The sub-prime mortgage crisis that began in 2008 was the catalyst that left many homeowners in foreclosure.  It caused the stock market downturn, which decreased or wiped out retirees savings; led to the insolvency of banks; and caused the Treasury Department to institute emergency bailouts of banks, major corporations and one very large insurance company in particular which, if it had filed bankruptcy, would have caused a ripple effect that would have devastated the financial markets here and abroad.

Homeowners and individuals who have been caught in this credit trap have had to make major changes in their lives.  While recent legislation has allowed for the revamping of home mortgages for those who are in foreclosure, the recession has caused a major effect across the nation and the world.

With unemployment currently at 8.5%, small businesses as well as large corporations have had to make drastic changes in order to survive this recession.  As a result, every facet of our worsening economy has had a direct affect on individuals across the spectrum.

We now know that the sub-prime mortgage crisis was a credit trap.  It allowed future homeowners to purchase mortgages with no money down and eventually spiraled into a high-interest rate debt that could no longer be managed.

In addition, banks stopped lending and consumers with credit cards faced a sudden increase of higher interest rates even though they had good credit and paid their bills on time.  Moreover, student loans and car loans became more difficult to obtain.

Banks raised the standard of lending to consumers and unless an individual had a FICO score of 720 or higher, the chances of obtaining a loan were nil.

Today, this financial crisis has left many individuals struggling to meet their debt obligations.  It is no wonder, then, that many are turning to debt consolidation, credit counseling and repair and, in some cases, bankruptcy.

While the events that unfolded over the last year are unprecedented and were a direct result of the sub-prime mortgage crisis, this report will address one aspect of this crisis: credit traps.

We will explore and offer suggestions on how to avoid such traps as: credit cards, mortgages, and loans that affect everyone from homeowners to teens.  In addition, we will offer recommendations on how to pay off credit card debt; what to look for when applying for credit, mortgages, or loans; and the resources that are now available due to the government’s intervention.

The good news is that the recession will not last forever.  Economists assess that we may see some positive results by the end of this year.  In the mean time, we all need to begin the task of paying down the debt we have and avoid incurring new debt, with all its trappings.

Credit Cards

Universal Default Clause

One of the most insidious credit card traps has to do with banksí Universal Default clause.  This clause allows banks to increase interest rates on credit cards if you make late payments to other accounts unrelated to your credit card such as utility companies, for example. Currently, there is legislation that will prohibit these excessive fees incurred by banks.

0% APR

Perhaps you have received dozens of credit card offers in the mail that invite you to apply for a credit card with a 0% APR.  It is important that you read the fine print as this low rate usually expires within six months.

Interest Rate Increases

Many banks have been sending out notices to credit card holders stating that interest rates will be increased.  While you may be paying your bills on time, they have nonetheless changed the terms and you can either agree or close your account.  The rate increase, in some cases, has been as much as 13% and the bank has the ability to apply the increase to the entire balance, and not merely to the new charges

Late Fees, Annual Fees, and Payment Fees

Making a late payment on your credit card can increase the interest rate as much as 23%. Some banks charge an annual fee for their credit cards. They can cost up to $50.00 a year.  If you make credit card payments online, there may also be a fee of up to $10 per month.

Cash Advances on Credit Cards

Banks usually send out notices with blank checks to allow for the consolidation of other debts.  This is considered a cash advance and has a higher interest rate. Furthermore, since you now have the cash advance interest rate and the regular credit card interest rate, most banks will only apply payments to the cash advance or lower interest rate before it is applied to the remaining balance.  Thus, the remaining balance on your card will continue to multiply.

It is important, therefore, to read the terms and agreement section of the credit card before you apply.  While it has been said that the language can only be understood by lawyers, you can still ascertain what penalties, fees, and other charges will be incurred using this card.

Look for these particular sections:
* Annual Percentage Rate (APR) for Purchases
* Other APRs
* Variable Rate Information ñ See Important Notice Regarding Change in Terms
* Annual Fee
* Grace Period for Repayment of Purchases
* Minimum Finance Charge
* Transaction Fee for Purchases
* The Default Clause listed under Summary of Terms
* Late Payment Fees
* Cash Advance Fees
* Fees for Issuance or Availability
* Method of Computing the Balance for Purchases
* Non-Usage Fees
* Fees for Purchases Made Outside the US

It is widely agreed that most credit card terms are ambiguous at best.  But it is still important to learn as much as you can by reading the terms and agreement section so that you will be able to avoid any traps in the future.

Credit Cards for College Students

There has been and still is an on-going campaign by companies to aggressively market credit cards on college campuses.  The methods used to entice students to apply for credit cards may include free items and other coercive tactics.

Studies show that over 50% of 18-year-old college students obtain a credit card for the first time and that more than 70% actually own one credit card with a balance of more than $2000.

This is a credit card trap that requires a student to ask some very hard questions before signing on the dotted line.
* Do I need a credit card?
* Can I afford a credit card?
* How will I use the credit card?
* Will I be able to make the payments each month?

For most college students, the answers may determine whether or not they are willing and able to take on this added responsibility.

In order to avoid this trap, college students should investigate different credit card companies and consider the following:

* What is the APR rate?
* Does the card carry an annual fee?
* What is the default interest rate?
* What are the policies as it relates to Change in Terms?
* Does the card carry a Universal Default clause?

After they have researched the terms and conditions thoroughly, then and only then should they make the decision whether or not it is worth it to apply. Once the card is received, it is important to use the card wisely.  This requires that the student:

* Pay off the balance each month
* Do not exceed the credit card limit
* Avoid cash advances
* Keep track of purchases and payments

Credit Cards for Teens

Debt not only affects adults, but it has trickled down to teens as well.  For those teens that have not been taught how to handle money in a responsible way, they become trapped too early and incur debt too young.

From an early age, children have no concept of money or how much things cost.  Therefore, educating children is the first step in learning fiscal responsibility.  Beginning with the simple task of putting money in a piggy bank to opening up their first savings account to eventually having their own checking account is the basis of what will be their introduction to understanding the process.

One of the many recommendations offered to help teens become more financially responsible is to set up a prepaid credit card.  Since the amount on the card will be limited, the teen will be able to make reasonable purchases.  It will help them to assess the difference between what they want and what they can afford.

If they exhibit responsibility using the prepaid credit card, perhaps then they will be ready to apply for a regular credit card.  But in the interim they will fully be prepared for, and become more knowledgeable about, the utilization of a credit card and know how to use it in an effective and responsible manner.

Getting Out of Credit Card Debt

Before the recession, consumer credit card debt was the highest in the nation.  Today, it has become the bane of every consumer who owns a card.  With banks raising interest rates, late payments and defaults have become the norm rather than the exception.

If you have credit card debt, here are some suggestions to help you pay down the debt.

1.    Make a list of all credit card debt with the highest interest rate card at the top.
2.    If your budget allows, double up on payments towards the first card on the list.
3.    Once the top card has been paid off, use that same amount to pay off the next card.
4.    Follow the same method to pay off the remaining cards.

If you cannot afford to pay off the credit cards, call each credit card company and explain your situation.  They may either lower the interest rate or reduce the minimum payment.

Recent reports have suggested that seeking out debt consolidators is not a good idea.  They charge a fee and utilize the same process mentioned above.  Moreover, this practice will lower your FICO score which, in turn, can hurt your overall credit standing.

Bankruptcy should be the last resort.  If you need assistance, talk to family members to ascertain if they can loan you the money to pay off the debt.  If you own a home, you may wish to look into a refinance loan. Filing bankruptcy will be listed on your credit report and remain there for ten years.
Finally, under no circumstances should you withdraw money from any retirement fund such as a 401K or IRA.  Doing so would incur a hefty penalty.

For information on consumer debt, credit reports, and other resources, check out:

http://www.myfico.com/Default.aspx

https://www.annualcreditreport.com/cra/index.jsp

http://www.ftc.gov/bcp/consumer.shtm and   http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm.

Mortgages

The sub-prime mortgage crisis is a perfect example of a mortgage trap.  Unscrupulous lenders would offer mortgages to clients with no money down.  While the initial interest rate was acceptable to the client, eventually the mortgage was sold to a third party and the interest rate skyrocketed, leaving the new homeowner facing foreclosure.

Here are some suggestions for new homebuyers.

1.    Choose a lender that is well-known, such as a bank or private institution.
2.    Acquire a list of the fees that will be incurred.
3.    Ask if there are any pre-payment penalties (these usually occur with ARMs)
4.    Obtain the lowest interest rate possible by comparing several banks and lendersí rates.
5.    Be prepared to place a minimum of 20% down.
6.    Compare the adjustable rate mortgage against a fixed rate mortgage.
7.    Watch out for mortgage discounts as they may include a hefty fee.
8.    Research a reverse mortgage thoroughly before you consider it.
9.    Inquire about insurance fees.
10.    Have the home appraised by a qualified and approved appraiser.

With so many homes in foreclosure, there is another scam that has become pervasive especially among homeowners that are close to losing their home.  It works like this:

Letís assume the bank has notified you that your home is being foreclosed upon.  An individual offers you a deal to keep your home.  He sells the home to another party and asks the owner to sign a paper which turns out to be a lease agreement for a specified period of time.  When the homeowner is in a position to buy the home back, the amount is so high the original owner cannot afford to purchase the home. Meanwhile, the scam artist has made a hefty sum.

The moral of this story is to make sure the lender you are dealing with is a well-known institution with a solid record, and avoid the pressures by real estate agents.

One can make the same analogy when purchasing an auto.  Dealerships have an in-house finance unit in which they pressure you into utilizing an insurance company of their choice.  You may already have a very good insurance company, but if faced with a choice of saving a few hundred dollars using another car insurance company, the trap may be unavoidable.

No matter whom you deal with, research the company before you set up a meeting with them and take a few days to make your final decision.
Loans

Whether you are seeking a loan to buy a car, a college loan, or a home equity loan; there are just as many traps in this area as well.

To avoid these traps, you will need to begin research different banks and lenders to compare the following:

1.    What is the APR?
2.    Are there any fees if you pay off your loan early?
3.    What is the insurance rate on the loan?
4.    What is the interest rate and how is it derived?
5.    What is the default fee?

Just as with credit cards, applying for a loan can have its disadvantages and traps.  For example, a consolidation loans either through credit card companies or home equity loans prolongs long-term debt.

In addition, if you make a late payment or default, your credit rating suffers and your FICO score is reduced to the point that any future loan may be impossible.

Now that the Federal Government is taking over student and consolidation loans, go to: http://www.govloans.gov/govloans_en.portal?_nfpb=true&browseLoans_1_actionOverride=%2FBrowseAllLoansFlow%2Freport&_windowLabel=browseLoans_1&browseLoans_1currentSubType=5&browseLoans_1bid=602&_pageLabel=gbcc_page_browse_loans.

In addition, you will find information on all types of student and business loans at:

http://www.govloans.gov/govloans_en.portal?_nfpb=true&_pageLabel=gbcc_page_browse_loans&_nfls=false.

Let discuss consolidation loans for a second.  Assuming you need a loan to pay off your credit card bills or other debts, it is important that in doing so cut up all credit cards and keep one just for emergencies.

Keep in mind, however, that the interest rate of the loan may be higher even though you are reducing the amount you pay each month.

Furthermore, since most banks are hesitant towards lending, your FICO score will have to be in the high 700s for the bank to even consider giving you a loan.

How do you increase your FICO score?

1.    Obtain a copy of your credit report.  Clear up any errors on the report.  Then go the website address given in this report and obtain your FICO score. Once you have this information, you will be able to make adjustments to increase your score.

2.    Call the credit card companies and ask to have the interest rate lowered. Make more than the minimum payments on credit cards each month.

3.    Cut up all credit cards except one.  Pay for items with cash.  If you cannot afford the item, you can’t buy it.

4.    Save as much as you can by re-examining the family budget.  Make appropriate adjustments to it so that you can put away a specified amount each month.

5.    Begin to pay down credit card debt using the example given under credit cards.

6.    Avoid late payments.

7.    Don’t borrow from Peter to pay Paul.  In other words, don’t apply for a 0% APR credit card to pay off a high-interest rate credit card.

8.    Ensure the credit card debt is less than 20% of your take-home pay.

9.    Put aside at least three to seven monthís savings for emergencies.

10.    Read the terms and conditions for each of your credit cards so that you know exactly what charges can be incurred based on specific conditions.

Know your rights as a consumer.  Go to the Federal Trade Commissionís website at: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm.  Here you will find information on debt collection agencies and their practices.

Credit traps have become more prevalent during this recession.  Scammers and schemers have invaded the lives of many homeowners and seniors.  Even today, the predatory mortgage lenders are out in force once again.

As the Federal Government continues to devise new methods to counteract these problems with legislation and information made available to the consumer, there will always be a scam that falls through the cracks.

To help you in this endeavor, you can find a list of free publications from the FTC at:

http://www.ftc.gov/ftc/contact.shtm#publications.

Finally, it should also be noted that identity theft has increased significantly.  To this end:

* Ensure that you change your online passwords monthly;
* Never give out any personal information online or via telephone;
* Make copies of all credit cards (front and back), passports, social security cards,  and keep them safe at home;
* Keep telephone numbers of all credit card companies accessible in case of theft;
* Be mindful of people behind you when using an ATM machine;
* If you purchase items online, make sure the website has the gold lock in the lower right hand corner and has encryption services;
* Use the ìFraud Alertî service available for most credit cards;
* Use only those accredited online sites such as Pay Pal and others that have the URL beginning with ìhttps.î

Thus, becoming more aware of what is going on through internet news, government websites, and the latest scams also posted on websites will give you the knowledge you need to circumvent these credit traps before they occur.