Painful notice: credit card payment hiking
Q: Dear Debt Adviser,
I have paid off most of my credit cards in the last few months. I still
have a debt with one creditor for $23,000 that I have been paying on
time, and I always pay more than the minimum. I just received a notice
that the minimum credit card payment is going to be increased to 5
percent of the balance, starting in August. That's $1,200, or $600 more
than I have been paying. I have never been late and have never skipped
a payment in the past, but I just don't have an extra $600 monthly in
addition to the $600 I already pay. What should I do?
A: Dear Coralee,
Welcome to the world of tight credit and low risk tolerance! For years
I have been saying that credit availability swings like a pendulum from
loose to tight and back again. It's impressive to see the swing
actually take place after talking about it for so long. From your
perspective, it seems insidious. But I assure you, this isn't personal,
and this tightening of credit is likely to persist for the foreseeable
The days of easy-to-obtain, inexpensive credit are behind us. Those
expecting their credit card payment to remain the same as it has been
for many years are destined for disappointment and default. Creditors
are no longer comfortable with the level of risk they took on in past
years. As a result, you should be prepared to pay more, get less and,
in general, have less generous repayment terms. In addition, those
seeking new credit will have tougher standards to meet to qualify.
Most cardholder agreements, yours included, usually contain terms that
allow the issuer to make changes to the agreement, such as raising your
minimum credit card payment due. Some card issuers are doing just that
by moving from a minimum payment of 2 percent to a minimum of 5
percent. I understand your frustration with the change, and I'm afraid
I don't have reassuring news for you or my other readers.
You were likely chosen to get an increase in minimum payment because
you are carrying a fairly large balance with a low interest rate that
is guaranteed for the life of the balance. Under a guaranteed interest
rate agreement, the creditor cannot increase your interest rate to
account for their desire to offset potential losses. So the creditor
must come up with another way to reduce risk. By increasing your
minimum credit card payment, the length of time for repayment is
decreased, thereby decreasing the exposure of the lender to risk.
The message in this latest action by card issuers is for consumers to
pay down or otherwise get rid of large credit card balances as quickly
as possible and not to use credit cards for long-term financing. If you
need to borrow more than you can comfortably afford to pay off in, say,
90 days, I'd ask about a fixed-term loan product. An installment loan
or home equity loan would be examples of a fixed-term option.
I recently purchased a new flat-screen TV when my set of 20-plus years
lost its sound. This resulted in a cascade of expenses as the old
entertainment center wouldn't accommodate the new set, so it had to be
replaced. My wife said the rug was "funny" where the entertainment
center used to be, so that had to be replaced. Then add delivery for my
bad back and extended warranty because my son said if I didn't get it,
the set would blow up in two weeks. So when the nice people at Best Buy
offered me three-year fixed financing though an installment loan, I
took it rather than purchase the set with a credit card.
I know you want to keep your $23,000 credit card balance at the low
interest rate you are currently paying. But if you can't afford the
minimum payment and default, the rate will increase dramatically. I
recommend you move the balance to a fixed-term loan that will likely be
at a higher interest rate than what you are paying now but far less
than the default rate, should you be unable to make the new minimum
I'm glad that you were able to pay off your other credit card accounts,
and I encourage all my readers to do the same as quickly as possible.
www.ncrcreditplus.com 866 4696599
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