The Truth about Credit Cards

You may find that applying for credit cards is easy-too easy-especially if you are applying for your first credit card and you find that banks and loan companies are crying out for your business. If you have no credit history, a credit card can be a great way to begin building yourself a good credit rating, as long as you are able to pay off the entire balance each month and you make your payments on time.

Often, however, a credit card company will increase your spending limit for being such a good customer, and the temptation to overspend may set in. With more money to spend, you almost fool yourself into thinking that you now have a disposable income. Unfortunately, you may discover that you are spending too much and are unable to keep up with the minimum payments. When this happens, you may decide to take out another card and "rob Peter to pay Paul" with a balance transfer or a cash advance (both of which often come with higher interest rates than regular purchases). The next thing you know, you are receiving collection letters every day, informing you that you owe company after company money that you cannot afford to pay.

 

Decrease Credit Card Debt

The best way to rein in out-of-control credit cards is to sit down and make a plan. Some counseling companies advocate using cash for items that "won't be there when the statement arrives," such as food and entertainment expenses. In addition to reigning in spending, you should also formulate a plan to pay the cards down one at a time. This can include paying an additional $50 a month over the minimum payment on the card with the highest interest until it is paid off and continuing to do the same with the remaining cards.

You may choose to repay your credit cards with the help of a credit counseling agency. These agencies will typically consolidate the debt into a loan and work out a repayment schedule over a period of three to five years. If you have multiple credit cards, this gives you the ability to make one low payment at a set interest rate across the board.

Sometimes, however, the easiest method is to file for bankruptcy. According to financial experts, a full 33 percent or more bankruptcy filings are related directly to credit cards.

 

Bankruptcy Laws

Bankruptcy laws once provided little penalty for individuals who ran into financial trouble primarily due to credit card debt. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into effect with the express purpose of making it harder for consumers to bail on their unsecured debt. Still, today's economy has placed many consumers in a position in which they feel they have little choice but to max out their credit cards just to live. Those seeking to eliminate their credit card dept through bankruptcy should look into qualifying for Chapter 7 bankruptcy. Chapter 13 bankruptcy uses the individual's disposable income to embark on a three- to five-year repayment plan, allowing them to repay their debt as opposed to eliminating it. For many consumers, the new bankruptcy laws have made it impossible for them to qualify for Chapter 7 filing. However, it is always a good idea to seek the advice of a qualified bankruptcy attorney to discuss the available options.

 

Credit Cards and Chapter 7

Credit card debt is considered unsecured debt and is therefore one of the types of debt that will be automatically discharged in the course of a Chapter 7 bankruptcy. The only time you will have to repay credit card debt is when you act fraudulently and charge something knowing that you will not pay for it because you are planning to declare bankruptcy.

 

Credit Cards and Chapter 13

If you opt to file a Chapter 13 bankruptcy, the credit card company may receive some of the money it is due in the course of your repayment plan. Usually, the amount is at least as much as they would receive if you were to have filed Chapter 7 and had your assets liquidated. However, in reality it usually still amounts to pennies on the dollar when compared to the amount owed. Regardless of the amount that has been paid, once the repayment period is over in three to five years, the remainder of the debt is discharged.

 

Bankruptcy Hearing

At your bankruptcy hearing, the facts, the judge will consider a number of factors regarding credit card use:

• The amount of time between when you applied for the card and when you filed for bankruptcy. This will look worse for you if you maxed the card out quickly and made few payments on it.
• The amount of time between when you maxed out the card and when you contacted a bankruptcy attorney.
• Whether you used your card after contacting a bankruptcy attorney.
• Whether you had the disposal income to make payments on the card.
• Whether you lied on your application about how much money you make.
Whether there are special circumstances that came about after you maxed out the card, such as losing your job or being in an accident (where you racked up high medical bills).

The judge will also look into whether the purchases were for luxury items. If you have spent over $500 on luxury items within three months prior to filing, they cannot be discharged in bankruptcy. This is the same for cash advances that amount to more than $750 taken within 70 days of filing.

 

Credit Cards after Bankruptcy

Obtaining a credit card following bankruptcy may or may not be easy. If you have filed Chapter 13 bankruptcy, you cannot obtain new credit without the approval of the trustee during your repayment period.

Once you have filed Chapter 7 and have received your discharge, you may want to look at obtaining a credit card again. There are companies that specialize in high-risk credit cards, and they will typically give you a card with a low limit, high annual fees, and strict, hefty late fees. Secured credit cards are also available through many financial institutions and can have much higher limits. This is because the card's limit is equal to an amount you deposit at the bank as a security on it.

 

Maintain Good Credit with Credit Cards

When used correctly, credit cards can actually help you establish credit. In fact, a credit card is often the first opportunity young adults have to put themselves on the map, so to speak. It is common knowledge that no credit can be just as challenging as bad credit when it comes to getting a loan. However, by opening a few accounts and using the cards sparingly (and paying them on time), you will develop a good credit history and become eligible for car loans and mortgages in the near future.