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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.
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