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Credit problems

Question: I have been working to eliminate my personal revolving debt for more than five years by paying the minimum monthly or more. It is evident that I'm not really making any headway and may be going in the opposite direction with creditors raising my interest rates to well above 25%. As you know, creditors check credit scores regularly and arbitrarily raise their rates and charges.

Now that my income has unfortunately dropped, I'm wondering if under the new bankruptcy law I'm better off negotiating a settlement with each credit card creditor. I'm not looking for a write-off, but a negotiated settlement with payment terms.

My question is should I take this course, suffer the consequences on my credit score, and rebound down the road? Ron, Escondido CA

Answer: It's outrageous that banks are hiking credit card interest rates when the economy is in recession, job losses are mounting and taxpayers are bailing out the financial system with at least $1 trillion dollars. It seems to me that raising credit card rates now is bad for households and the economy. (Longer term tighter credit terms might be good, but in the short-run it looks bad.)

For instance, both American Express and Citigroup have said they're raising rates by 2 to 3 percentage points on some customers. I expect we will also see many people get hit by "universal default" and the default rate of around 30%. About half of all credit card issuers have a universal default policy hidden in the fine print of a credit card agreement. Late on any payment to any creditor, and the rate on the card could automatically jump to the default rate--even though you're up to date on the credit card payments. I don't see how anyone ever gets out of debt at a 25% to 30% interest rate. That's loan sharking.

Here are three practical suggestions. First, get a copy of Gerri Detweiler's "The Ultimate Credit Handbook: How to Cut Your Debt and Have a Lifetime of Great Credit." It's in its third edition, and is very helpful. However, my guess is that your way past the kind of advice she gives since you've been working on paying down your debts for 5 years. (But it's worth a look for anyone worried that they're carrying too much debt and trying to pay it down.) I am also a fan of the credit advice at the non-profit organization Nolo.com. Its web address is www.nolo.com.

Second, contact the National Foundation for Credit Counseling (NFCC). It's the largest and oldest national nonprofit credit counseling service. You can find a branch near you at www.nfcc.org. I'd set up a meeting with a debt counselor, and see what can be done with their help and guidance.

Third, consult with a bankruptcy lawyer to what are your options for wiping the debt slate clean.

You'll then be able to make a reasoned decision.

I wouldn't worry about your credit score right now. The key is to figure out the best, most practical way to eliminate your financial burden and, at the same time, to make sure you won't end up in the same place 5 years from now.

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