COPING WITH RISING MINIMUM PAYMENTS

Have you heard the news?

Credit card minimum payments may be rising — in some cases even doubling — as of January 1, 2006. That’s great over the long run, potentially helping consumers reduce balances faster. But in the short term, the hiked minimum payments could leave you hurting. Read on to see how the rules have changed — and what you could do to soften the financial blow.

How It Used to Work
In the recent past, average credit card issuers set minimum payments at about 2 to 3 percent of the balance each month. In the worst case scenarios, that wasn’t enough to cover the interest charges incurred for the month. So even if you made on-time minimum payments and didn’t add charges, your balance could take years to pay off — particularly if your cards had high interest rates. For example, making 2 percent minimum payments on a $10,000 balance at 18 percent would require about 58 years to pay off.

How It Works Now
To help address the issue of consumer credit card debt, various federal agencies advised setting voluntary minimum payment guidelines that would help ensure each monthly payment made a dent in consumers’ credit card debt load. The result is that minimum monthly payments will likely be a minimum of about 1 percent of the principal balance plus any interest and fees incurred that month. So each minimum payment should not only wipe out the current interest charges and fees, but also go to paying down the balance.

What the Change Might Mean to You
Exactly what increase you may see on your credit card bill depends on multiple factors, including the credit card issuer, the interest rate, the existing minimum payment percentage and the balance. In a nutshell, the higher your credit card interest rate is, the lower your required minimum payment was before the change, the larger your balance is and the more cards you have with high balances, the more of an impact you’re likely to see. (Some minimum payments were already high enough and will not change.)

How You Can Soften the Blow
If higher monthly credit card minimum payments could cause you to feel a financial pinch, there are some steps you can take to help ease the pain.

Use credit wisely. Whenever possible, pay for purchases with cash or checks. Avoid using credit cards for quick consumables, such as meals, groceries or gas unless you can realistically pay off the credit debt within two months. Save up-front for big expenses, so you can buy them outright, or charge them and pay off the bill within a month, so you don’t accrue interest charges.

Trim your spending. For a month, track all the money you spend, from a fast-food lunch to weekend videos to the utility bill. Cut back on non-essentials and look for ways to reduce necessary expenses, such as making your home more energy efficient to reduce heating bills or carpooling to cut down on fuel costs. Use those saved dimes and dollars to help make your credit card payments.

Improve your credit score. Pushing your credit rating up may help you qualify for lower interest rates from lenders. Simple steps such as making sure your credit reports are accurate, using your credit wisely and paying all of your bills on time can improve your score.

Consider your credit options. Credit cards are handy, but they’re not always the best option when you encounter unexpected expenses, have a drop in income or need a safety net. Using the available equity in your home can sometimes be a wiser choice, since you’ll usually enjoy lower interest rates and, in most cases, that interest will be tax deductible. A cash-out refinance is one option to consider. It provides you with a lump sum of cash that you can use for any need, such as to pay off and consolidate credit card debt. After all, the best way to avoid hikes in minimum payments is to pay off the cards altogether. Plus, paying off multiple bills with a cash-out refinance leaves you with fewer bills to pay each month.

Ask for assistance. If you feel that your debt is simply more than you can manage, don’t be afraid to ask for help before you fall behind — but do be choosy about where you go for assistance. Avoid companies that charge a fee to “fix” your credit or that focus on declaring bankruptcy to “clear” your debts. Instead, opt for a reputable consumer credit counseling organization. Remember, too, that a Mortgage broker can help you with a variety of flexible lending options as well as answers to many of your finance questions, whether it’s related to a home purchase, refinance or home equity. For a free discussion concerning your options, call me at (818)521-3060, email me at tlbautista@aol.com or visit me online.