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Credit card defaults on the rise as holiday bills come due

Samantha Bomkamp, Chicago Tribune on

Published in Home and Consumer News

Americans are defaulting on their credit cards at the highest rate in nearly a year. Experts blame the improving economy: Consumers are feeling more confident in their overall financial situations and they're loosening their purse strings because of it. That confidence led to higher retail sales through the holiday season, but the credit card bills are coming due, and people are leaving them unpaid at an alarming rate, according to S&P and Experian. Another factor in the uptick in default rates is the increased willingness of financial institutions to extend credit to those who may struggle to pay it back.

Nationwide, the default rate was 0.91 percent in December; Chicago had the default index value of any U.S. city at 1.15.

It's a tough time of year to pay down debt, because holiday bills are due but many families are also planning for spring and summer vacations, said Michael Foguth, founder of the Foguth Financial Group in Brighton, Mich. Foguth believes that more Americans are prioritizing vacations due to improving confidence about the economy, and spending more on smaller indulgences like eating out. But the desire for date nights or a weeklong retreat are often too rich for consumer's budgets, he said.

"The reality is, if your paycheck doesn't support your spending, you're going to default," he said. Foguth thinks that social media has enhanced our desire to "keep up with the Joneses" -- another reason we're spending money we can't afford.

"I call it the 'Vegas syndrome,'" he said. "People always tell you how fun their vacation was, but they don't tell you how much money they lost."

But it's not just an improving economy or the thrill of a getaway that is leading more people to rack up debt they can't pay. Another reason for rising credit card defaults, observers say, is that banks are loosening lending standards and making it easier for more people to get more credit. Consumers have taken advantage of that trend, run up their balances -- and run into trouble.

A lot of the borrowers who are opening up lines of credit now are "subprime" -- those with bad or limited credit history or low credit scores -- noted Bruce McClary, spokesman for the National Foundation for Credit Counseling, an organization that provides access to financial counseling services.

"I don't think we're ready to sound the crisis alarm right now, but it's certainly something that deserves our attention," he said of the rising defaults.

Subprime borrowers generally pay higher interest rates, so it tends to take them longer to pay back debt. And McClary said credit card interest rates should go up this year as the Federal Reserve raises the key federal funds rate, which could make it even more difficult for borrowers paying higher interest rates to keep payments on time.

"It's really important not to let things fall far behind," he said. "Missing even one payment can hurt you." The result can be a higher interest rate, late fees of at least $25, and a possible hit to your credit score, he said. Missing credit card payments can be especially dangerous for consumers, he said, because credit card companies can move quickly to impose penalties.

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"It's not like a traffic violation where you get a warning," McClary said.

McClary recommends seeking help from a credit counselor as early as possible, a service that can be found in every major city at low- or no-cost, he said.

And if you're well down the road to default? Foguth recommends trying to negotiate a lower interest payment plan with the credit card company, or even an interest-free period. Credit card companies have an incentive to work with consumers, he said, because if they don't pay their bills, the debt will be sold to a debt collector, a scenario in which credit card companies only recoup pennies on the dollar.

And the most drastic step that Foguth recommends when credit card debt gets extreme?

"Weigh the option of letting them all go," he said. "Closing cards (while negotiating a payment plan for the balance due) may be the only smart move left."

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