Why Your Credit Card Debt May Be Spiraling
As a special holiday gift, many people got a nice surprise from the credit card companies that we have come to know and love. Those comfy little minimum payments began to double! For the few people out there with very little credit card debt, this change may have gone unnoticed, but for the rest of us, it is having (and will continue to have) a significant impact on our budgets.
For years now, these card issuers have spent hundreds of millions of marketing dollars inundating us with “pre-approved” offers for credit cards with bonus points, mileage, low rates and other perks; millions of people have not only taken advantage of them, but have run them up to the maximum limit. Some cardholders have been overspending; others simply found themselves caught in a situation that required them to use their credit cards just to make ends meet. We have become quite comfortable with the minimum payments, as they barely seemed to make a dent in our wallets. However, due to the fees and interest associated with them, making the minimum monthly payment becomes a problem—it could take decades to pay off your balance.
Enter Big Brother. In an effort to reduce the massive amount of consumer credit card debt, the Office of the Comptroller of the Currency, in 2003, issued guidelines requiring banks to increase their minimum payments. These guidelines stipulated that the minimum payment should include interest, any fees and one percent of the principal balance. Banks are supposed to be in compliance with these new guidelines by 2006. Some were proactive in implementing the changes, but most waited till the last minute.
When you put pen to paper, these changes can effectively double the amount of money that you are use to paying each month. For example, a consumer with $30,000 of credit card debt, making the minimum payment of $600 per month, could easily see those payments increase to $1,200!
Additionally, everyone has seen how dramatically short-term interest rates, such as prime, have increased over the last 18 months. Most credit card rates are pegged to the prime rate, so you can expect the interest costs to increase as well. Further, when you couple these dramatic changes with the increase in the price of gas and put it on the heels of sweeping bankruptcy reform, you have a recipe for disaster.
What should you do if you have credit card debt?
Most people do not realize that if you fall behind on one credit card and the bank increases your credit card rate, all other credit card companies have access to that information. That means that any other credit card companies you do business with will probably do the same. This can create a spiraling effect that could ruin your credit in a short period of time.
If you have a long, strong payment history with your credit card company, you may be able to contact them directly and negotiate a slightly lower interest rate. However, this is not a guarantee and it will not change the fact that, overall, your minimum payments will be increasing dramatically.
Another option is to consider a debt consolidation loan. You might consider refinancing your home—this will liberate some of the equity, enabling you to consolidate that troublesome credit card debt and eliminate it completely before the payments begin to choke you. Interest rates on longer-term mortgages remain at record lows, so you may be able to take advantage of the favorable tax treatment of mortgage interest. You can set up a plan that can actually save you hundreds, if not thousands, of dollars per month, allowing you to ease the concern over how you will be able to make ends meet when your minimum payment increases.
Do not let this dramatic change catch you by surprise. It is critical that you are proactive in addressing this situation, so that your credit is not negatively impacted for years to come.
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