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 have been paying a credit card balance transfer with a 3.99 percent interest rate for maybe three or more years. I was never late, and I never used the card for purchases knowing that my payment would go first to the higher interest balance. Today, I received a note from the bank changing my minimum payment from 2 percent of the balance to 5 percent of the balance, more than double. This change truly jeopardizes my ability to keep current on all my debt payments. Can the bank do that? What can I do about it? — Adriana
Yes, unfortunately, most cardholder agreements allow for changes in the agreement by the card issuer with notification of said change to the cardholder. With the current credit cycle, many creditors are tightening up from the much looser standards of the past and looking for ways to lessen risk. Creditors are accomplishing less risk by raising interest rates and lowering credit limits.
Because you transferred a balance, you have a guaranteed interest rate unless you default, so the card issuer cannot raise your rate if it believes you are a greater risk. The only option the card issuer has in the case of a guaranteed rate is to decrease the amount of time you have to repay the balance by increasing the minimum payment amount.
It is ironic that regulators tried for years to get card issuers to raise minimum payment percentages because consumers who paid only the minimum amounts due ended up paying twice as much or more in interest charges as the original purchase on the credit card. New federal rules that take effect July 1, 2010, will amend the Truth in Lending Act’s Regulation Z to require card issuers to warn consumers that paying only the minimum amount due increases the interest paid and the time it takes to pay off the balance. It will also require issuers to provide a hypothetical example of how long it takes to pay off a balance, as well as the total amount paid when paying only the minimum due.
So, in general, it is better for consumers to have a higher minimum payment percentage so that more of the payment applies to principal and the balance is paid down faster with less money paid in interest charges. But, for people in your situation, those who have transferred what I can only assume was a large balance to a credit card to take advantage of a low interest rate for the life of the balance, the increase in minimum payment can be an immediate hardship.
If you know that you cannot afford the increased minimum payment, contact your card issuer and let them know. Ask what alternatives are available. What is likely to be offered is that you can keep your lower minimum payment percentage — but only if you allow the issuer to raise the interest rate. Keep in mind that if you do not pay the increased minimum payment in full, the account will be considered in default and the very high default interest rate would then apply to your balance.
So if you can’t afford the new minimum payment, you need to decide if you will accept a higher interest rate, should it be offered by the card issuer, or if you need to transfer the balance to a fixed-term loan product. Some fixed-term products you might consider include a personal loan from your bank or credit union or a home equity loan or line of credit. You should have been given some time by the lender before the new minimum payment goes into effect, but you will need to act quickly.
Take care of your credit!
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