All About Credit Cards

Some homeowners struggling to keep up with their adjustable-rate mortgages are choosing a short-term fix that will only compound their troubles down the road, consumer protection experts say.

“We’ve had some people who are using their credit cards to cover basic living expenses so they can actually make their mortgage payments,” Rebecca Palmer, director of education for Consumer Credit Counseling Service of New Hampshire and Vermont, told the New Hampshire Sunday News. “It’s absolutely horrifying.”

“Because the thing is, they’re digging a deeper hole instead of finding a solution to the problem,” she said.

Counselors at her organization, which provides free, confidential counseling, are increasingly hearing from homeowners that they are taking cash advances on credit cards to make their monthly mortgage payments — or even contacting their mortgage companies to see whether they can pay with a credit card, Palmer said.

“Unfortunately, they don’t realize how much worse they’re going to make it for themselves,” she said.

David Deziel, director of communication and development for CCCS NH-VT, said the agency recently counseled one such family from Alton.

“Their monthly mortgage payment right now is a little over $3,100 a month, and these are folks whose household income is under $100,000,” he said. The married couple, who are in their 40s and have two children, are also paying off a home equity loan.

When the wife became ill, Deziel said, “They started making heavy use of credit cards to make ends meet.”

And by the time they came to the credit counseling agency for help, “They had almost $23,000 in outstanding credit card debt.”

Another recent client with an adjustable-rate loan had seen his mortgage payments jump from $900 a month to $1,700 a month — with a 14 percent interest rate, Deziel said.

The trend is bad news, said David Rienzo, assistant attorney general in the Consumer Protection and Anti-Trust Bureau at the AG’s office.

“If you can’t pay your normal monthly expenses and your mortgage, the smart thing to do is go get some credit counseling right away, rather than use a credit card until you not only can’t afford the mortgage but also now are stuck in over your head on a credit card as well,” Rienzo said.

Mortgage payments typically include both principal and interest, he pointed out; putting such payments onto a credit card means you’re paying interest twice.

According to Deziel, there are several “trip wires” that can increase your interest rate on a credit card, such as exceeding your credit limit or making a payment late. “That rate can jump to 28, 29, 30 percent on all of your outstanding balances,” he said.

According to Rienzo, credit card companies are bound by the laws of the states in which they are headquartered. And some states, including New Hampshire, do not have usury laws, so there’s no cap to the interest rates the companies based in those states can charge.

Taking on credit card debt will also worsen your credit score, Rienzo noted, which could increase the cost of future borrowing.

And then there’s something called “universal constructive default,” which, Rienzo explained, means if you default on one credit card, your other card companies can raise your interest rates too.

Recent changes in bankruptcy laws have also made it more difficult to walk away from credit card debt, experts say.

Dan Hebert has 23 years of banking experience, and is now president of New Hampshire Jumpstart Coalition, an all-volunteer organization dedicated to improving financial literacy for children.

Hebert noted a recent report by Mintel International Group, a consumer research company, found that credit card companies are actually pushing subprime borrowers to open new accounts.

The report found direct-mail offers from card companies to these borrowers rose 41 percent in the first half of 2007, while offers to customers with the best credit fell by 13 percent, according to published reports.

Subprime borrowers typically pay higher interest rates on credit cards because of poorer credit scores, and are more likely to only make minimum payments, which extends their card balances, Hebert said.

Deziel’s advice: “If you’re tempted to use your credit card because your mortgage payments have become too high, just stop yourself for a moment and think about what the problem is. The problem isn’t that you’re spending too much on groceries; the problem is the mortgage.”

And that’s where homeowners need to start, by contacting their mortgage companies to try to restructure their loans and avoid foreclosure, he said.

His agency can help consumers, but they need to seek help early, Deziel stressed, before the debt load becomes insurmountable.

He noted CCCS often gets calls from people whose homes have already been advertised for foreclosure auction.

“At that point, it’s too late. There really isn’t much we can do about it.”

As bad as the subprime mortgage mess has been so far, Hebert says the worst is yet to come. “The other shoe to drop will be a spike, in another 18 months, of bankruptcy filings for folks who weren’t able to hold onto those homes,” he predicted.

By Shawne K. Wickham

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