minimum monthly payments of $75, was racking up about $75 a month in finance charges with only 5 cents going towards principal, since his card has an APR of 18 percent. Now Joe's credit card debt is up to $6500, and he's going to be paying $97.50 a month in finance charges and a measly 7 cents in principal reduction. It will take Joe 4.63 years, assuming that Joe is making a payment of $40/month, to pay off his tax debt. Instead of paying just $1500 for taxes, Joe will have spent $2240.

That's 33% more in taxes than Joe would have paid if he'd bitten the bullet and written a check straight to the government when his taxes came due! Of course, this isn't always easy, and for many people it may mean adjusting their lifestyle for a little while, it beats having to pay far more than you should have.

For some people, though, overpaying in taxes still isn't enough. Nearly a million tenants can now use their cards to pay their rent, thanks to an arrangement between Visa and the biggest U.S. property manager, Chicago-based Apartment Investment and Management Co. Visa likes calling the solution a "convenience" for tenants and landlords. And many other property managers are considering this option as well.

This doesn't end with taxes and rent, though. Credit card companies are trying to earn more by encouraging consumers to use cards for recurring transactions, such as paying utility bills, car payments and now rent. According to a MasterCard survey, one out of three consumers in 2000 used credit cards to make at least one recurring monthly payment--typically for a health club membership, Internet service or newspaper subscription. Keeping in mind that glaring 112 percent that we mentioned, this could get out of hand fast for a lot of people.

The fact is that credit cards are not a solution. If you can't afford something, paying for it with a card will only mean more headaches down the line. Take a few simple steps now to reduce your credit card debt and prevent it from getting out of hand in the future:

Establish a working budget. Boring? Maybe. But absolutely necessary. Start by keeping track of how much is coming in and how much is going out. See where the money pits are, and figure out what you should be spending. To get help with creating a working budget, use The Pauper's Income and Expenses Budget Calculator.
Don't even bother with all those pre-approved applications. Shred them, recycle them, but don't open more cards in an effort to spread the debt around.
Cut extraneous cards. Do you really need a separate credit card for every store you shop in? By juggling lots of bills, you're sure to lose track. Instead, limit yourself to two cards. Cut the rest.
Negotiate a lower interest rate. Your credit card company wants to keep you. You'd be surprised how many are willing to give you a better deal if you ask.
Make more than minimum. Payments, that is. The faster you pay off your credit card bills, the less you'll be paying in the long run.

As a general rule of thumb, don't sell off investments or dip into retirement accounts to pay off credit card debt. Instead, try to maintain investments while reducing spending and improving saving habits. And remember: unless you're the kind of person who pays your cards off in full every month: remember not to mix plastic with taxes and rent.

by Allison Solin

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