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March 2000

Rural and urban Iowans alike must be careful to use credit cards as a source of credit, not a source of income. Using a credit card to cover a major purchase or essential family living expense is generally a bad idea. If you do not have the money to buy something, it may be wise to think twice about that purchase. You are buying something you could not otherwise afford.  When you have to use a credit card to pay for food, shelter or utilities, it is time to look at your budget. Federal, state, or local assistance programs may offer assistance. Credit cards should only be used as a source of funding for emergencies such as car repairs, or for short-term loans for large purchases only. Before using your card to make a purchase, think about where the money will come from to pay it off.

All who use a credit card should know the basic rules of credit cards:

Rule # 1.  Paying with a credit card is the same as getting a loan. Loans need to be paid back. When you fill out a credit card application, you sign a contract. You agree to the terms and interest rate that a credit card company offers. If you do not make payments as you have agreed, a credit card company can sue you for the money that you owe them. The credit card companies must go through a few steps before they can sue you. If you think that you are likely to be sued by a credit card company for a debt, you should contact an attorney. You may have a defense to the debt. If you are receiving public benefits or have a very low income, you may be protected by the law from creditors trying to get the money from you. For details on this, you may want to read the Legal Services Corporation of Iowa booklet Post-Judgment Relief: Legal Rights of Debtors in Garnishment and Execution.

Rule # 2.  Credit cards charge very high rates of interest. Credit card companies are in the business of lending you money. They make their money by charging you interest, and bigger debts mean higher profits from interest on the loans. Credit card companies may lure consumers to build up big balances by offering "deals" when you transfer balances. Advertising may also offer a lower rate for a short period of time. Credit card companies do this so you will build up a big balance, not be able to pay it back immediately, and then pay them lots of interest.

Many companies charge 18% to 24% Annual Percentage Rate (A.P.R.) interest. This is a lot higher interest rate when compared to other loans like home mortgages or even car loans. If you plan to get a credit card, you should shop around to find the lowest interest rate. Interest rates and terms should be on credit card applications or on the back of monthly statements. If you need to use credit to make a purchase, consider other options. Find out what forms of financing are available and consider the interest rate in making a decision.

Rule #3.  Paying only minimum payments is very expensive. Credit cards usually require a small minimum payment to be paid each month. The minimum payment is oftentimes 2% of the amount owed. Paying the minimum payment each month is very expensive. It also reduces your debt very slowly. Assume you have a credit card balance of $10,000 and never use the card again. If the interest rate is 20% and you only make the minimum payment each month, you would pay $11,600 of interest and pay for nine years.

Rule #4.  Credit cards are usually revolving credit accounts. Unpaid interest is added to the balance of your debt. A credit card may advertise a "limit." The limit is the maximum amount of debt the credit card company has pre-authorized. If you try to make a purchase which would cause your debt to exceed the credit limit, use of your card may be denied and/or it may be cut up. This can be very embarrassing. If you fail to make a payment, the unpaid interest is added to the balance of your debt. This can make your debt balance exceed your limit. Most credit card contracts have penalties for exceeding your limit or paying late. These charges can be high, $20 or $25 per month, and can be added to your debt.

Rule # 5.  Credit card terms are contracts and can be modified by agreement. If you get a late fee after you know you paid your bill on time, you can ask the credit card company to waive the late fee. Many cards will if it is the first time that you are late. You can also negotiate to lower the credit card interest rate. It is most effective when doing this to find an application from another credit card which offers a lower rate and will let you transfer a balance. If you are unable to pay your credit card debt, you may be able to negotiate for a lower rate if you offer to cut up the card and agree to no future purchases. If you are in financial trouble and don't think you can negotiate on your own, you may want to contact a credit counselor. Many credit counselors will work for you for free or at a low cost.

Rule # 6.  Credit cards are unsecured debt. Credit card companies charge higher interest rates because they have increased risks. Most credit card debt is unsecured. This means the only way the credit card company can get their money back is going to court to get you to pay the money. In most cases, the credit card company can't take back goods purchased with the credit card. Some store credit cards, such as Sears, claim to have a security interest in goods purchased with their card. A security interest is a secured creditor's  right to take the goods if the debt is unpaid. This right only comes after a creditor has followed the proper legal steps. If a creditor tells you they want goods back, you may want to talk to a lawyer.

People with more debt than they think they can pay may consider bankruptcy. Bankruptcy is a federal court action to help debtors reduce or eliminate their debt. Unsecured creditors and secured creditors are treated differently in a bankruptcy action. A secured creditor may still have a security interest in property after the bankruptcy. An unsecured creditor will usually have to settle for receiving only a small percentage of the value of the unsecured debt. More information can be found in the Legal Services Corporation of Iowa booklet Bankruptcy.

Maintaining the economic stability of low-income Iowans is a priority for Iowa Legal Aid. Assistance is provided in areas including consumer issues like debt problems. To find out which Iowa Legal Aid regional office serves your county, call 1-800-532-1275. Iowans over 60 can also call Iowa Legal Aid's Legal Hotline for Older Iowans at 1-800-992-8161.