You know the story. Higher interest rates choke consumers. Chasing the balance kills FICO scores.
USA Today has a story in which it details all of the credit-card-industry practices that can push card users over the edge. In some cases, though, customers are fully to blame for their plight. Indeed, pay attention to one gentleman who racked up some $70,000 in credit-card debt -- over a 15-year period -- by using his cards for "emergencies."
Someone with a few thousand in debt might be able to say that the cards are used for emergencies. However, when you have $70,000 in credit-card debt, that goes well beyond emergencies and moves right into day-to-day living.
From the USA Today (hat tip, Hanadarko):
Spaulding, 40, says he's a conservative spender who got trapped under $70,000 of credit card debt and high finance charges after 15 years of relying on his credit card for emergencies, such as car repairs. In a letter to the Federal Reserve, a bank regulator, Spaulding complained that "credit card companies are the reason why hardworking Americans like myself struggle for years."
Banks started raising his card rates two years ago, after his utilization ratio — the credit he used compared with his available credit — rose above 50%, Spaulding says. He borrowed $16,000 from his 401(k) to cover the higher monthly payments. Even so, he eventually fell behind, leading to rate increases on three other cards.
The higher card payments made it difficult to keep up with his mortgage. And plunging housing prices provided another reason to stop paying his mortgage. Now, he's trying to sell his house for less than he owes on it.
"More likely, I'd still be managing today if the credit card companies didn't raise their rates," says Spaulding, who plans to file for bankruptcy because he doesn't want to be saddled with high-rate card debt when he and his fiancée, Michelle, have their baby in April.
I feel sorry for the guy. But his own spending did him in. When you spend beyond your means, to the tune of $70,000, this is what happens. You fail. Bankruptcy is the perfect solution for this guy. Hopefully he'll change his ways once he emerges from bankruptcy.
Regarding balance chasing, I did find it fascinating that Fair Isaac, the creator of the FICO score, acknowledged that it is looking at its scoring model in light of the many credit-limit reductions that are taking place.
The potential for consumers' credit scores to fall and their rates to rise — through no action of their own — exposes a serious flaw in the credit-scoring model, some consumer advocates say.
Tom Quinn, vice president of global scoring at Fair Isaac, which developed the FICO score, defends its ability to predict which consumers are more likely to pay their bills. He says, though, that partly because of media inquiries, the company is reviewing how credit-line reductions affect consumers' credit scores.
It will be interesting to see if anything becomes of that.
In the meantime, read the rest of the story
here (link).
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