6 steps to dumping toxic debt

By Liz Pulliam Weston

I admit it: I didn't think credit card companies could sink any lower.

I thought issuers had already introduced every foul trick imaginable. I even harbored hopes that new restrictionsimposed by Congress and the Federal Reserve, would force card companies to shape up.

But their recent antics proved me wrong. Instead of cleaning up their act, issuers are innovating brand-new ways to jerk around their customers.

New fees, altered terms, abrupt account closures and unexplained rate increases are vivid illustrations of why credit card debt is considered toxic.

Of course, any debt can qualify as toxic if it has the potential to erode your financial well-being. Even a mortgage, which is generally considered good debt because it allows you to buy an asset that can appreciate, can become toxic if you can't afford the payments.

• Talk back: Have you been treated unfairly by a credit card company?

But debt is toxic by definition if any of the following is true:

• The lender can change rates and terms at any time, with little or no provocation.

• The standard or default interest rate is in the double digits, or higher, which typically prolongs the time you remain in debt.

• Initially easy payment terms encourage you to rack up more debt than you can comfortably repay.

The gloves are off

Payday and car-title loans are examples of extremely toxic debt, since their effective interest rates are in the triple digits. But the most common toxic debt for households today is credit card debt, and it's getting more poisonous by the day.

Just consider:

• Promises broken. Chase recently slapped a new $10-a-month service fee on customers who carried a balance but who weren't making new charges on their accounts. In many cases, the customers had taken advantage of balance transfer offers that promised a low rate until their debt was paid off. The smart way to use such offers is not to make new charges, since those accrue interest at a much higher rate. Chase didn't technically break its "life of the balance" promise, but the new fees certainly boost the effective cost of the debt.

• Guilt by association. American Express has been slashing credit limits on customers based at least in part on where they shop, where they live and what company holds their mortgage. Instead of being judged by your own behavior, in other words, you could be punished for shopping where high-risk people shop, living in an area of declining home values or getting your mortgage from a lender that also made subprime loans.

• Shuttered accounts. Many issuers are slamming shut accounts for lack of activity with little notice and no chance of appeal. Losing such unused accounts may not seem like a big deal until you consider the potential impact on your credit score. If the shuttered account is among your oldest or highest-limit cards, your credit scores could take a hit.

Clearly, the stakes are getting higher. A lousy economy and rising defaults have card issuers running scared. They will continue to use any means necessary to reduce their risk, regardless of the consequences to your finances.

It's time to ditch this and other toxic debt, once and for all.

Continued: 6 steps to take

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