By the time Curtis E. Arnold finished graduate studies at the University of Texas at Dallas, his credit card debt had climbed to $45,000. The looming debt put him under "unbelievable" stress, says Arnold, the founder of Little Rock, Ark.-based CardRatings.com, a consumer-education site that compares credit cards.
Today, credit cards are a ubiquitous — and often welcome — feature of the daily lives of most Americans. But the very nature of credit cards can make them debt traps for low-income people and unwary consumers of all economic levels.
Over-optimism about one's own earning ability can be a trap, says Arnold. "I bought into some lies as an undergraduate, like that I was going to make six figures when I got out of college and that my debt was temporary," he recalls. "Every college in America has 'increasing your salary' as one of its talking points," but that pitch — while true in the long run — ignores the fact that new grads start out in entry-level positions.
Arnold started off in a $25,000-a-year spot as a local bank manager and was in no position to pay off that "temporary" debt quickly, he says. The "debt happened so gradually, like a snowball rolling downhill, and I thought — I'm going to a good school, and as long as I make those minimum payments, I'm fine." But minimum payments "spread out over a number of cards" quickly mounted up to over $100 a month, and Arnold's debt didn't get any smaller. "Reality hit me like a ton of bricks," he says. 'This is not going to be temporary. You've deceived yourself."
Today, almost anyone can get a credit card, but analysts agree that, most likely, not everyone should, although getting along without one is tough in today's society.
"When you go to the video store, for God's sake, they want a credit card," said one low-income woman interviewed by Angela Littwin, an assistant professor at the University of Texas Law School. Nevertheless, most women in Littwin's study were shocked that they could get cards. "I sent [the application] in, and they actually sent [a card] to me, and I was in shock. I was like, 'Who the hell would give me a credit card?' " one said.
Arnold says that some people with low incomes, such as students, should avoid cards completely if they can.
"Not everyone can handle a credit card," says Arnold. "I'm generally pro-credit but with a bunch of caveats," mainly because "study after study has shown people spend more on a credit card [than without one] and even more on a rewards card," he says. "If that reward card will cause you to get another airplane ticket, then don't use that card." Otherwise, "you're digging yourself into a deeper and deeper hole."
"I would say, don't get a credit card until you're a junior," says Edwin Lindo, a senior business major and student body president at the University of the Pacific in Stockton, Calif., who's currently digging out from under his own credit card debt.
That's partly because temptations to spend are all around. "There's a perception that as college students, we hang on by threads, are minimalist, live on ramen [noodles], but that's just not realistic," Lindo says. Like other Americans, "we're surrounded by media" and advertising exerting constant — if largely unconscious — pressure to spend. And the nature of credit cards is such that "you don't realize what you're spending because you don't see the bill until later," and, even then, the bill won't clearly show the additional amounts you'll pay in interest, on top of the cost of your purchases, he says.
Worsening the peril is that, today, credit card bills and contracts inform users of some of the most dangerous provisions only in complex, legal language and small print.
A 2006 Government Accountability Office report found that cardholder contracts are written at a reading level that "50 percent of Americans can't understand," making it extremely difficult for many people to grasp the rules of the cards they hold, such as what the fees are and when those fees will be imposed, says Tim Westrich, a research associate at the Center for American Progress.
A few rules are very important to keep in mind, says Arnold. First, "be very aware of universal default" — the card industry's practice of sharply increasing your card's interest rate if you make a mistake on any bill, such as paying rent or phone bills late, bouncing a check or going over the credit limit on another card, he says. To avoid triggering high default rates — which can be as high as triple your previous interest — it's vital to pay all your bills on time, he says.
It's also crucial to be aware of your credit limit and keep your balance as far under it as possible to help your credit score — the number banks and other lenders use to determine your personal creditworthiness for loans and favorable interest rates, says Christopher Viale, president of the Cambridge Credit Counseling Corp. in Massachusetts. A full 30 percent of your credit score "is based on how close you are to your credit limit," says Viale.
Don't use special cards like store and gas cards, even if you think they'd be good for travel, says Viale. "It's way too difficult to navigate their promotional discounts," he says.
Be especially cautious with medical expenses, as well, Viale says. In a medical emergency, it's natural to panic and charge hospital or doctor bills on a credit card, but that's a huge mistake, he says. "You can work the charges out with hospitals, and as long as you didn't put it on a credit card, you won't be charged interest, just some collection fees." But once a medical bill is on a credit card, paying interest is inevitable unless you can pay it off in the first billing cycle, he says.
If you decide to get a card, don't just take the first offer, look around to "find the card that's right for you," says Arnold. "If you pay off your balance" each month, get a card without an annual fee, and "look at how you can maximize rewards" on a card whose rewards match spending you'd do anyway. "If you have a balance to pay down, don't look for rewards, look for the best interest rate," he says.