Defaults hurt credit card companies, leaving them with unpaid debts that impact their bottom line. Credit card defaults also hurt the people who can’t or won’t make their credit card payments, leaving them with financial problems that can plague them for years.

When you fall behind on your credit card payments, your credit card company can hit you with a penalty rate. These penalty rates can be up to 30 percent in some cases and help put you even deeper in debt. New federal regulations have given credit card holders some breathing space, however. Credit cardholders must now be at least 60 days late on a payment before credit card companies can invoke penalty rates.

In addition to penalty rates, cardholders can also be hit with late fees if they fall behind. If the extra interest from the penalty rate and the cost of the late fees drives the cardholders’ balance above their credit limit, they may also be hit with over-the-limit fees.

Credit card default occurs when cardholders fail to make payments for a significant period of time, usually six to eight months. When credit card companies don’t receive payments for six months or more, they charge off the debts. This means they remove the debt from account receivable and submit it for collections. The card holder is still liable for the debt and will likely pay much higher interest rates and other fees associated with the default.

When a credit card account goes to collections, bill collectors will begin contacting the cardholder directly to request payment. If the creditor is still unable to pay the debt after several months, the debt is then likely to be referred to a third-party collection agency. These collectors are commonly much more pro-active in their collection efforts, and will likely frequently call you and may even call you at work or leave messages with your neighbors.

If third-party collectors can’t collect the debt, they may take cardholders to court to collect the owed amount. The cost of legal fees will be charged to the debtor leaving him or her even deeper in a financial hole. If the collection agency or creditor wins a judgment in its favor, your wages can be garnished and liens placed against your home or other property.

When you default on a credit card debt, it leaves a dark mark on your credit history that will impair your ability to borrow, and borrow at attractive interest rates for many years to come. When you default on a credit card, the credit card company reports the default to the credit bureaus. A default can significantly impact your credit score, thus making it harder for you to get a loan for a house, car or educational needs. Even if you are able to get a loan, the interest rates will be high because you’re a poor credit risk.

There are a number of ways you can avoid default, but it requires fiscal discipline and a willingness to sacrifice. For starters, if you’re starting to get behind on credit card payments, it is imperative that you contact the credit card company and try to work out a payment plan. Many credit card companies are willing to work with their customers to work out a payment plan rather than have the account go into default and being required to spend time and resources on the collections process.

Consolidating your debts may help you avoid defaulting on a credit card debt. By combining your debts all into one, you’ll most likely decrease the amount of money you must pay out each month in minimum monthly payments.

Another tactic you may employ if your credit card account is going into default is filing for bankruptcy protection. This may get much of the debt forgiven or allow you to repay it in an easier manner, but it will negatively impact your credit rating for nearly 10 years. Bankruptcy is looked at very negatively by lenders, and will significantly impact your ability to borrow and increase the interest rate you’ll have to pay.

There’s little wonder why credit cards have become so widespread in the American and global economies. They’re easier and more convenient than cash or checks, and can provide an essential lifeline in emergency situations. Nearly 40 percent of American credit cardholders carry a balance from month to month, reaping billions in yearly profits for credit card companies from interest alone. Along with interest however, there are other revenue streams credit card companies derive from their business, some of which are obscured from the awareness of most customers. Some of these hidden costs are built into the cardholders regular monthly statement, others are triggered by specific events or circumstances.

For starters, many credit card companies have clauses in the credit card agreement that penalize cardholders for falling behind on payments to other accounts, even if they haven’t missed a payment to that particular account. Universal default, as it’s called, can jack up the monthly interest rates to 29 percent or more. With some cards, universal default can be triggered if you miss just one payment to another credit account.

Universal default has been widely derided as an unfair practice, and recent legislation has banned credit card companies from applying universal default rates to current balances. However, if a cardholder triggers his or her charge accounts universal default clause, this rate can still be applied to new purchases on that account. For example, if a cardholder with a $1,000 balance on an ACME card account triggers the universal default clause by falling behind on a payment to another creditor, ACME cannot apply the new 29 percent interest rate to that $1,000 balance, but it can apply the rate to new purchases.

Low minimum payments may sound like a blessing, but if you only make minimum payments, you’ll take longer to pay off your debt, and end up paying much more in interest. New regulations have required most credit card companies to increase minimum payments from 2 to 4 percent of the card’s outstanding balance each month.

Another hidden cost cardholders often get popped with are rate changes or changes to teaser rates. Many credit card companies hook new customers with low introductory rates that can be as little as zero percent. These rates usually go up after about six months, and card holders must then pay a higher rate. The teaser rates are good for customers who wish to transfer existing debt to the account and then pay it off quickly, but if these cardholders are undisciplined, they could end up paying higher rates on unpaid balances.

Many cardholder agreements also give credit card companies the right to change rates and fees for any reason with little notice. Recent federal regulations have clamped down on this practice, but card companies can still make changes, and fairly quickly.

When a credit card company offers a promotional rate, and then shifts to the regular rate later, the payments you make on your balance are usually applied to purchases you made at the lower rate first, leaving the higher rate debt on your account for a longer period of time, allowing it to rack up more interest. This is common to accounts where the cardholder takes cash advances, which are generally assessed at a higher interest rate than regular purchases.

If all this wasn’t enough, many cards also charge many fees that cardholders may not discover until they’re billed for them. These fees can include annual fees, transaction fees, over-the-limit fees, balance transfer fees and application fees, among others.

Credit cardholders can dodge the hidden costs of having a credit card by carefully reading card agreements and choosing only credit cards that come with favorable terms. Another good idea is to pay off your account balance each month. Folks who need long-term credit may want to consider a home equity loan instead of charging items to credit card. Most home equity loans have far more attractive interest rates than credit cards do.

Overall, avoiding hidden costs related to credit cards is possible through diligence and an understanding of your credit card agreement. Be careful that you fully understand the terms of any credit card agreement you enter into, especially those advertised with “too good to be true” teaser rates. Also keep current on other accounts to avoid triggering universal default clauses.

Under the Fair Credit Billing Act, consumers have the right to dispute credit card purchases. This law permits cardholders to challenge what they believe to be billing errors by submitting a written notice of the dispute to their credit card issuer. This notice triggers card issuers’ duties to investigate and resolve the dispute.

The cardholder must submit a disputed item to the credit card issuer within 60 days of the statement date on the billing statement that contains the alleged error. Once the credit card issuer gets notice of the dispute, the company must acknowledge it, conduct an investigation, and either make corrections or notify the customer that no error occurred within 90 days. Credit card issuers who deny the claim must submit documentation supporting the bill’s validity to consumers upon request.

There’s a variety of disputed items that the FCBA covers. The FCBA covers unauthorized charges, that is charges made to your account by an unauthorized user, charges that incorrectly list dates or amounts, charges for goods and services that you didn’t order or that were not delivered as you and the merchant agreed, mathematical errors by the card issuer, failure to credit payments and other items such as returns to the account, failure to send bills to the proper address if the cardholder has sent appropriate change of address information to the card issuer, and some other charges.

In order to use the consumer protection provided by the FCBA, you’ll need to find the credit dispute information on the back of your credit card statement and submit a written account of the alleged error along with your name, address and account number. (NOTE: The billing dispute address differs from the payment address.) You may want to send the notice via certified letter, so you’ll have later documentation to prove that you sent it in a timely fashion.

Once you’ve sent in your letter, the credit card company has 30 days to send you a response acknowledging the dispute, and 90 days in which to resolve it.

While the claim is being investigated, you’ll need to continue paying parts of your bill that are not in question, such as finance charges, annual fees and interest on the undisputed balance of your account. Your creditor will not be able to take you to collections for the disputed charges while the claim is being investigated, but the credit card company may apply the disputed amount against your available credit limit. The credit card company may not threaten your credit rating or report your account as being delinquent while your claim is being investigated. The law also prohibits other lenders from discriminating against borrowers who exercise their FCBA rights.

If your bill is found to be incorrect, your creditor must make adjustments and notify you in writing of the corrections. The creditor must remove the disputed item and remove all charges applied to the erroneous amount. If your creditor finds that you owe part of the disputed amount, you must also get a written explanation and can request documentation of the charges.

If your bill is found to be correct, your credit card company must inform you in writing and provide documentation on request. You’ll be assessed for the disputed amount, along with any finance charges that accumulated while the claim was being investigated. You may appeal this decision within 10 days of receiving the written explanation, but your credit card company can begin collection action at this point and report the debt as delinquent.

If the credit card company fails to resolve the dispute in a timely fashion, or acknowledge the dispute in the timeframe required by law, the company may not collect the disputed amount or any charges related to the amount.

Cardholders can pursue similar claims against credit card companies if they used their cards to buy unsatisfactory goods or services in order to prevent payment to the seller. Before taking this action, the cardholder must attempt to resolve the situation with the seller.

The Federal Trade Commission enforces the FCBA. To report credit card companies that violate the FCBA, cardholders should visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357). Cardholders may also sue credit card companies that violate the FCBA and recover damages, court costs and up to double the amount of the finance charge.

The APR reflects how much interest you’ll pay each year. Because using your credit card is like taking out a loan, interest is charged for each transaction you make if you take longer than a month or the grace period specified by your card to pay the transaction off. Credit card companies make their profits from APR and other fees and penalties. Without these charges the credit card companies would only be making interest free loans — not a great way to turn a profit.

At its heart, the APR is how much interest making a transaction via credit card will cost you. If an item you purchase remains unpaid for on your credit card for one year, you will pay the APR amount extra for that item. For example, a 9 percent APR will add nine cents to every dollar you charge to your credit card.

If you don’t pay off the amount you’ve charged to your credit card each month, the APR can have a considerable impact on how much money you pay your credit card company for using their money to make purchases.

Credit history

APR can vary anywhere from three to 30 percent. The APR rate on your credit card is largely determined by your credit rating. Your credit rating is based on your credit history, that is your history of paying back money you’ve borrowed and your overall debt load. Folks with bad credit are less likely to get credit cards with low APR. However, if someone with bad credit can obtain a credit card and successfully make payments and avoid delinquencies, over time they can see their APR lowered, or they can qualify for other cards with more attractive rates.

How it works

For example, let’s say that you have a $2,000 balance on a credit card that only charges you a minimum monthly payment of $40. While you can afford that monthly payment, it will take you a considerable amount of time to pay off that credit card balance. With an APR of 15 percent, if you only make the minimum monthly payment it will take you more than six years to pay off your credit card, and you’re likely to pay more than $1,000 in interest over that time. All in all, you’ve paid more than $3,000 for $2,000 worth of goods, services or whatever you purchased with your card. If you’re late with a payment, or if your card has annual fees, the amount you pay your credit card company could increase any more.

If you have a good credit history, and find a card with a more attractive rate, the amount you’ll pay your credit card company will be less. For example, if you secure a credit card with an APR of seven percent, and charge $2,000 to the card, you’ll pay off that amount in about five years if you make minimum payments and only pay about $400 in interest charges.

In most cases, however, credit card holders don’t just make one transaction and stop there. As you pay off your card, chances are that you’ll make more purchases, and thus add more debt — and more interest charges.

Cash advances, checks

Another portion of your credit card agreement you need to be aware of before signing up are the credit card companies policies regarding changing APR. Late payments, defaults and other events may result in your credit card company jacking up the APR on your card. Some credit card companies have even increased rates if you fall behind on payments on other debts. You should also be aware of the APR for cash advances or checks written from the credit card account. Most credit card companies charge different — usually higher — APRs for cash advances and checks.

When obtaining a credit card, customers should carefully read the information regarding the card’s APR, and understand how much interest they’ll be paying on purchases they make. They should also make sure to understand any changes to introductory APR rates that may occur in the future. Due diligence on the cardholder’s part can potentially save him or her thousands in interest over time.

A reliable credit card calculator can help you determine where you stand with regard to your credit card debt, and what’s the best plan for you to repay the debt and get the credit card companies off your back and out of your pocket.

The average American household carries about $8,000 in credit card debt, and chargeoffs, that is credit card debts written off by creditors because of non-payment, have climbed in the last two years over the course of the severe economic recession the world currently faces. The credit card burden faced by many families has them considering drastic action to discharge the debt such as bankruptcy.

Still others are choosing to rapidly repay their debt, pumping every spare penny into discharging the debt they owe to credit card companies. To make a good decision concerning how best to proceed concerning repayment of your credit card debt, you should find a reliable credit card calculator.

A good credit card calculator will help your determine how long it will take to repay your credit card debt dependent on the payment and interest information you plug into it.

Credit card calculators use mathematical functions to determine the repayment period dependent upon your interest rate, balance and how much you’ll be paying each month. Some calculators can even determine your length of repayment if you use a graduated repayment plan, that is a plan where over time you increase your credit card contribution.

There are a variety of good credit card calculators on the Internet, such as those offered at www.bankrate.com and by the Federal Reserve at http://www.federalreserve.gov/creditcardcalculator. Your credit card company may also offer a credit card calculator on their Web site. Many credit card companies offer these calculators to help their clients manage their credit more responsibly. It is in credit card companies’ best interest to help cardholders manage their credit responsibly, because of the costs involved with collecting or writing off bad credit card debt.

Once you use the calculator to determine how long it will take to pay off your credit card, and how much it will take to do so, you may want to consider other options for repayment other than just sticking with your current credit card company. You may transfer your balance to another card with a lower interest rate. This is especially a good idea for cards that offer a 0 percent interest rate introductory offer. If you can pay off your debt in this time, you can avoid paying the high interest rates that may be associated with your current card. You will likely be charged a balance transfer transaction fee, but in general these fees are minimal.

Another option is taking out a bank loan to pay off your debt. Bank loans tend to have lower interest rates than credit card debt. The success of both of these plans is dependent upon you not charging further purchase to your card and making the payments necessary to lower your debt.

Finding a way to pay off your credit card debt is far preferable to declaring bankruptcy to discharge your debts. A bankruptcy won’t necessarily get rid of all your debt, will cost you in attorney’s fees and court costs, and will stay on your credit record for seven to 10 years. Lenders look at bankruptcy very negatively and if you have a bankruptcy on your credit report, you will have a tougher time getting anyone to lend you money or issue you a new credit card. Even if you do manage to secure a loan or obtain a credit card, you’ll be saddled with higher than normal interest rates and may have to pay other fees because you are considered a poor credit risk.

That’s why it’s so essential to establish a feasible, doable credit card repayment plan that’s supported by solid numbers. Using an online credit card calculator to determine how much you need to pay each month, and how long it will take to repay the debt.

Credit card debt is a serious problem for many American families, but once you get your arms around the problem and have solid information to back your financial plans, you can begin work to knock out your debt in the most efficient, effective and comfortable means possible.

Chapter 7 and Chapter 13

The Bankruptcy Abuse Prevention and Consumer Protection Act contains several provisions, most notably language curbing the use of Chapter 7 bankruptcy and instead promoting the use of Chapter 13 bankruptcy to settle debts.

In short, a Chapter 7 bankruptcy discharges some forms of debt while allowing debtors to keep some forms of property, such as their house or car. Assets debtors filing a Chapter 7 bankruptcy are allowed to keep vary from state to state. Chapter 7 bankruptcies have historically been used to help discharge credit card debt and debt from medical bills.

A Chapter 13 bankruptcy allows debtors to keep some exempt property, but requires the sale of other assets and also requires debtors to pay off some of their debts under a repayment plan before discharging the remainder.

Creditors have complained that debtors had been abusively using Chapter 7 to discharge debt that they could have repaid under Chapter 13. Arguing that this threatened the solvency of banks and other lenders, such as credit card companies, the financial services industry lobbied Congress to make filing Chapter 7 more difficult.

Prior to the new law, about 70 percent of Americans who filed for bankruptcy did so under Chapter 7. A great number of these debtors did so to discharge credit card debt. The new law has sharply reduced the number of people filing for bankruptcy under Chapter 7.

Means test, other provisions

The new law makes it tougher to file Chapter 7 bankruptcy by imposing a strict means test for debtors wishing to file. Under the new law, households earning more than the median income for their state are required to file Chapter 13 bankruptcy instead. The court ascertains debtors income by requiring debtors to document their income with pay stubs and tax returns. In the past, debtors were not required to submit this information to the courts.

The new bankruptcy law didn’t stop at just shifting Chapter 7 filers to Chapter 13, however, The new law also made some changes to Chapter 13. Under the new law, debtors are now required to make payments on debts for five years rather than three. This means debtors must now pay back a greater percentage of their credit card debt. Car loans purchased within 30 months prior to the Chapter 13 filing must now be paid back in full. In the past, bankruptcy courts could impose lower payments and interest rates.

The Bankruptcy Abuse Prevention and Consumer Protection Act also mandates that debtors filing for bankruptcy must undergo debt counseling at their own expense six months prior to filing for bankruptcy. The intended goal of this provision is to encourage debtors to pay back their loans. After filing for bankruptcy, debtors are required to take a financial management training course.

Another key element of the Bankruptcy Abuse Prevention and Consumer Protection Act regarding credit cards are new regulations concerning minimum monthly payments. Under the new law, credit card companies are now required to ask cardholders to pay a larger amount of the principal on their credit card back each month in the form of minimum monthly payments. This is expected to speed cardholders’ repayment of their debt, discourage excessive borrowing, and help cardholders keep from getting trapped on the debt treadmill of high interest rates. The credit card companies are also now required to inform cardholders about how long it will take for them to repay their credit card debt if they only make minimum monthly payments.

Prior to filing for bankruptcy, debtors should consult with an accountant or bankruptcy attorney to ascertain their status with regard to Chapter 7 means test requirements. Debtors should also consult with their lenders to see if they can work out a viable repayment plan, as attorneys’ fees related to bankruptcy proceedings can be quite expensive now, thanks to the extra work the new bankruptcy bill requires of them.

If you want to get out of debt, it’s important to have a plan, and the credit card calculations offered by various helpful Web sites can help you decide what sacrifices to make and what avenues to pursue to get you and your family back on sound financial footing.

Default a poor option

According to experts, the average American household owes about $8,000 in credit card debt. In the past two years, the total amount of debt owed by Americans to credit card companies has dropped by almost $100 billion, but that’s not entirely because people are paying off their debts. According to experts, about 90 percent of the dropoff can be attributed to chargeoffs, or credit card companies writing off bad credit card debts and referring them to collections. Paying off credit card debt is a better option, and by using credit card calculations supplied by a credit card calculator, you can accomplish repayment of your debts.

There are a number of reasons why just walking away from credit card debt is bad for you and the overall economy. On a macroeconomic level, escalating chargeoffs could contribute to instability in the financial services industry, causing banks to become insolvent, credit to freeze and overall economic growth to stall, exacerbating joblessness and other economic woes. By becoming delinquent on credit card payments, you’ll be subject to penalty rates and fees and may face collection action. If you deal with this debt by declaring bankruptcy, you could lose some of your assets and have a black mark on your credit record that negatively impacts your ability to secure loans and secure loans at favorable interest rates for years to come.

Calculating a plan

Using the credit card calculations provided by many Web sites such as that of the Federal Reserve and the Federal Trade Commission, you can sketch out repayment plans under a variety of scenarios. Many credit card companies also provide credit card calculations on their Web sites to better help their cardholders responsibly manage their credit.

The credit card calculations offered online will take into account your current balance, your interest rate and how much you intend to repay each month. More advanced credit card calculators can help you see how long it will take to repay your credit card debt under a graduated repayment system in which you increase your monthly payment over time. Some calculators will even break down your total repayment, showing you how much you’re paying in interest.

By using the calculations, you can chart your best course of action with regard to paying off your credit card debt. For example, you may choose to continue to make payments on your current credit card account, or after discovering how much interest you’re paying on that account, you may choose to transfer the balance to another account with a lower interest rate. Another option is to take out a bank loan at a lower interest rate.

Your repayment plan will be contingent upon your ability to stay current with payments, and avoid running up further debt.

Credit counseling

If analyzing credit card calculations isn’t your forte, you may want to consider seeing a credit counselor. A credit counselor can look over credit card calculations, your monthly income and bills and other factors to determine the best course for you to repay your credit card debt. With good credit card calculations and a viable plan that you can realistically follow, you can get out of credit card debt and improve the financial stability of your family.

Before using a credit counselor, you should check their credentials and inquire about their fees. While most credit counselors are honest professionals, there are also many fly-by-night shady operations in the credit counseling business.

Interchange fees are essentially fees charged to merchants for the processing of credit card payments. The fees can run as high as 5 percent of every purchase, depending on the card company and the merchant. This is the reason why many merchants don’t accept some credit cards, or would prefer to be paid in cash or by check.

Interchange fees are big revenue generator for credit card companies. According to industry experts, the average American household pays about $337 in interchange fees as a result of their credit card purchases each year. This amounts to about $48 billion in revenue for credit card companies per year. In 2005, Visa and Mastercard, the two leading companies which control about 90 percent of the payment processing market for credit cards collected about $30 billion in interchange fees.

How it works

There are two key players in credit card issuance, the banks issuing the cards and the company handling payment. Banks provide the capital that’s lent through the credit cards, and the payment processing companies handle the transactions. That’s why your Acme Bank, Generic Bank or Omni Bank cards may also be Visa or Mastercard cards.

Merchants have agreements with Visa, Mastercard or other payment processors to accept their cards. For their work in processing transactions made with credit cards, the merchants must pay a portion of the transaction to the credit card company. The banks issuing the credit cards get a cut of this interchange fee, as do the payment processors (i.e. Visa, Mastercard, etc.).

According to industry experts, interchange fees have a very complicated price structure, which is determined by the type and brand of credit card being used, the size and business of the merchant, and the nature of the transaction being processed. The average interchange fee in the U.S. is about 2 percent of the value of the transaction, but some fees may be higher than this average. Online sales and telephone sales tend to carry higher interchange fees than other credit card transactions.

Controversy

Interchange fees have become a sore issue in the market, as they cut into merchants profits and contribute to inflation. In the U.S., the fees have come under investigation for alleged violations of antitrust and fair trade law.

Some economists argue that interchange fees lead to higher prices because merchants must increase prices to offset the cost of interchange fees. Refusing to accept credit cards isn’t practical for most businesses, as fewer and fewer customers are choosing to carry cash to pay for transactions. While large chains like Wal-Mart may be able to use their size to leverage reduced interchange fees, smaller businesses don’t have the muscle to pressure credit card companies into accepting such an agreement.

Merchants are also arguing that the costs to credit card processors that interchange fees are supposed to help defray have decreased as information technology has made payment processing easier. Despite the improvements in technology, the interchange fees have doubled in the past decade. Credit card companies claim that the interchange fees help offset the cost of rewards offers to clients, and that doing away with them would result in increased fees and higher interest to cardholders.

Several lawsuits have been filed claiming that the credit card companies interchange fee policies violate federal antitrust and price fixing law. Credit card companies have been extremely closed-mouthed about their interchange fees structure and policy, and only released this information to Congress after considerable pressure was exerted by lawmakers.

How other countries deal with interchange fees

Several  foreign countries have some strict regulations dealing with interchange fees. For example, Australia forbids interchange fees of higher than .05 percent of transactions and also allows merchants to tack a surcharge directly on the purchases of customers paying by credit card. The result has been a reduction in the use of credit cards for payment. The European Union has fined banks regarding interchange fees and is considering legislation to more tightly regulate interchange fees on the premise that these fees constitute price fixing by credit card companies and banks.

In the U.S., Congress has made hints that it may decide to examine possible legislation concerning interchange fees in the near future. The U.S. government has taken steps to regulate other perceived excesses of the credit card industry in recent months that target cardholders.

Every credit card company’s monthly statement looks different, and some are easier to understand and offer more useful information than others. Every credit card statement contains several key bits of data on the front and back of the statement that you can use to get a better grip on your account, if you know how to interpret them.

Here, we’ve analyzed some of the key elements of your credit card statementand broken them down into easy-to-understand terms.

• Annual percentage rate: The annual percentage rate, or APR, is your annual interest rate on the money you borrow by using your credit card. This is one of the key factors that credit card companies use in calculating your monthly finance charges. The higher the APR is, the more money you’ll pay the credit card company as interest for the privilege of using their money. APR is usually further broken down into a daily periodic rate or monthly periodic rate.
• Minimum payment due: The minimum payment due is self-explanatory. This is the amount you must pay monthly to remain in good standing with your credit card company and avoid freezes on the account or other penalties such as late or delinquent fees. Most credit card companies require card holders to pay at least 2 or four percent of their outstanding balance per month as a minimum payment. Paying just the minimum payment is inadvisable however, as high interest rates can leave some card holders with even more debt at the end of every month even if they pay the minimum payment each month. Many credit card companies have started adding additional information to the credit card statement that tells customers how long it will take to pay off their credit card accounts if they only make minimum payments.
• New balance: This is an important figure, because it lets you know how much you currently owe on the account. The new balance is usually determined by subtracting payments from the previous month’s balance and then adding new charges, interest and fees from the current billing cycle to this total.
• Finance charge: This is the cost of borrowing money from your credit card company. The finance charge listed on your monthly statement is the interest you’re being charged on the unpaid balance of your credit card account. Most credit card companies calculate finance charges by means of an average daily balance. This means the average amount of debt you have over the billing cycle is calculated to determine your monthly finance charge.
• The usual formula looks like this: Average Daily Balance x Daily Periodic Rate x days in cycle = finance charge. For example, let’s say your average daily balance for March is $1,000. Your APR is 10 percent, which equates to a .02739 daily periodic rate. Therefore, your finance charges for March are $27.39.
• Grace period:  The grace period is how long you have to pay off a purchase before the credit card company begins charging interest on that purchase. Most credit card companies extend grace periods of about 20 to 25 days. The grace period usually only applies when the previous month’s balance has been paid in full, however. If the previous month’s balance has not been paid in full, interest charges are applied to your previous balance and any new purchases you choose to make. To avoid paying interest, pay off your balance each month.
• Credit limit: This is the maximum amount you can charge to your credit card. Your credit card statement lists your maximum limit and your available limit, that is how much credit you have left after current charges. Excessively high credit limits, even on cards that you pay the monthly balance off on each month, are viewed negatively when you apply for other loans such as home or car loans. If you have excessively high limits on existing cards, you may want to request that your credit card company lower the limit.
• Credit card fees: Many credit cards carry fees beyond the finance charges. These fees include annual fees you pay for the privilege of having a credit card and late fees and penalties assessed when you become delinquent on payment. Other fees include over the limit fees that are charged if your account balance goes over your credit limit.
• Cash advance fee: This is a fee your credit card company charges if you use your credit card to withdraw cash from an ATM. With this information is usually listed a cash advance limit stating how much cash you can withdraw using your credit card. Typically, the interest rate charged on cash advances from a credit card are higher than your APR.

The U.S. economy started down the road to the present crisis in 2007, when fueled by excessive risk taking and spurious lending by banks and a downturn in the overall jobs market, an increasing number of people with subprime mortgage loans — that is home loans made to people with poor credit — began to fall behind and eventually default upon their loans. These defaults sent shockwaves throughout the economy, causing major financial institutions to collapse and exacerbating what was already shaping up to be a severe recession.

While the worst of the subprime mortgage meltdown has passed, a similar meltdown in the credit card industry may be looming. The very bad practices that have led to a meltdown in the mortgage market — spurious loans and excessive risk taking — have also been very much in practice in the credit card industry. To put it in plain terms, the credit card companies have issued cards with sky-high rates and larger than prudent credit limits to customers whose credit history and ability to keep up with payments was dodgy, at best.

American consumers have nearly $1 trillion in credit card debt, and economists fear that a substantial portion of it is just as toxic as the subprime mortgages that helped drag the economy down in 2007-2009. Because of their near-ubiquity in the U.S. economy, the potential credit card meltdown threatens the American way of life because it could severely damage the American middle class, the nation’s largest socioeconomic group and the engine of consumer spending, which accounts for more than two-thirds of the U.S. economy.

According to experts, credit card companies have already been taking heavy losses as customers become delinquent on payments and begin defaulting. Industry reports show that in 2009 Bank of America, the nations No. 2 credit card issuer had about nearly $3 billion in toxic credit card debt. BoA’s total credit card portfolio stands at about $184 billion. As a result of delinquencies and debts, the company has had to cut its dividend by half and raise nearly $10 billion in new capital.

In the early months of 2010, charge-offs, or debts credit card companies designate as uncollectable, spiked sharply. Many economists expect that the charge-offs will level off later in the year, but if they don’t, it can result in a variety of negative impacts.

A mass amount of charge-offs can result in a credit freeze. This happens when banks and lenders like credit card companies become extremely risk adverse and severely tighten their rules and regulations concerning lending. Because many consumers use credit cards for purchases, and many businesses also require credit cards to make purchases, an increase in interest rates or a decrease in available credit via credit cards can result in people and businesses being unable to buy things, which negatively impacts the economy, a drop in banks and credit card issuers profitability because they’re doing less business and business will have less access to an important source of capital.

Even worse than a credit freeze, however, would be the insolvency and collapse of financial institutions as a result of toxic credit card debt. The subprime mortgage debacle hammered the financial services industry in 2008 and 2009, causing the collapse of many banks and financial institutions. These collapses had a seismic effect throughout the economy, resulting in the mass layoffs and weak economic conditions that persist to this day.

The U.S. government has begun to act to stave off another economic crisis. The recently passed CARD Act will work to curb some of the abusive interest rates and fees levied by credit card companies, and provide the industry with stronger regulation to prevent the type of behavior that led to the subprime debacle. The government has also passed a stimulus package, and a jobs bill aimed at putting people back to work, thus making them much more likely to pay their credit cards and not become delinquent.

While these are steps in the right direction, according to economists, the potential for a credit card meltdown remains if a significant number of people fall behind on monthly credit card payments and default. Also, the government’s ability to react to such a crisis is likely limited, as it has already spent substantial amounts of money bailing out the auto and financial services industry, and as public opinion has turned against such bailouts.