As Economy Recovers, Consumers Once Again Turn to Credit

American consumers have had a long and complicated love affair with credit cards. On one hand, credit cards help people pay for major purchases that would otherwise be unaffordable. On the other, using cards too much – or not paying them off like you’re supposed to – can lead to serious problems.

Many American families learned this lesson the hard way when the recession first hit. As incomes dried up, people began to realize what the long-term consequences of their debt habits really were.

In response to this awakening, those consumers who could afford to do so began paying off their credit card debts. The progress has been striking: during the first quarter of 2008, Americans collectively owed about $837 billion on their credit cards. By the first quarter of 2012, that number had fallen to $679 billion.

However, this progress doesn’t mean our credit card problems have gone away. In recent months, the rate at which Americans are paying off their credit cards has begun to shrink and new credit card use starting to grow. In the second quarter of 2012, the average credit card debt per consumer increased 6 percent from a year earlier. Experts predict that credit card use will continue to increase as the economy recovers.

Common Credit Card Myths and Mistakes

Many economists see the uptick in credit card use as an indicator of increased consumer confidence. They think it’s a good sign that Americans now feel confident enough in their income streams to start loading up on debt again.

Consumer advocates and bankruptcy attorneys aren’t so sure. They worry that consumers are simply walking back into the same traps that caused so many people to fall into bankruptcy when the recession hit.

To a certain extent, credit card use will always be a part of the American economy. However, it is important to use credit responsibly and to understand the long-term implications of carrying credit card debt. By understanding and avoiding these common credit card myths and mistakes, you can help protect yourself against bankruptcy and other financial problems:

Credit Cards Aren’t Free Money: It is always a good idea to factor in interest charges before making a credit card purchase, especially if you aren’t going to pay off the balance right away. If you can’t afford the interest, you can’t afford the purchase.

It helps to sit down and do the math before making the charge. As a hypothetical, imagine charging $1,000 to a card with a high interest rate of about 24 percent. If you make only the minimum payment each month, it could take more than five years to pay off the charge and cost you nearly $575 in interest.

Understand the Terms of Your Credit Agreement: Every credit card has a different set of terms and conditions. A lot of people end up getting into trouble because they don’t understand the consequences of a late or missed payment until it is too late.

Nearly all credit card companies will raise interest rates after a late or missed payment. Going over the credit limit can have a similar effect. Depending on your credit agreement and your previous payment history, the interest rate could go as high as 33 percent. When this happens, the minimum monthly payments can quickly rise to an unaffordable level.

Failing to make the payments on some credit cards can result in the loss of your personal property. For example, most jewelry and furniture stores offer “secured” credit to their customers. If you don’t pay the bill, they can take the property back, even if you have already paid off most of the loan.

Similarly, credit unions often “cross-collateralize” their loans. If you have a credit card and a car loan, the credit union can seize your vehicle if you don’t pay your credit card bill. This is true even if you have never had a missed or late payment on your car loan.

The Credit Card Company Isn’t Looking Out for You: On a basic level, credit card companies base credit limits, minimum payments and interest rates based on the cardholder’s ability to repay the debt. But, this doesn’t mean that they are always going to offer you a good deal.

Credit card companies make money by charging you interest. They want you to charge more than you can afford to pay off each month. Think about that every time your credit limit goes up.

Bankruptcy Can Help With Credit Problems

Keeping these tips in mind can help you avoid getting into trouble with your credit cards. Still, unforeseen problems still do arise. Luckily, there is help out there if you find yourself in a troubling debt situation. A New Jersey bankruptcy attorney can help you sort through your obligations and devise a comprehensive debt management strategy.