Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
Understanding credit card debt is crucial in today's economy, where the convenience of credit cards can sometimes lead to unforeseen financial stress. Many believe that credit cards inevitably lead to debt, but this doesn't have to be your reality. With informed strategies and disciplined practices, you can harness the benefits of credit without falling into the debt trap.
This guide reveals three essential insights to manage your credit card debt effectively, ensuring you remain in control of your finances rather than letting your debts control you. Let's demystify credit card debt together and explore how you can use credit to your advantage.
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1. Debts Older Than Seven And A Half Years Should Not Be On Your Credit Report
Under the Fair Credit Reporting Act, an account that has been charged off can only appear on a consumer’s credit report for seven years and 180 days from the original date of delinquency.
The original date of delinquency is the date that the first payment became overdue directly prior to the account being closed. For example, if someone had credit card payments due on the first of each month, and missed their February payment and all subsequent payments until the card was closed, Feb. 1 of that year would be the original date of delinquency. If they missed their payment on Feb. 1, but then later brought the account back into good standing, Feb. 1 would not count as the date of original delinquency. In other words, it’s the date of the first missed payment that started the chain of missed payments that eventually led to account closure.
In the past, the date could be changed when one collections agency sold the debt to another. This is no longer legal, but some of the shadier collections agencies still try to get away with “re-aging” the debt by simply reporting incorrect dates to the credit bureaus and hoping the consumer doesn’t notice or isn’t aware of their rights. Debt can be re-aged legally only if the consumer agrees in writing with the current debt holder to make payments on the account.
The date of original delinquency should be listed on credit reports under a “tradeline” bearing the original creditor’s name; sometimes, however, these don’t appear. If the original tradeline isn’t available on one credit report, check the other two for it. If it isn’t on any of your credit reports, you’ll need to dig up your old statements from the credit card company to determine the true date of original delinquency. If you don’t have these, you can usually get them from the original creditor without any trouble, though they may charge a fee for them.
If you’ve been a victim of re-aging, you should first contact the current debt holder and inform them that they are reporting an incorrect date of original delinquency in violation of FCRA Section 605. If they do not voluntarily change the date, the next step is to report them to the FTC using the “Complaint Assistant” tool on their website. You can also contact each of the credit bureaus directly about changing the entry, though this method is less sure. You’ll have the best chances of getting through to them if you hand-write a polite letter with any supporting documentation that is necessary.
One important thing to note is that debts aren’t canceled after seven years, they simply can’t be reported to the credit bureaus any longer. Owners of the debt may still attempt to collect it from you by contacting you directly.
2. There Are Legal Limits On Interest That Can Be Collected
The original creditor is allowed to continue collecting interest and late fees that were specified in the original contract until they charge the debt off and sell it to someone else. From there, the law gets a lot more complicated and fuzzy. The Fair Debt Collection Practices Act limits debt buyers to collecting interest and fees that were specified by the original contract, in essence putting them in the shoes of the original creditor.
Some debt collectors go above and beyond, of course. As with illegal re-aging, they’re hoping the consumer doesn’t know their rights or challenge them on it. State law comes into play here. Each state has its own statute of limitations on how long a debt collector has to sue a debtor, usually four or five years. The state where the debt originated is the one that matters for this time limit — it doesn’t matter if a collection agency in a different state purchases it. Once that statute of limitations is up, the debt collector has no legal recourse whatsoever to collect on the debt. All they can do is pester the debtor with letters and phone calls in the hopes that they’ll capitulate. State law may allow them to continue adding interest at this point, but they have no means of collecting on that amount unless you agree to pay them.
When debts are sold, they are sometimes only sold with the name and last known contact information of the debtor. If the original contract was lost at some point while the debt was changing hands, the debt holder no longer has any legal basis on which to charge interest or fees.
Collections agencies will often present a staggering amount of interest and fees to the debtor in the hopes of convincing them to “settle” for a substantial reduction. But the reason they’re always so willing to settle is that they originally purchased the debt for much less than its actual value, and they know that if they’re taken to court over it, they’ll likely have a hard time justifying the extra amount they’ve tacked on.
The Legal Limits on Interest
- Research usury ceilings and interest rate caps in your state, usually 15-30% APR for credit cards. Collect sample dispute letter language online.
- The statute of limitations on collecting debt ranges from 3-6 years depending on the state. Know the timeframe for your state.
- Without the original contract, collectors cannot legally add interest or fees. Request documentation if amounts seem inflated.
3. Many Common Collections Practices Are Illegal
The Fair Debt Collection Practices Act lays out a set of rules regarding what debt collectors can and can’t do. Of course, some will take calculated risks in violating these laws, with the expectation that the relatively few consumers who catch them in their wrongdoing and get them fined will be outweighed by the many they can intimidate and harass into paying.
A debt collector isn’t allowed to contact third parties about your debt. They can only communicate with the original creditor, the credit bureaus, and an attorney that you specify. They are given more freedom to contact other people solely for the purpose of determining their whereabouts, but they can only contact each third party once and cannot reveal that they are collecting on a debt.
If a collector has gotten hold of your phone number, there are limitations on when they can call you. Calls earlier than 8 a.m. and later than 9 p.m. are forbidden. If you can demonstrate that you work a late shift and sleep during the day, you can also prevent them from calling during that time. They are allowed to contact you at work unless your workplace has a policy preventing personal calls or collections calls. If you have appointed an attorney to represent you and they have the attorney’s contact information, they may no longer contact you directly.
Collectors may never use threats, insults, or obscenity in any communication with you. They are also not allowed to publicize your debt in any way. They are allowed to verify your name when you pick up the phone, but then must immediately identify themselves as a debt collector. As with re-aging, complaints about violations can be directed to the FTC through their online “Complaint Assistant” tool.
Debt collectors will continue to skirt rules as long as they think it’s profitable and not too risky for them. The only answer is consumer vigilance. At a minimum, everyone should take advantage of their free annual credit reports to ensure that the information in them is accurate.
Tips for Avoiding Credit Card Debt
- Make a comprehensive budget tracking every expense and identify non-essentials to cut back on. Things like dining out, entertainment, and shopping can often be reduced.
- Pay off entire statement balances each month. If that's not possible, always pay more than the minimum due to reduced interest charges. Set up automatic payments.
- Secured cards require a refundable security deposit that becomes your limit. This helps demonstrate responsible usage. Prepaid debit cards let you only spend what's loaded on them.
- Build an emergency fund savings account with 3-6 months of living expenses. Contribute each month until you reach the target savings amount.
- For large purchases, wait 1-2 weeks and ask yourself if you still need the item before using credit. Don't buy on impulse.
When to Seek Professional Help
- If you've missed multiple payments and have accounts in collections, credit counseling services can negotiate with creditors.
- If total credit card debt exceeds 50% of your gross annual income, debt management plans can consolidate your debts into one payment.
- Reputable nonprofit credit counseling agencies provide free consultations to assess your situation and provide recommendations.
- Beware of scam credit repair agencies; get guidance only from accredited nonprofit organizations.
Credit Card Alternatives
- Secured card deposits become a usable line of credit to build a payment history with minimal risk.
- Prepaid cards let you pay with "credit" without linking to your bank account. Load funds to start using the card.
- Credit unions offer personal loans with APRs often lower than credit cards. Payment plans help build credit.
- Retail store cards tend to have lower limits but high APRs. Use sparingly and pay off each month.
- Debit cards deduct purchases directly from your checking account. Withdraw cash to use instead of credit cards.
FAQs
Conclusion
Credit card debt can quickly become overwhelming if you don't take proactive measures to avoid it. Make a detailed budget each month tracking your income and expenditures. Look for areas where you can reduce unnecessary spending on things like entertainment, takeout food, and shopping. Commit to paying your full credit card statement balances every month to avoid accumulating high-interest debt.
If you struggle to pay more than minimums or rely on credit cards to cover emergencies, build up a savings fund with 3-6 months of living expenses as a safety net. Consider using secured cards, prepaid debit cards, or community credit union loans instead of traditional credit cards. If your debt persists or worsens, seek help from accredited nonprofit credit counseling services.
Understand your rights under laws like FDCPA and FCRA regarding accurate credit reporting, fair interest and fee charges, and legal debt collection practices. Collectors cannot add unauthorized fees, report paid-off debts, call outside allowed hours, threaten you, or sue after the statute of limitations expires in your state. Dispute errors on your credit reports, challenge unfair interest rates, record collection calls, and report violations.
With vigilance and a proactive plan, you can eliminate existing credit card debt over time by budgeting, cutting expenses, negotiating lower interest rates, consolidating payments, and seeking professional guidance as needed. Maintain responsible usage of any open cards and limit new applications to gradually rebuild your credit. Take control of your finances, improve your credit standing, and regain your financial freedom.
If you are struggling with overwhelming debt and want to explore your debt relief options, Pacific Debt Relief offers a
free consultation to assess your financial situation. Our debt specialists can provide objective guidance relevant information and support to help find the right debt relief solution.
*Disclaimer: Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.
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