How Your Small Credit Card Balance Got Huge
One of the most common complaints I receive from consumers is the doubling and tripling of their credit card balances. People get extremely angry and frustrated, for example, when their $1,000 limit credit card turned into a $4,000 debt. Is this legal? The answer in most cases is: "yes, it's legal."
Jacking Up Your BalanceYour credit card balance is basically governed by two things: 1) the contract terms and conditions contained in your credit card agreement; and 2) the law in your State. Jacking up your balance is an art, and credit card companies are experts at increasing your balance and then collecting it.
Credit Card Terms and ConditionsWhen you obtain a credit card, you agree to the one-sided terms and conditions created by the bank. Make no mistake, you are entering a binding contract. If you break the rules, you will pay dearly. Banks and retailers are primarily in business to make profit. Nickel and diming consumers with fees and interest is the overwhelming source of bank profits. Among the menu of fees and costs you may be subject to include:
o Balance Transfer Fee (often a % of the amount transferred)
o Annual Fee (usually between $50 and $100 but could be waived or as high as $500)
o Finance Charge (the interest that accrues if you carry a balance - the average APR in 2017 was 16.15%
o Cash Advance Fee (usually a flat fee or a % of the amount of the cash advance)
o Foreign Transactions (usually a % of each transaction in U.S. dollars)
o Late Payment Fee (usually a flat fee based on your credit card balance)
o Return Check Fee (usually $25 for the first ISF and $35)
o Over-the-Credit-Limit Fee (banks have generally decided to scrap this fee, in exchange for punishing you in other ways such as decreasing your credit limit, raising your interest rate or canceling our rewards).
Notably, not all credit cards include all of these fees. For example, you may be able to find a credit card with no annual fee or no foreign transaction fee. The better your credit score and repayment history, the more likely you won't be saddled with some of these fees.
The most important and abusive fee on the list is the finance charge. But this is avoidable if you simply don't carry a balance. If you pay your monthly bill in-full, every month, there will be no finance charge, no interest.
Conversely if just make the minimum payment, (the average American carries $5,700 in credit card debt as of 2017), you open the door for a mind-numbing escalation of your balance. The machinery of compound interest and other fees and charges will paralyze your spirit and potentially push you to a financial position from which there is no reasonable recovery. The interest builds on itself every month thereafter, and if you miss a payment, that's when the other fees and penalties kick in. Your interest rate may skyrocket and late fees may also pile up.
Life After DefaultAfter the unconscionable fees and interest skyrocket, it is difficult to keep up with the escalating monthly payment. That's when many Americans are forced to stop making the monthly credit card payment. Whether you lost a job, had medical bills piling up, or another financial hardship, there will be little understanding or relief from your creditor.
After 6 months of not making payments, most creditors will "charge off" your account, noting it as a loss to the I.R.S. for tax purposes. But for you, the charge off and closure of your credit card account is just the beginning of the free fall. If you ignore the debt or are unable to resolve it, massive accumulation sets in.
Debt Collection and Junk Debt BuyersJust because your account is closed and charged off, doesn't mean the fees won't accumulate. Over the next months and years your credit card debt will be collected by debt collectors or junk debt buyers. Your credit card debt will be assigned or sold, (sometimes more than once), to debt collectors who will make phone calls, send texts, and/or send letters attempting to get you to pay. Generally, (subject to the FDCPA and other laws), debt collectors ARE permitted to add additional interest and fees to the balance relating to their collection attempts. The amount of interest charged goes all the way back to the original credit card agreement and is permitted by law.
Post-Judgment CollectionIf the creditor obtains a judgment against you in court, they are now permitted to take court-sanctioned collection action including wage garnishment, tax garnishment, bank account or other asset garnishment, property liens, or even seizure of personal property. The type of collection actions that are permitted depends on your State law. But yet again, the post-judgment collection efforts may lead to more fees on top of all the others previously discussed. This includes garnishment fees, lien fees and other fees relating to the collection efforts.
ConclusionCredit card debt multiples over time and this multiplication is generally permitted and fully legal.
With few exceptions, the only way to stop credit card debt from snowballing is to make payment arrangements early, before default. If you find yourself with an unbelievable credit card balance, you must always question the rights of debt collectors and demand an itemization of your balance. But you should also understand the reality of compound interest and the other forces that cause the debt to get out of control.