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OK to Just Pay Minimums? Think Again!
For a family on a tight budget, just keeping credit cards
current can be a real challenge. Many people sacrifice common
needs in order to make sure that their credit card payments are
made.
It is no secret that making just the minimum payment on your
credit cards will cause you to spend 10 to 20 years or more
repaying credit card debt. For some debtors, this is necessary
until their income rises. The trouble is, rising income is also
usually met with rising expenses which further delays debt
repayment.
Logical, Yet Flawed Advice
Many financial advice columnists correctly advise debtors to
concentrate additional funds on one single credit card while
keeping up with their other credit card payments. This is sound
advice, as it sets the stage for rapid repayment of one card,
which would in turn free up additional cash once that card is
paid off. That additional cash could then be reallocated toward
another credit card.
The problem with this method is in the details. Paying just
the minimum on any credit card for an extended period of time
carries additional risks. Many credit card issuers will
categorize such activity as "slow pay" behavior, which results
in a hike in interest rates.
To be safe, you should always make sure that every credit
card receives an additional amount above the minimum payment at
least once every 4 months. This need not be a substantial
amount, just enough to prevent "slow pay" classification.
Slow Pay
If this has happened to you, fear not. There is a remedy.
This author experienced this practice first hand. After calling
the creditor, I was informed that making just the minimum
payment for 6 consecutive months caused the account to be
labeled as a "slow pay" account, therefore justifying their
increased interest rate.
I explained that this was news to me,
but that I would make a much higher payment to show my financial
strength if they agreed to reduce my interest rate to the
previous level. My request was approved. My rate was returned,
but I was nonetheless out of the additional finance charges that
had incurred during that billing cycle.
Many debtors do not have the luxury to send more than the
minimum payments. If this sounds familiar, you are likely on the
verge of financial disaster. One slow pay rate increase can push
your payments beyond your ability to keep up. Just one emergency or one missed
payment can put all of your bill payments at risk. You risk
spiraling debt, heavy late fees, interest rates of 30% or more
and rapidly rising minimum payments, not to mention a battered
credit rating. Even your other credit cards with solid payment histories
could justify rate increases through
universal default.
If you can make higher than minimum payments, you should do
so and focus on reducing your debt. If you can barely afford the
minimum payments on your credit cards, then you should seek the
help of a qualified financial counselor for debt relief. Even if
you are already late, it is likely not too late as long as you
act now before your accounts go to collections.
You may be eligible for a special program sponsored by major
credit card companies that helps to restore credit while
allowing you to eliminate your debt through
lower minimum payments. |
