Consumers may be better off letting old debts die

No Comments » | Posted by Jacob ONeill
Sep 01 2010

The Credit CARD Act was developed to level the credit card industry playing field for consumers, but analysts say responsibly using a credit card is as simple as thoroughly reading through the terms and conditions.

Industry lingo has been regarded as a problem throughout the years for consumers, many of whom have no prior knowledge of personal finance terms. The Credit CARD Act was created to provide Americans with more transparency and insight into the credit card industry, and in order for consumers to avoid debt, analysts say it’s more crucial than ever to read the fine print.

Bankrate reports that the average interest rate on credit cards across the country soared to 14.7 percent in the second quarter of 2010, the last quarter before the Credit CARD Act went into full effect on August 22. According to Synovate, a market research firm, this is the highest average since 2001. As credit card issuers grow more desperate for profitable revenue streams, rates and fees are predicted to increase in the coming months.

High interest rates can quickly result in mounting debt for card holders. In turn, this can result in credit score damage that may not be easily reversible by just paying off delinquent balances. As MSN Money reports, paying down an old balance can even hurt a credit score.

Charge-offs are accounts with past-due balances that lenders never expect to be repaid, typically 90 days after the last late payment. By attempting to repay an old debt, MSN Money says that borrowers can be subject to credit score damage and even potential lawsuits.

Digging up a late payment can provoke a credit card company to sue the consumer at hand in various states across the country. Reviving a past-due account may also encourage a lender to try to collect interest on the outstanding balance. MSN Money specifically tells consumers to beware of debt collection agencies. These agencies may try to make an old debt seem more recent than it really is. When this is reported to one of the national credit bureaus, it can result in further credit score damage.

MSN Money reports that credit card holders should attempt to repay their debt in a timely manner. Charge-offs are reported to collection agencies by credit card companies, which eventually takes its toll on the consumer’s credit history.

The financial site says, however, that Fair Isaac has worked hard to make sure that old debts have little effect on credit scores. Together with the three national credit bureaus, the new FICO score formula can decipher old debts from new ones. This results in greater transparency for consumers who choose to try to repay debt from the past.

The financial site recommends that all credit card holders with outstanding debt educate themselves on the statutes in their specific states. Each state has a set limit on the amount of time in which a lender can sue the borrower once an account has become delinquent. Old debt can cause credit score damage, but being taken to court for it can cause even more.

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