Consumers carrying a> lot of credit-card debt have a big stake in the U.S. economy. If prices fall and stay low, as some economists suggest, the cost of credit-card debt could surge.
In a deflationary period, the value of goods and services falls relative to the value of money. That situation puts debtors in a tough spot. As the price of everything from automobiles to airfare falls, so goes the value of assets already purchased. That means debtors will be paying a higher price against assets that are losing value.
Presumably, credit-card interest rates could fall too, as rates move in tandem with the prime rate. However, the industry could buck that trend, says Josh Frank, senior researcher at the Center for Responsible Lending. He says card companies have been steadily raising rates for consumers and business owners for many months.
Whether a rate cut occurs will generally depend on a number of factors, including an issuer s risk tolerance and economic conditions, says Carol Kaplan, a spokeswoman for the American Bankers Association.
To avoid getting stuck paying more for depreciating purchases, here are five ways to curb high-priced credit-card debt:
The direct approach
The most effective way to get out of credit-card debt is to stop using your cards and pay off your balance as much as possible each month, says Bill Hardekopf, the chief executive of LowCards.com, a credit-card comparison site.
For those facing a rate hike, consider declining the increase. Under the new credit-card law, issuers must allow card holders a reasonable amount of time to pay off their balance at the old rate. However, by opting out of a rate hike, consumers won t be able to make new purchases with their card. If they do, they ll be automatically billed at the higher interest charge, says Hardekopf.
Skip high-rate cards
Those stuck paying high interest rates could consider a balance transfer. Currently, Citigroup is offering a 0% annual percentage rate (APR) on purchases and balance transfers for up to 18 months.
Before making account changes, consumers should be mindful of the fees associated with balance transfers, says Hardekopf. Such fees can range between 3% and 5% of the amount transferred, he says. See whether it's worth that additional expense compared to what you may be saving in interest because that fee is charged upfront, Hardekopf says.
Debtors should also weigh other fees associated with using the card. For instance, in February Citi notified some of its cardholders that, effective April 1, they will be charged a $60 annual fee. That fee is refundable to anyone who charges $2,400 or more a year.
Use one line of credit per issuer
Although the new credit-card law requires issuers to apply only those payments above the minimum payment to balances with the highest APR, the minimum payment gets diverted at the issuer s discretion. If the issuer moves to apply those payments to the balance with the lower APR, the balance with the higher APR will continue to grow, says Odysseas Papadimitriou, the CEO of Evolution Finance, which publishes CardHub.com, a credit-card comparison web site. Unless consumers can pay more than 15% of their balance every month, they should only carry one type of balance on each of their credit cards, he says. For those already stuck paying off two balances with the same issuer, a balance transfer is also an option, Papadimitriou says. (Note the fee considerations above.)
Consider a debt management plan
Consumer credit counseling organizations can help struggling consumers establish debt management plans. If you are in one of those varying APR prisons and you don t have the capacity to pay more than the minimum each month, look elsewhere for help, says John Ulzheimer, the president for educational services at Credit.com. For example, one of the National Foundation for Credit Counseling'sConsumers can locate the agency closest to them by calling 800-388-2227, or checking DebtAdvice.org
When all else fails
Cardholders in debt could also negotiate a settlement directly with their card issuer, says Ulzheimer. They might wind up paying less than what they would otherwise, but their credit will suffer, he says.
Debtors who go this route should negotiate on their own, Ulzheimer says. There are lots of companies marketing settlements to consumers taking a fee to do exactly what you could do if you went directly to the credit-card issuer, Ulzheimer says.
Cardholders could also consider filing for bankruptcy protection. Although filing for Chapter 7 protection would also hurt a credit score for seven years, the cardholder would immediately be released from much -- if not all -- of their credit-card debt, says Ulzheimer. However, paying a bankruptcy attorney isn t cheap. Bankruptcy should be your last option, but it s not your worst option, he says.