Minimum payments won't dent high-interest debtBy Todd Ossenfort
Dear Credit Guy,
I
have a credit card with balances at varying rates. I thought that when you make
a minimum payment, the first thing that gets paid is ALL interest accrued.
Next, the balance that carries the lowest rate gets paid. What is happening to
me is the interest accruing at the lowest rate is being paid off and the
interest accruing at the highest rate is being added to the balance carrying
the highest rate. So the balance that carries the high rate of interest is
increasing even though I have not made any new purchases. Is this correct?
-- Ed
Dear Ed,
The
biggest problem I see with your situation is that you are only making minimum
payments. The Credit Accountability, Responsibility and Disclosure Act of
2009 (better known as the Credit CARD Act) provisions regarding how payments must be applied only apply to
those amounts paid in excess of the minimum payment. For this reason, and many
others, I strongly encourage you to work out a way to make more than the
minimum payment due each month.
How
your minimum payment is calculated and applied to your balances will be spelled
out in your cardholder agreement. If you, like most people, can't locate your
cardholder agreement, the CARD Act has come to the rescue. Your card issuer is
now required to include cardholder agreements in plain language on their
company website. Should you be unable to locate it there, just call the
customer service number on the back of your card and they will be happy to let
you know where to get a copy.
Your
high-rate balance will continue to increase until you begin to pay more than
the minimum due or until your lower rate balance is paid in full. The CARD Act
specifies that any amount paid in excess of the minimum amount due must be
applied to the balance on the card with the highest interest rate. So, any
amount, even $10 or $15 more than the minimum due will be applied to your
higher interest rate balance. Of course, to make any significant decrease in
the balance you will need to pay at least the interest accrued on that balance
for the month and as much more as you can afford.
For
example, let's say your highest interest rate balance is $5,000 at 24 percent
interest. That balance is currently costing you approximately $100 in interest
charges each month. To begin to see that balance decrease, you would need to
pay at least $125 or more above and beyond your minimum payment.
Many
people who make only minimum payments on their credit card balances are doing
so because that is all they can afford. In numerous cases, people are stretching
their budgets just to do that. Should you be one of these people, you may still have
a couple of options to get that higher rate balance down.
Option No. 1 is to consistently make the same monthly payment as you did this month.
This means that if you paid a minimum payment of say $175 on your last
statement, continue to make a $175 payment every month even though your minimum
amount due will be less each statement. Over time, that consistent payment each
month will help you to increase the amount that is applied to your higher rate
balance. See the CreditCards.com
minimum payment calculator to see how that works with your debt.
Option No. 2 is to transfer your balance on your higher rate card to a new credit card or to a card
without an existing balance. You will need to have a fairly good credit score
to take advantage of this option, but if you have good credit, you might
consider it. Shop around for a card with terms that make the most sense for the
goal you are trying to accomplish: paying off the debt.
Take care of your
credit!
See related: Study: Credit card statements 'virtually incomprehensible', Credit card agreements: Find yours online, A guide to the Credit CARD Act of 2009
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.
Published: July 12, 2010
 |
 |
 |
|
Three most recent The Credit Guy stories:
|
|
 |
|
 |
|
|
|
|
CreditCards.com's newsletter
Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!
 |
|
|
|
|
|
