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Get Out of Credit Card Debt

Perhaps you read my blog earlier this week on on how some credit card companies have become the new loan sharks and are able to charge exorbitant rates of interest that contribute to many people's paths toward bankruptcy. Well, if you are a victim of these companies you now have a way to fight back.

You may have seen TV ads for non-profit organizations that intervene to persuade credit card companies to reduce the interest rate extracted from borrowers. These non-profit outfits do well enough to pay for TV ads. What few Americans know is this: you can skip the middleman.

The banks that issue credit cards are in a price war. But only one card company, Capital One, advertises heavily. "What's in your wallet?" is a great slogan. It's working. Capital One also claims to offer the lowest fixed rate: under six percent. This is far better than the 18 percent or 24 percent that millions of Americans are paying.

The presence of Capital One offers you a tremendous bargaining chip. Sit down and write a letter to your credit card company. Request a reduction in your interest rate. Explain to the credit card company or the revolving-credit issuing company that you have seen Capital One's ads on TV, and you are thinking of switching. You're thinking of consolidating your debt with a Capital One card. This, I assure you, will get the attention of the creditor. The creditor is profiting at your expense. Ask for a new contract: a lower fixed rate for all of your existing debt on the card.

Here is his new option: he can get 0 percent from you after you switch cards and pay off your debt to him, or he can earn a much lower rate by offering you a permanent reduction. A creditor would rather receive something than nothing. He will offer you a much better deal. In the meantime, keep shopping on the Internet for low fixed-rate cards that offer loan consolidation for your existing debt. The ads are all over Google.

Get this in writing: a permanent reduction to a fixed rate on all existing debt on the card. The longer you have to repay at the new rate, the better. If you don't get the rate and time frame you want, negotiate in writing or on the phone with the person who signs the response letter.

The companies are relying on the ignorance of existing borrowers who don't know that the companies are ready to negotiate lower rates with people who threaten to pay off their loans by borrowing on a new card. You are no longer ignorant. While rates are low, negotiate a better deal. Do not do what so many Americans do; namely, expand your existing debt burden because you can afford to after you receive lower rates. Please remember one of the major keys to financial success is to spend less than you earn.

If you are borrowing for something that will probably increase your output, then debt may be legitimate. For example, a debt for college education might be wise if you are majoring in civil engineering (not much competition from China or India), but not if you're majoring in sociology. But if you are borrowing to buy a consumer good that will decline in value, debt is a lot riskier. The market value of the asset may not be--probably will not be--as high as the principal remaining on the loan. If you lose your job, you could get trapped. You might even have to violate your contracts and declare bankruptcy.

Gary Notth's Reality Check Issue 277 September 23, 2003 (No Web Link)

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