Stuck in debt & don’t know how to cope up

July 8, 2009
  1. Try to lower your interest rate. Negotiate with your bank. One other way is to convert your credit card debt into a personal loan debt. It will definitely be lesser than the credit card interest rate.
  2. Calculate your net worth and see if any of your investments could help you prepay a part of your loans.
  3. Make a contingency plan for the immediate future. Talk to your bank along with your debt counselors and explain your situation and see if you can resume your loan at a later date but do make an effort to prepay some amount.
  4. If it is a double-income household, try and see if your spouse can support you in the event of a job-loss in the short term before you land a job.
  5. Manage your current finances judiciously to battle through the current situation and emerge wiser.

Source: BankBazaar.com

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Credit-Card Rage

August 29, 2008

Debt-strapped consumers vent their frustration with banks as they root for new rules to rein in card rates and fees

David Giantomasi says he vigilantly paid his credit-card bills each month. Even if he could only make the minimum payment, he made sure to get all his monthly payments squared away. So he was shocked when the interest rate on his Chase credit card suddenly jumped to 19.99% from 7.99%. When Giantomasi called the card issuer to demand an explanation, he was enraged. He was told that overall turmoil in the credit markets meant higher rates for a number of customers.

Chase won’t comment on individual cardholder accounts. “I felt completely helpless,” Giantomasi recalls. “These credit-card companies are beyond the law and should be more tightly regulated.”

New Rules on Rates

The proposed rules, which could be implemented as early as yearend, would represent the first time in over 20 years that a government agency has recommended banning certain credit-card industry practices. Regulation has been left largely to the card issuers, and the Fed and other banking regulators tended to stick to forcing card companies to disclose terms and conditions clearly to customers.

Under the proposed rules, though, banks would no longer be able to hike up interest rates on existing debt, as Giantomasi experienced. Card companies would have to split required monthly payments evenly between the high- and low-rate balances on a card. (Currently, card companies allocate payments to the lowest interest-rate balance first, which leaves a lot of cardholders unable to make a dent in balances at higher interest rates. That’s a recipe for rapidly accruing interest and a feeling of helplessness about managing debt, say cardholders.) And consumers would get a longer grace period before they’re slammed with penalty fees.

Many consumers say it’s about time. The rules were proposed just as the U.S. economy started to tank, when many card holders were falling further behind on their payments at the same time home equity lines of credit were drying up and jobs were disappearing. Regulatory agencies came under fire to act, and Senator Carl Levin (D-Mich.) held hearings this spring to examine card company billing practices.

The proposed regulations generated more than 56,000 comments from individuals, banks, credit unions, and industry associations. That’s a record number of submissions, says the Fed, beating the previous record of 45,000 submissions for a proposal that would have let financial firms assume the role of real estate brokers.

Source: Businessweek


Taking personal loan to finsh your outstanding Credit card bills is worth?

August 25, 2008

Credit card users, who have overspent on their card, have a new option – conversion of the outstanding into a personal loan. Banks are willing to do so because they are worried that any non-payment of dues would increase their non-performing assets, which in turn, could hurt their balance sheets quite badly.

Such an offer also implies that many customers, who were finding it difficult to pay off the amount, can use this method to ensure that they do not become defaulters.

One of the biggest benefits of this kind of conversion is that the rate of interest will be much less on personal loans. As far as credit cards go, there is huge interest burden (between 36-44 per cent per annum) that is climbing with each passing month. A personal loan comes much cheaper at 16-22 per cent, lesser by almost 40-50 per cent.

However, things are not that simple. There is an additional risk that even when the interest burden goes down, it could lead to a situation where it becomes very difficult for the consumer to manage his finances.

Regular payment: In case you opt for a personal loan, regular monthly payments have to be made and for a specific time period. While this is good because it will mean a disciplined payout, for some, the situation could worsen.

This is because while the credit card company allows a minimum payment of 5 per cent per month, in case of a personal loan the outgo could be higher, especially if one opts for a smaller tenure.

For instance, if a person has an outstanding of Rs 200,000, the monthly outgo at the rate of 5 per cent will be around Rs 10,000. In case the amount is converted to a two-year personal loan at say 18 per cent, the outgo will be around Rs 18,000. Clearly the sudden rise in the repayment amount by 40-50 per cent could lead to a situation where the budget goes completely haywire.

Also, in such situations, investments are the first one to take a hit because other expenses are more difficult to control. And if this happens, the safety net that you are creating for the future could get reduced. When faced with such a situation, it is important to select the right tenure so that the burden does not increase dramatically.

Prepayment problem: Also, many times when you go for a personal loan, the bank puts a clause where prepayment is allowed only after a certain number of months or only so many times in a year. In some cases, there is even a hefty prepayment penalty if you were to exercise this option. This is because the bank is losing out on the interest income.

Individuals facing a temporary glitch as far as their finances go, should take a step back and give the situation some serious thought. If they get a sudden cash flow, in terms of bonus or any other source, they could use that to wipe off the outstanding credit card bills.

Yes, it will mean temporary pain because of high interest rates, but it would be a better option to clear the entire loan instead of coughing out equated monthly instalments for a long time.

Continued spending: The biggest risk is that the person could actually sink further into a debt trap, if he continues to hold and spend on the card. Now that the outstanding on the credit card is converted to a loan, there is no outstanding. This could easily lure a spendthrift to use it again.

In this situation, the balance on the card will rise again leading to financial crisis as the consumer would now they have a personal loan and more credit card bills that need to be paid.

Source: Rediff