Imagine trying to get out from under a mountain of credit card debt. As you're struggling to make the payments, the credit card company slaps you with a new interest rate that's double, maybe even triple, what you were paying.
It's such a common occurrence that Congress is working on legislation to rein in some credit card industry practices that many lawmakers see as punitive. And many consumers say it's long overdue.
Unlike many Americans in these troubled economic times, Carole Hodges, a business consultant in Los Angeles, doesn't have to worry about keeping a roof over her head. That's because she's living in a cabana — a small, former pool house.
"There was a large pool outside and it sat on part of an estate," Hodges says.
There's no pool now, just a bigger house in front where Hodges' 87-year-old mother lives. She says it's good to be just steps away from her elderly mom. And living here keeps expenses low while Hodges nurtures a relatively new business.
"I consult businesses and individuals about how to create great relationships in business," she says.
Hodges decided to go into business herself in 2003 after she got laid off from a dot-com company. She was divorced, her kids were grown and it seemed like the right time.
"It was like being a teenager all over again," Hodges says. "I said, 'So, what do I want to do when I grow up?'"
First, she needed some more education. Then she needed some startup money. Hodges decided she'd use her credit cards to cover those things, thinking it would become "good debt."
"Good debt is your assets. Good debt can be your training. Good debt makes you money," Hodges says.
Racking Up Thousands In Debt
Over time, she charged around $100,000. She's still carrying a balance of about $70,000. Hodges planned to pay it all off in five years, but then her interest rates started going up and up.
"Suddenly, it's an extra $300 to $400 a month on the very same debt," says Hodges.
One of her credit cards started out charging 7 percent or 8 percent interest. It has now skyrocketed to 24 percent. Another card with a 2-3 percent rate is now charging her almost 18 percent.
The minimum monthly payments on all of her credit cards total about $1,800, which is one-third of Hodges' total monthly income. Even paying more than her minimums has had bad consequences.
"As I've chipped away and brought it down, they take away the credit [limit]. So as it went down, I had less credit available," she says.
Gail Cunningham, vice president of the National Foundation for Credit Counseling, says it's a story being told by millions of Americans. The clientele of the foundation has doubled over the past couple of years.
"So many people are struggling already and one hiccup pushes them over," Cunningham says. "If they were already struggling to make that minimum payment, sometimes it's back-breaking and they can't do it."
And just one ding on your credit, like having your limit lowered, can trigger a host of repercussions.
"You're not going to be able to get future credit — buy a house, buy a car, rent an apartment or purchase insurance," says Cunningham.
But if consumers are having a hard time these days, so are many of the banks that issue credit cards.
"The increased cost of borrowing in today's tight credit market is the reason that consumers who've done nothing [wrong] are seeing an increase in their interest rates," says Scott Talbot, senior vice president with the Financial Services Roundtable.
The legislation moving through Congress would prevent credit card companies from boosting the interest rates on existing debt, as they have with Carole Hodges. But Talbott says that could backfire if credit companies can't tailor the terms for each individual card holder.
"You'll see a decrease in the availability of credit," Talbott says. "And you'll see an increase in price for everyone else."
Looking For Reforms
But Hodges is willing to take her chances and eager to see Congress adopt some significant credit card reforms to protect consumers. She says it'll be good for her and good for the country.
"Because essentially, the extra money that I'm paying to the bank is taking it out of the economy," Hodges says.
She says she'd rather put the extra $300 to $400 toward goods and services. It'd be her small way of helping end the recession.