The Credit Guy

When a minimum payment increase becomes unaffordable

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 expert

Dear Credit Guy,
I’ve had a credit card for 16 years with a company I liked. They recently announced an increase in monthly minimum payments — to 5 percent of balance — a change that would double my payment. I have a wildly fluctuating monthly income. I called upon receipt of the announcement, saying I wanted to cancel the card and stay with the original terms. Customer service canceled the card, but when I asked to confirm we were back on original payment plan, he put me on hold and said nope, I still had to pay 5 percent of balance. The supervisor said there’s no opt-out option — call after I’m billed, and maybe we could work out a payment plan. This charge is sudden, unfair, and I do not agree to these terms. Is it just a case of tough luck Charlie? Is this legal for the bank to change the payment terms overnight? Just wondering. — Melissa

Answer for the expert

Dear Melissa,
Some of the major credit card issuers made the change to a higher percentage of the balance owed minimum payment before all the provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) went into effect. The change to a higher minimum payment can be tough for those who cannot afford to more than double the minimum payment due under the old terms. But the change is good for the average consumer in the long run because more of your principal balance is paid and you get out of debt faster.

The long-term benefits, however, are not going to help you in the short term. The CARD Act does not prevent the card issuer from raising your minimum payment and it is a term change for which you do not, unfortunately, have the choice to opt out. From the creditor’s point of view, they are attempting to decrease the time to collect by raising the minimum payment.

What you need to decide is how best to deal with paying what you owe. If you can’t afford the new minimum payment, you will need to work out a different payment plan with the creditor or move the balance to a different loan product. You might consider transferring the balance from your current card issuer to another credit card with more affordable terms or research a home equity line of credit or loan to pay off your balance. What you don’t want to do is pay less than the minimum payment. If you do so, the account will be considered late. If it is late for more than 60 days, the creditor can raise the interest rate to the default APR of 29 percent or more.

Due to your fluctuating income, a home equity line of credit may make the most sense for you, assuming you have sufficient equity in your home. Should you need access to additional income some months, the line would be available. In the months that you do well, you can pay back what you borrowed in the previous months as well as make a regular payment to pay down what you borrowed to pay off your credit card. Keep in mind that with a home equity loan or line of credit, you are putting your home at risk if you default on the loan. If you are not a homeowner, you might consider contacting a local credit union to see if you qualify for a personal line of credit.

Take care of your credit!

See related:A guide to the Credit CARD Act of 2009, When even the minimum payment is too much, How to cope with sudden minimum payment increase

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