Story last updated at 3/25/2009 - 10:58 am
Editor's note: This article is a revision of an article written in January, 2009 by T. Gedon of the Oklahoma State University Extension.
Many credit card users across the state cringe when they open their credit card statements because there is always the chance their interest rate has gone up.
Despite making payments on time, many consumers have seen their interest rates increase. Fortunately, new regulations announced recently by the Federal Reserve will provide some relief to consumers who carry a balance, according to Eileen St. Pierre, Oklahoma State University Cooperative Extension personal finance specialist.
"When consumers get into credit card debt and credit card companies raise interest rates, these companies make it harder for consumers to pay off the debt," St. Pierre said. "The new regulations announced by the Federal Reserve do not go into effect until July 2010, but they will have a positive impact on consumers."
Currently credit card companies can raise interest rates with little notice and for reasons that are not directly related to the consumer. In addition, the new, higher rate is applied to the already existing debt. Under the new regulations credit card companies can still raise rates, but the new, higher rate would apply only to new charges on the account.
Some consumers have different interest rates on different portions of their credit card balances. For instance, the interest rate on purchases may be 9.9 percent, but a cash advance carries an interest rate of 19.9 percent. In the past, credit card companies have been allowed to apply a consumer's payment only to the lower interest rate debt (in this case the 9.9 percent). This prolongs the amount of time it will take a consumer to pay off the debt at the higher rate.
"While these new regulations will save consumers some money, it's important for them to realize how they got into credit card debt in the first place," St. Pierre said. "They need to start making changes in their financial behavior so they do not rely so heavily on credit in order to make it from paycheck to paycheck."
As many consumers know, it can be very easy to get into credit card debt, especially for those who have more than two or three credit cards. Many consumers accumulate debt due to a job loss, a major hospital stay, a divorce or some other stressful event. Others simply live beyond their means. Figuring out why you have debt is the first step in getting it under control.
It is important for consumers to make a budget and stick to it. Along with a budget, establish a savings account and pay yourself first. Determine a set amount or a percentage of your pay to deposit into the account each month and treat that deposit like a bill. You can decide to deposit the money every paycheck or monthly. Consider setting up automatic withdrawals from your paycheck to make saving easier. However you decide to save, make that payment to yourself, along with all other financial obligations, before splurging on something that is not in the budget.
St. Pierre cautions staying away from department store cards. "They typically have a higher interest rate and hidden fees. In addition, when making credit card payments, try to pay more than the minimum amount. This will help knock out debt faster, as long as you don't charge more. Also, work on building a better credit rating so you will quality for better interest rates."
To help get a feel for how long it will take to pay off credit card debt, visit the Web site www.powerpay.org. Power Pay is a financial tool developed by the Utah State University Extension. Although you must register at the site, the service is free. To use it, simply key in information such as the amount of debt on a credit card, the interest rate and the minimum monthly payment. Power Pay will then show you exactly how long it will take to pay off existing debt by making minimum payments. It also will calculate the time it will take to get out of debt by adding extra money to monthly payments.
Consumers who get an income tax refund, a bonus at work, or other money such as the Alaska Permanent Fund Dividend are encouraged to use those funds to help pay off debt. It's alright if you choose to take some of the extra cash and do something fun, but be sure to use the majority of it to pay off debt or fund a savings account.
The financial crunch has been devastating to many families, and experts caution that the current economic situation may be with us for a while. The silver lining in all this may be the realization of how important it is for all of us to simplify and live within our financial means.
Sonja Koukel, PhD, is an assistant professor in the Health, Home & Family Development Program for the Cooperative Extension Service UAF Juneau District. Reach her at firstname.lastname@example.org or (907) 796-6221.