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A credit cards debt is a term that is used to refer to the form of unsecured customer loans/ debts in which the customer accesses such credit via the usual credit cards. As a result, the debt culminate in circumstances or rather situations where the customer buys a service or a product using the credit card systems such as visa cards, leading to a loan that the customer is bound to pay within the agreed period of time and at predetermined and agreed interest rates. Consequently, such debt is likely to accumulate and soar due to the increasing interests as well as penalties for defaults in situation where the customer/ defaulter declines to pay the credits card company for the money that makes the debt or rather failure to pay the debt within the agreed period of time. The interest rates or penalties that are charged on credit card debts either normally or in cases of default is not static thus vary among credit card companies or with time (Dugas 7). For instance, in case where the customer has either defaulted or failed to pay the credit card debt, the credit cards debt company will levy the customer interest and the respective penalty basing on the current such terms and in line with the organizational policies and procedures governing the same. According to Aparajita & Anusha (6), penalties for default and late payment ranges from between $ 10 to $ 40 the latter of which the company will inflict to the customer upon which the respective company is expected to report the delayed payment/ debt default to the respective credit rating bodies/ agencies. This paper reviews the issue of credit cards debts with a bias to the United States of America. Furthermore, it reviews the pros and cons of the credit cards debts.
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Credit card debts: empirical facts
According to Dugas (7), statistics have evidenced that the credit card debts are more popular and extensive in use among the highly developed and industrialized countries. In a research conducted by the United States public interest group in 2008, it was found out that the total amounts in credit card debts in the United States was approximately 962 billion USD as at July 2008. On the other hand, the approximate total of in credit card debts among the United Kingdom consumers was estimated at 64. 7 billions Euro as at match 2009, while in Australia, such debts were estimated at 41 billion AUD by the end of the year 2009. In the United States of America, it has been proven that before an average college graduate kicks of his or her after college life such a student in most cases will have accumulated credit card debts amounting to $2000 or even more; a factor the places young American in credit cards debts crisis very early in life. More so statistical results reveal that the mean credit card debts as at March 2009 in the United States of America fell close to 3000 USD. Similarly, the average number of credit cards held and continuously used as at the same time was found to be 2 (Tyson 8).
The credit card debts and the universal defaulters
The most controversial part of credit card debts is the application of the universal default principle. In relation to the credit card debt, the universal debt principles arises in circumstances where in cases of default or delayed payment by a customer to specific lender/ creditor even the other creditors to whom this specific customers owes money in terms of credit card debts increases the customers interest rates despite the fact that he is only a defaulter with only one creditor (Aparajita & Anusha 7). The critics of this practice have often termed it as unfair to the customer and purely a fraudulent move by the Credit Cards Company or creditor whoever is the applicant of the principle. According to Aparajita & Anusha (7), the universal debt principle is the key cause of credit card debt crisis among the credit card users especially in the United States of America and which has made it lose a great extent of popularity among the American consumers.
Credit card debts relief
Prior to the amendment of the America bankruptcy law, it was easier for the credit card debts holders/ customers to get credit card debts relief. Under the earlier bankruptcy laws, it is possible for the customers/ account holders to apply for or rather requests for the relief on the annual card debts interest rates, which are typically known as the annual percentage rates (APR). This leads to reduction in cost/ interest of the credit card debts incurred by the customer. Basing on the results of the survey conducted by the United States public interests group (USPIG) in 2002, it was found out that out of the sample population of fifty respondents and which included American from varied credit backgrounds who had got in touch with their credit cards provider requesting for debt relief, more that half (56 %) had succeeded in getting significantly lower annual percentage rates (Dugas 9). The survey had found out that the APR of the successful applicant had been reduced by 5.53 on average. Also the credit card debt could be cancelled in certain circumstances especially when the account holder is by law proven to be bankrupt. However, amendments on the bankruptcy law steered by the great need to protect the credit companies from the risks arising from the bankruptcy concerns has rendered debt relief and canceling of credit cards debts very difficult (Aparajita & Anusha 10).
Credit card debts forgiveness
This is also referred to as total relief of the credit card debt by the company. It is a situation in which the company cancels all the customers’ debts predominantly due to circumstances of legally declared bankruptcy on the part of the account holder/ customer. Bankruptcy is an extreme form of credit card debt crises in situation where the debt holder is overwhelmed by default penalties, very high annual percentage rates or having been subjected to financially overwhelming universal default consequences especially on customers who steadily and continuously fails to settle their credit cards debts. Such customers often apply to be declared bankrupt in the US court system and if successful, the customer is entitled to a total credit card debt waiver by the credit card company(s). However such bankruptcy can be successfully contested by the credit card company(s) or one or more creditors through the same systems and which may result in an exception from the waiver. Another controversy on the credit card waiver and holder’s bankruptcy, a bankruptcy judge can block the challenge using legal procedures and facts irrespective of the challenge by the creditors to contest the waiver (Dugas 10).
While the risk of bankruptcy would favor the customer/ debt holder in relation to credit cards debt, the creditors and the credit card holders are usually in the receiving end. Consequently, such debt waivers reduce the possibility of the credit card company making reliable profits and compromise their future survival. As a result, Credit Company have adopted strategy of offering alternative deals to customers that are likely to reduce cases of bankruptcy which includes greatly reduced annual percentages rates abolition of past late levies on defaulters as well as other punitive levies on the part of the consumers as well as virtual reaging of the account with an objective of making the credit agencies to view them as late accounts thus attracting less penalties on defaulters (Dugas 11).
The new bankruptcy bill
The new bankruptcy bill that was assented in to law by the former president to the United States; George Bush on Wednesday the 20th of April 2005 came as a sigh of relief to the credit card company. Under the bill, the company’s interests are not only safeguarded in cases of bankruptcy but it also gave them freedom to adjust the annual percentages rates with limited remedies on the part of the consumer(Litvan 5). Consequently, the short-term interests are on the increase; a factor that comes with an implication that the credit card companies can raise the interest rates at will without necessarily consulting the credit cards holders. According to Gross (2) the bill and which is backed by the increasing employment levels and low marginal rates of unemployment, it is expected that the credit card defaults and bankruptcy rates from the customers will greatly decline. Irrespective of credit card leading companies such as MBNA posting extremely poor result in the first quota of 2005, the management upon the assenting of the new bankruptcy law and the improving climate to favor the credit cards industry expressed optimism that things could take a drastic turn to the positive in the subsequent quarters of the 2005 fiscal year. According to Gross, freedom to increase the annual percentage rate is likely to intrigue customers to hurriedly pay their credit card debts in fear of further increase. The managers expressed optimism that basing on the suitable situation that characterized the industry at the time of the bill enactment customers will increase their borrowing in the subsequent quotas to make up for their spending liquidity deficit irrespective of increasing annual percentage rates and that a substantial number of customers will settle debts frequently so that they can qualify for more debts
Credit cards debts problem in America
Empirical facts from 1989 all through to 2007 in a research carried out by the American institute of economic research (AIER) revealed that the United States customers have been virtually overburdened by credit cards debt. According to their finding, it indicated that majority of the American customers were actually struggling to settle the ever surging credit cards debts with some either facing universal default penalties, default levies, high cost of debt re-servicing due to increasing annual percentage rate or even filling bankruptcy claims for waivers(Tyson 6). In their most recent research of credit card debts AIER found out in 2007 that 77% of the American possessed at least one credit card debt, with only 23% spared. Among the American households with credit cards, the survey found out that the average number of credit cards per each household was too similar to the finding of a research carried out in 1989 on the same.
Since 1989 to 2007 however, the survey revealed that the number of credit cards holders among the American population has in fact tripled relative to the number of families whose credit cards indicated a balance the latter of which statistics reveal a slight percentage increase in the last 20 years. Also, facts from the survey revealed that out of the 73% of Americans who had credit cards slightly over half 42 % recorded zero balance after settling their most recent bills (Moncrief & Khadem 7). Also, a only a quarter of those in possession of credit card seldom settled the credit card balances an implication that only one in every five Americans in possession of credit cards consistently carries credit card balance (Tyson 5). Consequently, the research revealed a significant average of credit card balances among the Americans i.e. a median of 3000 USD. More so the research indicated the possibility of American sinking further into the credit cards debts crises in the wake of the global economic recession but expected a counter effect as American slims up their spending in an effort to cut down debts and increase savings as a measure of security. Furthermore, use of credit card is loosing popularity among the Americans as consumers become more rational with degenerating economic situations since as Anonymous (2) argues, there are no advantages of using credit cards over cash as the purchase ends up being more costly irrespective of whether the consumers settles the credit card well in time or not.
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