The idea sounds a bit silly at first – a credit card that helps people manage their debts and pay them off without defaulting. Because credit card companies tend to encourage people to spend. Quite simply the more people spend they more credit card companies will profit.
However one new non-profit company has created a credit card and counseling service which helps people steer clear of the very high interest rates and toxic credit provided by some credit card companies – the “Trust Card”.
Before discussing how their system works, first some details on the credit card industry in the United States.
Credit cards are one of the major sources of debt for most Americans. It is one of the largest sources of debt, only behind mortgages, student loans and car loans. Credit card debt is over $850 billion in the United States and rapidly growing every year. Credit cards are very easy to obtain and the sad fact is that many people now rely upon them to make ends meet.
Consumers are using the cards to pay for food and utilities bills, wracking up debt on one card then easily obtaining another. Some consumers end up juggling 3, 4 or even 5 credit cards, moving balances between them to keep the whole show going. Most credit cards have extremely high interest rates, usually between 18-22%, so people can get stuck paying huge amounts of interest every year.
Medical costs also rate highly on credit cards with an estimated 50% of people using credit cards to pay medical bills. When people resort to credit cards with huge interest rates to pay for their essential purchases, you know there is a problem.
The credit card companies are only seeing their profits grow every year, and they also take much larger profits than banks do with personal loan and mortgage products. The government has taken action on the predatory lending practices of credit card companies, but problems still exist and the debt can be very dangerous to the average consumer.
The Neighborhood Trust Project is hoping to stop the damage that high interest credit cards are doing to some families with their Trust Card. The organization is a non-profit group that provides free financial counseling services and now, financial products for the working poor.
As Justin Zinkin, CEO of the company says: “One of the biggest economic challenges for low-income individuals and families is burdensome credit card debt, Once you are in debt, it’s hard to get out.”
That reason of course is that the credit card interest rates are very high, and companies constantly push more credit cards at consumers. The companies make it easy for people with low incomes to just make minimum payments and keep a number of credit cards active at one point. The credit card companies don’t care if you only make the minimum payment when they are receiving interest rate profits of 22% on the debt. In fact they want you to take on more debt and be stuck forever paying off that debt burden with a very high interest rate.
So the Neighborhood Trust decided to release their own credit card to help low income families transition off of the toxic high interest credit cards gradually. Zinkin explains “We have created access to a card where the default behavior would be to help people with too much debt get out of debt and stay out of debt,”
Ideally consumers can use the card to help manage their finances as they gradually rid themselves of toxic high interest credit cards. In conjunction with financial counseling, the card has had success in it’s test phase. Non-profit group Innovations for Poverty Action was also involved in creating the card and funding was provided by the Ford Foundation.
The card has an interest rate between 12% and 15%, nearly half the rate of most credit cards. When entering into the program, individuals must agree to stop using the high interest credit cards, and they simply use debt consolidation to move as much debt as possible onto the low interest card. The financial advisers help reduce sometimes complex debt arrangements to a single monthly or fortnightly payment that clients agree to.
So far the trial program has been very successful with none of the families involved in default. The program is quite small in size, but it is still a positive result.
The Neighborhood Trust intends on rolling the scheme out to many more people with the help of large financial institutions who will back the card. Ideally the credit card will help both the low income lenders who can better manage their finances, and banks who will see less defaults on credit cards.