 Tackling
debt from multiple credit cards
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 Dear
Debt Adviser,
With the credit card companies charging 4 percent minimums, I was
wondering if I can pay less than the minimum on two of my three
cards and concentrate extra funds on the third account to get it
paid off? Is there a penalty for paying a significant amount on
a bill, but not all the way up to the listed minimum? Thank you!
-- Linda
 Dear
Linda,
I sure hope you get this before your next minimum payment is due!
There's a reason why they call it "minimum" -- it's the
smallest amount they'll accept without imposing penalties. You must
pay at least the minimum amount due on all your accounts or you
will be hit with fees, a higher minimum payment next month and worse.
Your creditors view any payment amount that does not cover the minimum
amount due as a late payment, because you did not pay as agreed.
A small bit of good news is that the 4-percent number
you quoted may be overstated. Each creditor has its own formula
for repayment, and yours might well be less than 4 percent. Also,
some have already gone to the higher minimums, so you might not
have an increase at all. For example, Citibank started moving to
the new minimums back in March of 2005.
Here's the bad news if you do not make a minimum payment
by its due date:
- You would be assessed a late fee of up to
$39 each month that you did not pay the minimum amount due. This
would be added to your next month's minimum payment.
- If you are not already there, it is likely that your creditors
would increase your interest rate to the maximum allowed by law
in the state where the card is issued. In Bankrate.com's Feb.
8, 2006, survey of credit card issuers, these "penalty rates"
reached as high as 31.5 percent. The reason for the interest-rate
increase in is because by not paying as agreed (the minimum due),
you are put in a high-risk lending category. The new penalty interest
would also be applied to your next month's minimum payment.
- You would have to make up the shortfall in last month's minimum.
So the amount you didn't pay would also be added to your next
month's minimum.
- Your credit score would deteriorate, giving your other lenders
the right to move your other accounts to the penalty rate under
what is known as "universal
default" and you can see that your accounts would be
in bad shape very quickly by paying less than the minimum amount
due.
You are on the right track by trying to get one of
the three cards paid off quickly. My advice is to stick to that
plan, but make sure you have enough to pay your other two cards'
minimum payments while concentrating on paying more than the minimum
to the account with the highest interest rate. Obviously, the larger
the payment amount, the quicker the credit card is paid off.
Because it sounds as if you might have trouble making
the minimum payments on the other two cards while paying down the
third, you might want to consider taking another look at your monthly
expenses and income. To reach your goal of paying off the credit
card debt you might have to make some temporary sacrifices. Places
to look for extra money to pay down debt include eliminating or
decreasing eating out, new clothing purchases and even looking at
cutting back on cable television. A temporary second job may be
worth looking at, too.
If you have cut expenses down to the bare minimum
and still don't believe you can make any headway on your credit
card debt, contact a reputable credit counselor.
Good luck!
The Debt Adviser, Steve Bucci, is
the president of Money Management International Financial Education
Foundation and the author of Credit
Repair Kit for Dummies. Visit MMI
for additional debt advice or to ask a question of the Debt Adviser
go to the "Ask the
Experts," page to ask a debt question.
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