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Credit card double trouble: Minimums up, law changes

Dear Steve,
I have painfully found that the minimum payments are on the rise. We have always paid a little more than the minimum, but we cannot manage the doubled minimums now. I have spoken to the credit card companies about my inability to make the complete minimum payments but they are unwilling to help me work out a plan. They instead send me to a credit-counseling service. I don't want to declare bankruptcy, but I am thinking about it because of the news about the implementation of the stricter bankruptcy rules. Please give me some advice. Many of my friends are in the same situation. Thanks.
-- Sally

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Dear Sally,
Let me say this, and say it loud and clear: The game has changed and will never be the same again. By the end of 2005, it will no longer be possible to use a credit card to make a purchase and carry that balance forever without paying it off!

Also, it has been widely reported that minimum payments are doubling from 2 percent to 4 percent. This is just not true. They are increasing, but not by a set percentage.

Unfortunately, you are among the many who will find it difficult to pay the new minimum payment standards that have been or will be raised by creditors under new federal guidelines.

Here's my take on this: The Office of the Comptroller of the Currency, or OCC, regulates national banks and is concerned that many people have credit card balances that will take virtually forever to pay back. The OCC, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of Thrift Supervision have proposed that, by the end of 2005, credit card companies establish reasonable periods for paying back balances. The suggestion is a seven- to 10-year payback or amortization period.

In addition, bankruptcy law changes set to take place in October 2005 will make it harder to get out of repaying debts, such as credit card debts.

The effect of the two coming at the same time is that first, the minimum payment will be more, and second, you are more likely to have to pay it.

What can you do? Well, while some banks are still at the 2-percent repayment level, you can transfer your balances to them. This will help until the transfer period is over or until the end of 2005. Then you may be able to find a bank or credit union that does not have to follow the guidelines and may still be operating under the old rules. But don't expect this to last.

You made the right move in contacting your creditors to let them know that you would have trouble making higher payments and requesting to work something out. Regrettably, your creditors were unwilling to help and referred you to credit counseling. Other creditors might see this as an opportunity to put you into another type of loan that will meet your budget. Let me see if I can give you some information to help ease your frustration and help you make the best decision about your current debt situation.

First of all, the best credit-counseling agencies charge little or nothing to help you work out a budget that will allow you to make your payments. Second, if you can't make the new payment and you do decide to enter a debt-management plan, your interest rates will be reduced, and you will end up spending less to repay your debt even with the minimal monthly fee paid to the agency.

You are correct that the new bankruptcy law will make it more difficult for families that make more than median income in their states to have most of their debts erased through bankruptcy. You are also correct in shying away from bankruptcy. It should be the last resort in working to solve financial problems.

Whatever you decide to do, the message to all of my readers is this: Begin to plan now to live more in line with the actual money coming into your household each month. As you use credit cards in the future, make sure you have a plan to pay the balances in full, in a reasonable time, before you make a purchase.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

-- Posted: May 11, 2005




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