My Minimum Payment is raised from 2% to 5% – What to Do?
Here’s a question we got recently from one of our readers.
I am a person who pays his bills on time and value my good credit. I am on a fixed income, but well able to pay the minimum on the several cards on which I have a balance. Recently however,one card issuer sent me notice out of the blue that my minimum balance will automatically go from 2% to 5%. On one card, I have with them, that will mean a $500 monthly unplanned liability which I cannot afford. I am now waiting with baited breath afraid that another company will pull the same thing: which will put me under water and unable to control my finances or credit as I always have. What are my options? What will happen if I just continue to send 2%? Is this Socialism 101?
mr Dennis Brandyberry
Answer – Dennis – you actually asked a couple of questions.Firstly, what would happen if you just paid 2% instead of 5%? If you just paid 2%, you can bet that the credit card companies will raise your interest rates to the default rate – which most likely will be in the high twenties.
Secondly, you said that you always have your finances and credit under control. I think you have to take a step back and realize that is not the case. What has been happening is that you have been living on the edge. You live on fixed income, and you carry credit card debt. The interest on that debt can jump any moment based on the most basic “where are interest rates in general”. If you are in trouble just because interest rates rise or your minimum payment increases, then how can you say that your finances are under control? That means you have absolutely no money that you set aside from any emergencies? Do you have an emergency fund?
What can you do? – To be honest, nothing but simply pay the higher monthly minimum. If you do not, then the credit card company will report you to the credit bureaus as late payment and the chances are that your other credit card companies will do the same thing that the first one did.
You can also help yourself by cutting back on your spending (via budgeting), setting aside a sum of money every month to pay more than the minimum. That way, you can pay back your credit card debt faster. In fact, your goal should be total credit card debt elimination.
You should also stop carrying any larger balance from your credit card. If you charge anything to the card from now onwards, make sure you pay off the monthly charges in full.
In essence, what I am saying is, come up with a debt elimination plan. To recap:
1. look at every thing you spend
2. Make some cuts to your lifestyle and spending
3. Use the savings to pay off your credit card debt – pay off either the one with the highest interest rates (which makes the most sense financially), or pay off the one with the smallest balance (works better psychologically for some folks).
4. Do not add any more balance to your credit card.
Lesson to be learned – Credit Card companies have been raising their minimum payments to 5% recently. Many folks have been caught off guard and are getting into trouble. And they say that they always had their finances under control. Here’s the thing: you do not have your finances under control if you are affected by by credit card companies raising their rates or increasing their minimum payments. That simply means that you have been living really close to the edge with no buffer zone. This should be a great motivation to have some cushion in your budget in case something this happens. You should also be more motivated to completely get rid of your credit card debt.
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