Credit Card Interest Rates Increasing

Many of us have already or will soon receive notice with our monthly credit card statements that the interest rates will soon increase.

For those of us at Pookah Finances 101, this creates a problem, as we are carrying a balance from month-to-month while we work ourselves out of debt.

For those of us at Pookah Finances 201 (and 301), we don’t care. We pay off our interest-bearing credit card bills in full every month, thereby avoiding the interest fees. In addition, we have the ready cash available in a high-interest savings account to pay off the full amount of our efforts with credit card arbitrage.

Needless to say, Pookah Finances 201 (or better) is a great place to be in this economy.

But as for those of us at Pookah Finances 101 (or lower), we now have a problem.

Credit card debt has great potential to be Phase 2 of this recession. The credit card companies have loaned out billions of dollars, at ridiculous rates, to many people who lacked the basic ability to repay the debt in a timely manner. Add in the current job crunch, plus a credit card-holders’ bill of rights set to go active in 2010, and you can see why the credit card companies are running scared: Billions of dollars defaulting or lost through bankruptcy plus the wising up of the general “consumer” population. Either one is cause for fear on their bottom lines. Both together has put the fear of Armageddon in them.

Explaining the credit card companies’ viewpoint does not provide any immediate help with our current situation. It does, however, give us insight into possible methods for keeping our heads above water so that we can make it from Pookah Finances 101 to 201.

For starters, review your resources (web sites, books, friends, family, and neighbors) for thriftyness and make the changes necessary to reduce your dollar outflow. I know it’s hard. Believe me, I KNOW it’s hard. My pride has taken many a beating at the local second-hand store. And I absolutely hated having to give up even basic cable TV so that I could pay my water bill each month. But it IS doable. Performing sewing repairs to my own underwear (and the mistake that resulted in an uncomfortable abrasion) so that they survived a bit longer still generates fits of giggles. It also meant I could pay off a credit card debt shortly after I graduated from college.

Oh? Pookah is now interested in her human’s story.

Uhm… next.

Second, call each of the credit card companies that are increasing your rates, and talk with them. Talk costs you nothing. A little courtesy, a LOT of patience, and you may get a stay on the interest rate increase – that equals dollars in your pocket. Remember the credit card company’s situation described above. Threatening them will get you nowhere. Cooperation – so that the credit card company gets money, and you get out of debt – is FAR more beneficial to you both. Be prepared for the credit card company to come out ahead. They already hold most of the advantages from the contract you signed. The basic idea is to make sure that you CAN continue to pay without going under. The credit card company is like a parasite to those of us at Pookah Finances 101: We have to feed them their due in blood before we can remove the bloated little leaches. We want to make sure we survive the experience – and the credit card company fundamentally does too, so they can parasitize us again. A dead host gives no blood. Most of all, request that they send you confirmation of any negotiated changes IN WRITING. Any verbal deal you make is only worth the paper it’s printed on in front of a judge.

Third, redouble your efforts to pay AT LEAST the minimum due on each bill BEFORE the due date.

Fourth, put every spare penny that you save towards the highest-interest credit card that you have. Those dozen pennies you found in the couch – deposit them along with your other monies in the bank and then use it to pay down the debt. Five cents may not be much, but the reduction in interest-accruing principal will pay for itself many times over in a single year. This is a time where truly every little bit helps.

Fifth, review your options for balance transfers to reduce your interest payments. Be careful here! It does you no good to pay a 3% balance transfer fee to reduce the interest by only 1%.

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