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.
Dear Credit Guy,
I currently have a credit card that instead of raising the interest rate raised my minimum payment from $70 a month to $160 a month. Is that legal under the new credit card law? — Michelle
Unfortunately, I have received numerous questions from consumers in the same situation as yours — confronting a sudden, steep and unwanted minimum payment increase on their credit card accounts. Knowing you are not alone may be somewhat comforting, but it doesn’t really help resolve the situation. To that end, let’s explore some options for how to deal with the situation in which you’ve found yourself.
First, let me clarify that, as much as it stinks, the card issuers are within their rights under the law to raise your minimum payment. The percentage of the balance due to formulate a minimum payment is not covered under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, a sweeping credit card reform law commonly referred to as the Credit CARD Act. President Obama signed it into law in May 2009 and its first provisions went into effect in August.
Also, the financial picture in the United States right now, as far as credit is concerned, has moved 180 degrees from where it was just five years ago. Then, banks were granting mortgages to people with less-than-stellar credit and doing so without asking for any verification of employment. Today, these same banks are requiring proof of employment and a better-than-average credit score to qualify for an affordable mortgage loan. The same goes for new credit card offers. There once was a time when we received credit card offers in the mail at least twice a week — not so anymore. Credit card mail offers have plummeted.
I make this point because as the credit environment gets tighter, creditors are take action to assure they are making the most of the money they have. What appears to have happened to you is a perfect example — they’re raising your monthly payments so they can collect the money faster, thus giving the creditor more money to lend.
Here are some options you have to resolve your increase in minimum payment:
- Bite the bullet and pay it if you can afford to make the higher minimum payment. You will save money in the long run by paying the balance off quicker and saving interest charges.
- Move the balance to another existing credit card account with a different card issuer. Be sure your credit limit is high enough to accommodate the transfer and that the transfer amount is preferably below 50 percent of your credit limit.
- Open a new credit card account and transfer the balance onto the card. You will want to read the cardholder agreement carefully and make sure you get a card that will meet your needs.
- Research a signature loan with your bank or credit union and see if you qualify for a loan in the amount of your balance. You will want a fixed rate loan product with no penalty for paying the balance off early.
- Consider using your home’s equity to pay off the credit card by taking out a home equity loan or line of credit. Before taking this step, assure that your job is secure, the housing prices have stabilized in your area and you will use no more than 70 percent of the equity available. You will be transferring an unsecured debt to a secure debt that is tied to your home, so make this move only if you are committed to paying off the debt.
One more piece of advice: I would not use any retirement account money to pay this debt. You are going to need that money when you retire, and it is virtually impossible to make up what you will lose by borrowing from those funds.
I leave you and all my readers with the following recommendation: Pay down your credit card balances as quickly as possible and avoid using them in the future unless you have a plan in place to pay off the balance in 90 days or less. To help you avoid using credit, save three to six months of your living expenses in an emergency savings fund and replenish it as you use the funds.
Take care of your credit!
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