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It's All About Your Salary -- and Your Debt

A recent New York Times story details the debt of Christine and Mark Moellering, a Midwestern couple earning average salaries--she earns $30,000 a year as an administrative assistant, while he makes $36,000 a year as a software applications designer.

(PayScale data show Mr. Moellering's pay is typical for software application/Web designers in Michigan.)

According to the article:

Ms. Moellering, and her husband, Mark, 39, earn average salaries for their age (together about $66,000 a year), live in an average-priced home and have an average cost of living. But like many other households these days, they have found that their day-to-day economic life has come to depend not just on how much they earn or spend, but also on how well they shuffle what they owe among a broad array of credit cards, home equity loans and other lines of credit.

Americans spent one in seven of their take-home dollars on debt payments last year, up from one in nine in 1980. Experts say few consumers are able to calculate the true costs of such payments.

Behind closed doors, the decisions families like the Moellerings make about their debt — when to pay it off, when to shuffle it to lower-interest sources and when to let it revolve and build — can determine how much their salaries are worth. Like many others, the Moellerings have run up avoidable penalties and occasionally spent themselves into more debt or higher interest rates, even as they have tried to juggle other balances to bring down their monthly payments.

This spring they allowed a reporter to see how they struggled with these choices. Ms. Moellering’s basket recently included more unwelcome news: $2,693 due on a Visa card through her credit union, including finance charges of $25, and $13,680 on a CashBuilder Elite Visa, including a monthly finance charge of $200.

Their credit card debt came to $22,228, including $380 in monthly finance charges. Interest varied from 12.1 percent to 32.24 percent. The Moellerings also have a mortgage of $93,000 and a home equity loan balance of $68,574, at 8 percent interest.

Washington Steps In

Last week Sens. Carl Levin, D-Mich., and Claire McCaskill, D-Mo., proposed a bill to address certain credit card practices that critics say increase consumer debt.

A column by David Lazarus in the San Francisco Chronicle reports some of what the bill would do:

-- Ban interest from being charged for any portion of a cardholder's debt that was paid on time during a grace period. As it stands, many card issuers charge interest for the entire amount put on plastic in any given period, even if only a small fraction remains unpaid.

-- Limit interest rate increases to no more than 7 percent if a cardholder misses a due date.

-- Require that any increase in interest rates apply only to future debt, not what the cardholder may have already run up in money owed.

-- Prohibit "pay-to-pay" fees by which cardholders have to pony up extra cash just for paying their bills by phone or online. ...

Yet shortly after the legislation was introduced, the American Bankers Association responded with "deep concerns" over the provisions of the bill. ...

Ruth Susswein, deputy director of national priorities for Consumer Action, said it's remarkable that the banking industry sees the proposed law as being detrimental to consumers.

"What they're really saying is that if we toy with their freedom, they'll take their ball away," she said. "The industry threatens to curb credit any time there's some effort to end abuses."

Quashing Debt's Stranglehold

The Moellerings' story is painful to read--mostly because they admit they've not taken time to focus on their finances and get hold of their debt. Instead, it seems debt has a hold on them.

There's no one-size-fits-all debt solution that every American consumer can adopt. But consumers and lawmakers can make a joint effort to improve the situation.

Lawmakers should craft legislation that does away with truly abusive, misleading practices of credit card companies and other money-lenders.

In the meantime, consumers should stay educated about their finances and informed about new policies or practices affecting their debt loads. They also must spend time charting a financial plan--without one, finances can too easily get tangled, debt can too easily soar.

-kc

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