Credit Card Watch

Numerous sources online have discussed the issue of credit and how it can help push homeowners over the edge into foreclosure, and how it can continue to have financially destructive effects even after the mortgage has gone into default. The point of this article will be to look a little more at credit in general and how it can both hurt and help consumers.

In the vast majority of situations in working with homeowners in foreclosure, credit only helps these homeowners lose control of their finances and borrow too much today based on an uncertain or negative future. Once that uncertain future entails a financial hardship, credit cards go into default, collection agencies and attorneys are hired, and homeowners have to search out some trustworthy source of foreclosure advice. And this is all the result of them borrowing money just to finance the basic necessities.

Granted, the simple act of obtaining and using credit is not a problem. Borrowing money can, at certain strategic times, help consumers purchase an investment (like their homes) that will increase in value over time, start a business, or obtain some other financially beneficial asset. Credit used in this way can help households improve their overall worth and comfort, and is a wise use of credit, as long as the homeowners are comfortable in their ability to meet the obligation of repaying the debt.

The problem is when homeowners begin using credit to finance basic necessities of their lives and to continue an unsustainable life of consumption for the sake of a subjective, meaningless, unattainable goal, such as “looking good,” “keeping up with the neighbors,” or “because we can.” In these cases, the borrowing can spiral out of control and homeowners can find themselves throwing all of their money away at the interest charges on their various credit lines. Especially when homeowners are borrowing money just to eat, keep a roof over their heads, and keep the lights on, any financial hardship will probably end up in numerous missed payments on any of their open credit cards or mortgage.

Again, homeowners have very little or no protection when they begin to fall behind on their bills. It is very common (almost universal) for credit card companies to raise the interest rates very high when consumers miss a payment, and some even practice the concept of “universal default,” whereby a credit card will raise its rate if the consumer is late on a different card from a different company — being on-time or late on that particular card has no bearing whatsoever on the rate being increased.

These kinds of tactics are being examined by the credit card industry and even by Congress, but it is doubtful any real relief will be offered to homeowners. The exact same result of the foreclosure and predatory lending hearings will probably be seen in these hearings — a lot of talk about protecting consumers from high interest rates and irrationally high fees, and then silence. Even in the midst of a collapse of consumers’ ability to repay their loans, the only new laws and regulations will most likely protect the credit card industry.

Take, for example, the new proposed regulation requiring more disclosure on the part of credit issuers to show how much it will cost the borrower. In reality, borrowers do not read the current paperwork they get from lenders, and a new law changing what the borrowers do not read will not give them any better understanding of how they are being drawn into the credit trap. And no law will be able to force debtors to read the paperwork they are given, let alone understand what its ramifications will be in certain situations.

Thus, credit used for a very specific purpose may help homeowners improve their financial positions and their quality of life. Building equity in a home, starting a business, or improving one’s efficiency are all viable reasons to borrow money for the short term in anticipation of a better future. However, borrowing for the sake of consumption or for basic necessities, or borrowing for the goal of improving one’s credit score to be able to borrow more later: these are simply unsustainable and unachievable goals that can not lead homeowners to a better financial life. They will, as we are experiencing now, be forced to pay the bills even after their stream of income dries up, and then find themselves looking for solutions on how they can stop foreclosure.

This entry was posted on Friday, June 8th, 2007 at 7:32 am and is filed under Credit Cards, Identity Theft, Credit Card Processing, Apply for a Credit Card, online credit card application, Blog Carnivals. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.