Solutions to Delinquent Credit Card Debt & New Ways to Get Credit Card Debt Relief – an essay submitted by Kennon Bacon From Utah State University (for the Golden Financial Services Scholarship)
As a young, (more) naïve high school student, I asked myself from time to time how credit card companies could afford to give so much cash back, offer other perks, and take the hit on fraudulent purchases. I eventually realized that credit card companies mainly make money in two ways: one, they make a small amount of money on each transaction, and two, they use these perks to entice customers who will, sooner or later, miss a payment on time and then have to pay the exorbitant amount of interest, often times in the double digits. Maybe this happens only once, or maybe it starts a pattern of borrowing, spending, and falling a little more behind in debt. In the United States alone, this has culminated in a staggering $15 billion debt of delinquent credit card debt, and that number is rising. What solutions are there for this problem?
In my personal opinion, credit card companies actually want their clients to fall behind on payments. This way, they can easily fall into the trap of paying off interest on interest, hardly making a dent in the principle. At the same time, they don’t want clients to fall so far behind that they can’t ever pay them back.
One possible solution, if credit card companies really have their clients’ best interests in mind, is that they can use the interest payments to provide money management classes. Educating those in debt on how to get out and stay out of it would greatly decrease the total amount of delinquent credit card debt. This solution, however, lays most of the burden on the credit card companies, and actually getting people to attend is another difficulty.
Another solution is to enable credit card companies to directly take money out of debtors’ paychecks. This, obviously, is a very controversial solution. Some would argue that this violates their privacy rights, or even their human rights in general. However, for those that are already behind on payments, they don’t really have a lot of room to complain: they violated their contract. To jump this hurdle, lenders could implement a stipulation in their loan agreement that grants them permission to do this if the debtor falls behind more than a set amount of time or money. Alternatively, the amount that they could take out each paycheck could be up to the debtor, though it should at least be the amount of interest owed so that they don’t fall further into debt. It is much easier to pay something off when you pay for it first, then making the rest of your money make it to the next paycheck, instead of buying everything you “need” first and then trying to pay off bills. Very few debtors, though, would agree to let the companies take money directly from their paycheck, so a law would have to be passed in order to enforce this. Additionally, there is a chance that the debt would still be so high that they would have to seek other loans to make necessary purchases such as automotive maintenance and gasoline, buying groceries, clothes, education, etc. Because of this and other complications, this is a very controversial solution replete with potential problems, though it is also very promising.
A third solution is to pass a bill that caps interest rates or total interest amounts (such as capping the total amount of interest owed at 50% of the principle, or something similar to this). It is ridiculous that companies can collect interest that sometimes exceeds the value of the loan itself. If the possibility of getting into a never-ending interest-debt cycle is eliminated, delinquent credit card debt will greatly decline. Opponents of this proposition will argue about how debtors will then just put off paying their loan indefinitely, so it would be wise to couple this idea with some way of ensuring debtors pay off their loans long before the interest hits the cap.
A final solution is to allow third parties to buy up credit card debt and negotiate the loans independently. While this solution also has some drawbacks, as all solutions do, there is a lot of potential good that can come from this solution. Credit companies are willing to sell off large amounts of debt at a discounted rate just to ensure that they get paid back something instead of a little bit over the long run and, in cases where debtors can’t repay, nothing at all. The buyer of that debt can then earn money from interest, at a lower rate than before due to the discounted sale price. The original owner of the debt is happy that they’ve been repaid, and the debtor is also happy that they have a lower interest rate to pay. With this scenario, everyone wins.
Credit card debt is a complex problem with no straightforward solution. The interests (pun intended) of the lender as well as the debtor must be taken into consideration. Educating debtors on how to better manage their money could only be beneficial, though credit card companies would risk losing future business by doing this. If credit companies could take money directly from debtors, they would always get their money on time, though some would argue that grants them too much power. Capping the interest rate or amount would limit profits by companies but promise that debt from interest does, in fact, have an end. Finally, selling off debt to third parties would allow many independent investors to make profits, it would satisfy credit card companies, and it will provide a smaller interest rate for debtors. While this is a very complex problem, a combination of these solutions shows some promise for bringing credit card debt down to a much smaller, more manageable level while also granting financial security to many that currently don’t have that luxury.
***Please Include; a Cover Letter illustrating your full name, college or high school, college year, graduating year and intended major. In your cover letter, explain how you plan to use the scholarship and why we should select your application.***
Utah State University-Junior, 2018 graduation
Studying Economics, with a minor in Spanish
While I don’t know exactly how each and every dollar of this scholarship would be spent, I do know that I would use every single one both gratefully and frugally. Currently, there is a rather large gap between how much money I have for college and how much money I need for college. I need money for tuition, books, housing, transportation, food, pretty much everything that comes with paying for college. I am determined to go this fall semester, and I’ll figure out how to pay for it somehow. Right now “figuring it out” entails me living out of my car to save money, spending my days working on scholarships, looking for better places to work, and seeing if a living situation will come up that I can afford. As I alluded to, I am a very frugal individual. I have never had any debt (other than short-term loans to my mom, which I promptly repay), and that is because I abhor owing others, particularly financially. Though I am only 22, I’m doing my best to save money now for my future while also saving for college. Maybe this isn’t the smartest thing to say, but I’ll never have to come to you guys to help me with debt relief. That said, I’m grateful for companies like you that lift burdens from others to help enrich their lives. Thank you. Thank you also for considering my application. I hope you enjoy the essay!
The company offering this scholarship is Golden Financial Services, an IAPDA accredited and BBB “A+” rated debt consolidation company.