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Credit card companies boosting payment requirements

October 19, 2009


While the credit card reform legislation that was passed by Congress this year cleans up some practices of the credit card companies and makes the accounts easier for consumers to understand, many of the credit card holders who are carrying balances are discovering a downside to the law — higher monthly payments.

Already, a number of credit card companies have issued notices to cardholders that minimum monthly payments are being re-calculated. That minimum is as high as 2 percent of the balance, which for a $50,000 balance means a monthly payment of $1,000 . That's can be triple what minimum payments used to be. For cardholders who budgeted minimum payments, that throws them off budget, and in some cases now unable to pay their credit card minimums. This only adds further hardship to consumers who are already struggling through a weak economy and high unemployment.

The solution to this problem isn't easy. Either pay the new minimum or face a damaged credit report and lower credit scores.

A cardholder unable to afford increased payments may have to shop around for another card with a lower rate. But even that is not easy as many cards are changing to variable interest rates, making them all more similar as they track the same changing interest rates. But some may offer balance transfers at a lower introduction rate that could allow the cardholder more time to save up for higher payments.

For homeowners who have enough equity in their home to borrow from, a home equity line of credit can be a good source of funds to pay down or pay off credit cards. In addition, the interest paid on a home equity loan is tax deductible, where credit card interest is not tax deductible.

Credit cards are not the easy money they used to be. As banks get tougher on lending, so do they with credit cards. By making cardholders pay more now, it allows banks to make up for other fees the law no longer allows them to charge. There is a benefit, however, of getting the cards paid off sooner.

But if a cardholder is able to pay off the card, it doesn't mean closing the account. Keeping it open will help improve credit scores when future creditors see credit has been available for a longer period than if it was not available by canceling the card. It's OK to have credit available, just don't use it.

The best solution, and the hardest, is to not even use credit cards if they can't be paid off in another month or two.

 


McClatchy-Tribune Information Services