Tiny payments don't keep creditors away

Paying less can land you in hot water

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question for the CreditCards.com expert

Dear Credit Guy,
My bank closed my credit card account because it was over the limit. I was over the limit because they raised the interest rate, and I was only able to make minimum payments. There once was a law that as long as you were making regular payments, the creditor could not come after you. If the minimum payment is $50, and I pay $25, can they come after me? -- Ethel

Answer for the CreditCards.com expert

Dear Ethel,
Although the bank raising the interest rate on your credit card account might have been the "straw that broke the camel's back" in regards to you only being able to afford the minimum payment, you definitely had a hand in running up the balance so close to your limit. Everyone reading my response to your question needs to strive to get your balances below the 50 percent of your available credit limit to avoid ending up in your circumstances. This way, if the credit card issuer does raise your interest rate -- although it might be an uncomfortable situation -- it won't end up causing a crisis.

Unfortunately, what you refer to as a "law" is an urban myth that in some ways makes sense, but is untrue. You signed a contract with your issuer regarding your credit card account, and by signing that agreement, you promised to pay as agreed. Most credit card agreements state that you agree to pay at least the minimum amount due on a monthly basis. Obviously your circumstances have changed, but the original agreement you signed has not.

Even though you are meeting one part of the promise and are paying monthly, you are not meeting the other half of your obligation to pay at least the minimum amount due. If the creditor chooses to, the bank could take action regarding your account just as if you were making no payments at all. Meaning, the company can report your account as not paid for 30, 60, 90 days late (depending on how many times you have made less than the minimum payment due) to the credit bureaus, and can charge off the account as a bad debt after you are 120 days late.

What concerns me most about this account is that you are likely being assessed high fees (typically $29 to $39) including over-the-limit and late fees each month. Yes, even though you are making a payment on time, because it is not minimum amount due, the creditor considers you late. If you are paying only $25 per month, your payment likely would not even cover one of the assessed fees. Each month your balance is getting higher and higher with no end in sight. This is known as negative amortization.

Maybe you are planning to gain some relief from the fees and interest if the account is closed or if the account is placed for collection, but the news is not good there either. Once an account is placed for collection, the over-the-limit and late fees are stopped from the original creditor, but the collection agency usually starts assessing its own fees and collection efforts are escalated.

My recommendation is that you rework your monthly budget so you have enough money to bring your account current (pay the full minimum amount due as shown on your statement) and to continue to make at least the minimum amount due each month. If paying the full amount due does not bring the account below your credit limit, you will need to work to pay what is necessary to do so. Adding a large fee to your balance each month is very counterproductive and should be avoided if at all possible.

With some perseverance and dedication, you can get out from under this problem debt. Remember, this situation didn't occur overnight You won't be able to fix it overnight either.

Take care of your credit!

See related: What to do if a credit card issuer cuts your limit, Lower credit limits can hurt consumers' credit scores

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Updated: 03-26-2019