TOPDOG08.COM

« Start your watches | Main | Why I Support Al Hakim »

January 13, 2005

Average Daily Bankruptcy

As you may know, you're now as likely to file for bankruptcy as you are to file for divorce. Guess who's filing? Not the ones without credit cards, or the ones who pay on time. The odds are that if you usually carry a revolving balance, you'll be filing for bankruptcy at some point. This AP article helps explain why:

Howard Dvorkin, president of Consolidated Credit, said many people have so many credit cards they don't know how much they owe overall. He offers a step-by-step approach to help consumers work on the problem:

First, list all your bills on a single sheet of paper in three columns: who you owe, how much and the minimum monthly payment.

Then look at your earnings and spending.

"With earnings, look at every aspect," Dvorkin said. "Can you adjust your (tax) withholding to get a little more in your paycheck each month? Do you need to find a part-time job to supplement your income?"

This guy actually tells people to write down your minimum payments so you can keep track of them all. If you can only afford to make the minimum payments on a balance, you should stop using that card for new purchases immediately. That's step one. Not making a chart of all these minimum payments like they are your guiding light. They are designed to maximum profit! This 2002 CNN/Money article has a few of the key points to remember:

Credit card companies have reduced their minimum payments of late. Most cards now only require a two percent minimum payment, said Brobeck, down from five percent. This makes the offer sound more appealing, but it actually isn't. If you pay only the minimum, you'll pay even more interest for a longer period of time.

"Mathematically, if you're being charged a penalty interest rate of 24 percent, and only make the minimum payment of two percent, you will never pay off your debt," said Brobeck.

It also explains:

"Some credit cards don't offer a grace period anymore," said Fritz Elmendorf, vice president of communications at the Consumer Bankers Association.

According to CardWeb.com, the average grace period on a card from one of the major issuers is about 22 days. But some cards have shortened the period to 20 days, and others have none at all. With no grace period, you're charged interest on the purchase from the day you make it, probably before the credit card company has even paid the store on your behalf....

Your credit card balance is computed using one of three methods: the adjusted balance method, the average daily balance method, and the two-cycle balance method.

The adjusted balance method is the most consumer friendly: interest is charged on the account balance remaining after payments and credits during the billing cycle. The average daily balance method is charges interest on your average balance during the billing cycle.

The one to watch out for is the two-cycle balance method, where the interest on your average daily balance is computed using both your purchases from that billing cycle and those from the month before.

"If I charged a bunch of things in February, even if I paid them off completely, that figure would still be used along with my March purchases in order to calculate my average daily balance for March," said Brad Dakake, a consumer advocate at the Massachusetts Public Interest Research Group (MASSPIRG). "The average consumer probably has no idea – it's very sneaky."

The average consumer doesn't understand the difference between the adjusted balance method or the average daily balance method, either. Fortunately, there are no adjusted balance cards left, so no worry.

Posted by Mike at January 13, 2005 03:02 AM

Trackback Pings

TrackBack URL for this entry:
http://www.topdog08.com/cgi-bin/mt-trackback.cgi/574

Comments

Post a comment