Digging out of Debt

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Meet the Petersons. Matt is a software engineer and Suzie works mostly at home raising their three daughters: Julianne, 12, Rachel, 11, and Caroline, 9.

They live in an upscale California neighborhood in a 4,000-square-foot home with a pool, a huge walk-in wine cellar and even its own movie theater. They drive nice cars and own a second home and two vacation time shares.

How do they do it? They're in debt up to their eyeballs.

"I know that we don't make ends meet each month, and to make ends meet, we use credit cards, and then the credit card payments start increasing, and you just can't make ends meet even doing that," Suzie said.

Their monthly household income of $8,750 isn't enough to cover all of their expenses, which total $15,000 a month. For over a year, the Petersons have relied on credit cards to keep afloat financially.

Using one card to pay off the other, their credit card balances eventually ballooned to $60,000. Their Bank of America Visa alone has a balance of $19,000, at an interest rate of nearly 33 percent.

The burden of their debt is something that keeps Suzie up at night. "I woke up at 2:30 a.m. this morning because yesterday we went to the diner and tried to use the debit card and it didn't work."

An Epidemic of Debt

The Peterson's financial situation may sound shocking, but they are not alone. Nationally, credit card debt is growing -- almost tripling since 1989. Today, American consumer debt is over a trillion dollars. More than half of all cardholders don't pay their cards off each month and carry an average balance of around $2,000.

Ironically, families like the Petersons -- who struggle to make the minimum monthly payments -- are more valuable to credit card companies than customers who pay in full every month. According to the Government Accounting Office, credit card issuers make 70 percent of their profit from the interest payments made by cardholders who carry a balance every month.

Still, credit card companies insist they are not banking on customers' inability to pay.

"Credit card issuers are concerned about people who are only able to make the minimum payment because those people are at significant risk of not repaying the loan in the short term and that means the bank loses the money," said Nessa Feddis, a lawyer with the American Bankers Association, an industry trade group.

For that reason, Feddis says, credit card companies are constantly adjusting their policies to minimize the number of customers paying only the minimum amount.

Read the Fine Print

Elizabeth Warren, who teaches bankruptcy and commercial law at Harvard University, disagrees. "Credit card companies have a special word for the customers who pay in full every month. They're called deadbeats."

Nothing helps the credit card companies' bottom line more than the fees and high interest rates they earn from consumers who are struggling with their payments. For example, one of the Petersons' credit cards charges a $39 fee for going over the spending limit or being late on a payment.

And even if the Petersons always pay their bill on time, the bank can still increase their interest rate to 32 percent if the Petersons are late with a car or mortgage payment, or any other payment to a creditor. That's because a "universal default" clause is buried in the fine print of the Peterson's credit card agreement, the terms of which can be changed by the credit card company "at any time for any reason."

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