Why Paying Off Credit Cards Needs To Be Top Of Mind

John Vaughan (Financial Advisor) @ Lucid Living
New data from the National Credit Regulator (3rd Quarter 2010) shows an uptick in credit demand. The total value of new credit granted increased from R67.55 billion for the quarter ended June 2010 to R75.14 billion for the quarter ended September 2010, an increase of 11.23% when compared to the previous quarter and 40.23% higher than a year ago.
After homeloans and vehicle finance, credit/garage cards and store cards were the main drivers of “credit facilities” granted. Of the R8.81 billion granted in credit facilities, credit/garage cards and store cards amounted to R5.95 billion (67.53%).

But, while credit demand grew, so did bad debt and non-performing loans. Of the 18.35 million credit active consumers, 17% had accounts in arrears for more than 3 months, 15.4% were blacklisted and 13.9% had judgments and administration orders.

Falling behind on your credit card payments has a double negative effect – 1. non-payment means that you are blacklisted and 2. credit card debt carries a high interest rate, so arrears costs you a fortune.

Here’s what consumers who have missed one or more credit card payments need to know:

Seek help immediately
Consumers who find themselves falling behind should start by meeting with a LUCID Credit Manager or Debt Counselor. Many people wait too long to consult a professional, says Gail Cunningham, a spokeswoman for the National Foundation of Credit Counseling. Meeting with a debt professional “will help you understand your Plan B and your Plan C,” she says. Consumers who can say they’ve already consulted professionals will also be in a stronger position to negotiate with their lenders, she says.

Consider debt counselling
Borrowers who can not make their minimum monthly payments should consider debt counseling, which is less damaging to credit scores than administration or sequestration, says Odysseas Papadimitriou, the chief executive of CardHub.com. LUCID’s Credit Manager can also help create a plan like this, which typically involves a reduced interest rate and an easier payment schedule, but no overall reduction in the amount owed.

Be wary of debt-consolidation offers
In the past, debt-consolidation companies have been a trap for consumers more often than a helpful service, according to the Center for Responsible Lending. Many of these companies charge up-front “broker” fees and use your home as security against the loan, leaving consumers vulnerable. According to statistics in the US, more than half their clients end the relationship without any relief (often because they’ve had to file for bankruptcy). On the whole, consumers have suffered a net loss from working with debt consolidation companies, according to a report prepared by the center.

Negotiate a settlement if you need to
Because banks have had to write off so much consumer debt, they’re increasingly willing to negotiate settlements. These days, many people who are between 30 and 90 days past due will get a call or a letter from their bank offering a deal, Papadimitriou says. At that point, it’s still wise to consult a Credit Manager or attorney before agreeing to an offer, he says. And of course, consumers can also initiate this conversation themselves.

Keep emotions out of it
When coping with credit card delinquency, it’s important to remember that it is possible to rebuild credit, Cunningham says. When speaking to a bank representative, keep in mind that they’re likely following a script, “so don’t take anything personally,” Papadimitriou says. “Don’t feel overwhelmed talking to them, they are not going to be judgmental,” he says.