Credit card minimum payments rising
Another way increased minimums may cut debt is by
forcing buyers who think in terms of monthly installments to take
a second look at what they can afford. The new minimums will effectively
double the monthly price of a purchase, turning a $40-a-month payment
for a new sofa into an $80-a-month one. "People charge up to
the point that they feel they have room within their budget to afford
those payments," Peterson explains. "If I'm trying to
figure my budget based around what my credit card payment is going
to be, I'll be able to carry less debt."
Bad news for big debtors
Of course, if your finances are already squeezed to the breaking
point, the rate hike is a bitter pill to swallow -- good for you
in the long run, but hard to take right now.
"If you're living paycheck to paycheck and your
minimum payment goes from $200 to $275, spread over five cards,
that's an extra $375 a month," says Brauer. "A lot of
families can't come up with that." The banks already know that
and are planning for it. Bank of America, one of the first to raise
minimum payment requirements, worked an extra $130 million into
its 2005 budget to cover projected losses from defaulting cardholders.
But default isn't your only option if your new payment
seems out of reach.
"I always tell people there are two sins: not
paying, and not paying as agreed," says Cate Williams, vice
president of financial literacy for Money Management International,
in Chicago. Most creditors would rather opt for the latter, so give
your credit card company a call to see if you can either negotiate
a reasonable payment arrangement or reduce your interest rate. Otherwise,
missing a payment can quickly have you fielding calls from collections
agencies -- and at that point, no one will be willing to listen
to you, says Williams.
Coming up with the cash
If you've been carrying a big credit card balance and suddenly need
an extra $300 a month to make your minimum payments, now's a good
time to re-examine your finances. With some smart spending shifts
and careful planning, virtually anyone can dig an extra 10 to 15
percent out of their budget.
Here are some ways to get started:
- Pay less to Uncle Sam. In 2004, 80 percent
of taxpayers got a refund -- on average, $2,400 a pop. By adjusting
your withholdings, you can keep that money in your own pocket
and put an extra $200 a month toward your debt.
- Curb your spending. Even small changes, like
brown-bagging lunch or renting one DVD a week instead of three,
can free up to 10 to 15 percent of your income, says Peterson.
To find expenses you can shave, track your spending for seven
days. You may be surprised at how relatively small expenses --
like 75 cents for a Diet Coke from the vending machine -- add
up over time.
- See a credit counselor. The new bankruptcy
law mandates at least two financial counseling sessions during
the bankruptcy process, but if you see a counselor now you may
be able to avoid reaching that point altogether. For help finding
one, visit the Web site of the Association
of Independent Consumer Credit Counseling Agencies or the
for Credit Counseling.
- Control your cards. Paying down a big debt
is hard enough without adding more fuel to the fire. To avoid
the temptation to spend, "Take every credit card except one
out of your wallet," recommends Williams. "Lock them
away. People have frozen them in bowls of ice or given
them to a trusted friend. I'm concerned about people walking around
without some means of emergency cash. But we all agree what an
emergency is, and a shoe sale at Nordstrom is not it."
Melody Warnick is a freelance writer
based in Iowa.