Monthly Archives: April 2015

Credit Card Debt: History, Management, and Resources

Unforeseen circumstances can place anyone into crisis, no matter what walk of life they come from. Lack of savings, a job loss, emergency medical bills and credit card debt are common problems that our client-partners face. Many client-partners are low-income and with fewer resources on hand to pay financial obligations, they often walk through our doors with credit issues.

While the practice of buying goods and services on credit has existed for centuries, the first actual “credit card” was invented after the Great Depression. In 1946, banker John Biggins of New York created the “Charge-It” program between customers and local merchants. In 1950, the card evolved into the Diners Club Card. Customers charged to their card, the bank would pay the merchant, and then the customer would pay the Diners Club. Sounds a lot like our system today, right? But unlike credit cards of today, each balance had to be paid off in full at the end of the month. Banks quickly realized they could make more by charging fees and higher interest rates to riskier customers. Over time, the modern credit card system has evolved into what it is today: a convenient, yet incredibly dangerous system that creates an illusion of wealth.

American debt flows freely. In order to keep up with the Joneses, we’ve got to buy nice cars, nice houses, and nice stuff to put into our nice houses. Studies show that millennials graduate from high school or college expecting to have the same lifestyle as their parents – a lifestyle that often takes 30 years or more to achieve. None of this is necessarily wrong. A high-quality standard of living is something everyone should work toward, if they want to. But unfortunately, many of us can’t afford that lifestyle and live beyond our means. We quickly accumulate debt that can take years or even decades to pay off, if we’re able to pay it off at all.

On the other hand, many of us still live well within our means but have trouble with credit and debt because of problems with access. Once seen as a sign of foolishness, holding debt and having a credit score is now considered a requirement to gain access to many of our most basic needs. Want to rent an apartment? Need to buy a house? Or, are you a recent college graduate who’s looking for their dream job? More likely than not, you’re going to need a credit check. FICO scores reflect your credit history and how risky you are to lenders. Scores range from 300-850; scores that are 620 and below are considered subprime by lenders. In Mecklenburg County, 59% of residents have a subprime credit score. It’s difficult for consumers with subprime scores to gain access to credit and if they can, that access comes at a steep price.

In the Economic Mobility Corporation’s article “Building Credit Where it’s Needed: Why Workforce Programs Should Focus on Credit”, authors Mark Elliot and Anne Roder illustrate a subprime lending score through this scenario:
Most people have to borrow money to make major purchases. For someone with a FICO score of 700–759 to purchase a home at current interest rates, a $150,000 30-year fixed mortgage would entail a monthly payment of $716. A borrower with a credit score of 620–639 would pay $839 each month, which might not seem like that much more, but it adds about $44,000 to the total interest paid over the life of the mortgage. Similarly, people with poor credit also pay more when they borrow to buy a car. A four-year used-auto loan of $5,000 would require someone with poor credit (a FICO score of 500–589) to pay about $2,100 more in interest payments than someone with good credit.

If you’ve never purchased anything on credit before, then you don’t exist in the system and lenders have no reason to trust you. This is what happened to one of our employees here at Ada:
“I always paid everything on time, but I paid it out of my checking account. When I graduated college and needed to get a car, I went to a used dealership and found a great car for $8,000. The dealers checked my credit score and found nothing; the salesman came back to me with an offer on the car with a 26% interest rate. Over 5 years, I would have paid $10,080 for an $8,000 car. I had a sizeable down payment and money and proof of bill payment in the past, but the dealers refused to budge. I bought a car from a family member instead.

I’ve since opened a line of credit and built some history, but it took 6 months for my FICO score to be considered prime. My bank keeps me up to date on what’s helping and what’s hurting my score. It seems that in order to stay in the credit system’s good graces, I’ll need to remain in some kind of debt.”

We can’t think of anyone who would rather pay a few thousand dollars extra in interest because of bad credit, and that’s why it is so important to take control of our finances. As predatory as lenders may be, it is ultimately up to the individual to correct their spending habits and reverse the debt cycle. At the Ada Jenkins Center, we help people regain control of their finances every day. We help client-partners find and keep a job, encourage them to save money, and train them to get out of debt.
Below are some resources that can help to educate more on this topic, as well as achieve financial stability and self-sufficiency.

Spent: Looking for Change — This documentary follows several Americans struggling with common financial issues. See the movie and the “Get Financially Ready” plan here. – Dave Ramsey is a financial author and radio personality. His debt snowball plan explains how to get out of debt, step by step. His website has numerous articles that can aid you in changing your financial life.
Legal Services of the Southern Piedmont  provides a wide range of assistance to eligible low-income persons. Their office is in Charlotte, but they will come to Ada and consult if needed.

Charlotte has many other assistance programs – come in and talk with us, or use our free computers, to research what fits your needs.