Dear Debt Adviser,
I have paid off most of my credit cards in the last few months. I still have a debt with one creditor for $23,000 that I have been paying on time, and I always pay more than the minimum. I just received a notice that the minimum credit card payment is going to be increased to 5 percent of the balance, starting in August. That’s $1,200, or $600 more than I have been paying. I have never been late and have never skipped a payment in the past, but I just don’t have an extra $600 monthly in addition to the $600 I already pay. What should I do?
Welcome to the world of tight credit and low risk tolerance! For years I have been saying that credit availability swings like a pendulum from loose to tight and back again. It’s impressive to see the swing actually take place after talking about it for so long. From your perspective, it seems insidious. But I assure you, this isn’t personal, and this tightening of credit is likely to persist for the foreseeable future.
The days of easy-to-obtain, inexpensive credit are behind us. Those expecting their credit card payment to remain the same as it has been for many years are destined for disappointment and default. Creditors are no longer comfortable with the level of risk they took on in past years. As a result, you should be prepared to pay more, get less and, in general, have less generous repayment terms. In addition, those seeking new credit will have tougher standards to meet to qualify.
Most cardholder agreements, yours included, usually contain terms that allow the issuer to make changes to the agreement, such as raising your minimum credit card payment due. Some card issuers are doing just that by moving from a minimum payment of 2 percent to a minimum of 5 percent. I understand your frustration with the change, and I’m afraid I don’t have reassuring news for you or my other readers.
You were likely chosen to get an increase in minimum payment because you are carrying a fairly large balance with a low interest rate that is guaranteed for the life of the balance. Under a guaranteed interest rate agreement, the creditor cannot increase your interest rate to account for their desire to offset potential losses. So the creditor must come up with another way to reduce risk. By increasing your minimum credit card payment, the length of time for repayment is decreased, thereby decreasing the exposure of the lender to risk.
The message in this latest action by card issuers is for consumers to pay down or otherwise get rid of large credit card balances as quickly as possible and not to use credit cards for long-term financing. If you need to borrow more than you can comfortably afford to pay off in, say, 90 days, I’d ask about a fixed-term loan product. An installment loan or home equity loan would be examples of a fixed-term option.
I recently purchased a new flat-screen TV when my set of 20-plus years lost its sound. This resulted in a cascade of expenses as the old entertainment center wouldn’t accommodate the new set, so it had to be replaced. My wife said the rug was “funny” where the entertainment center used to be, so that had to be replaced. Then add delivery for my bad back and extended warranty because my son said if I didn’t get it, the set would blow up in two weeks. So when the nice people at Best Buy offered me three-year fixed financing though an installment loan, I took it rather than purchase the set with a credit card.
I know you want to keep your $23,000 credit card balance at the low interest rate you are currently paying. But if you can’t afford the minimum payment and default, the rate will increase dramatically. I recommend you move the balance to a fixed-term loan that will likely be at a higher interest rate than what you are paying now but far less than the default rate, should you be unable to make the new minimum payment.
I’m glad that you were able to pay off your other credit card accounts, and I encourage all my readers to do the same as quickly as possible.