Minimum Payment Trap

Does it seem like your credit card balance never goes down? Wondering where your minimum payments go each month? Has your interest rate increased without your knowledge? Does your credit card statement have fees that you do not understand? You’re not alone! Many people find that they make their minimum credit card payments each month by finding out at the end of the year that their balance is almost the same as when they started.

How does that happen? Most credit card balances increase innocently enough. Once, I worked with a woman who had this experience. She was given a credit card that was intended to pay the monthly balance. This plan worked to perfection for the first three months. At that time, Kim (not her real name) very gently used an annual clothing sale. She used the sale to buy much needed workwear for 50% off. The final bill was just over $ 1,500.00. Kim’s intention was to pay the balance two weeks later when she received her paycheck. Two weeks later, when Kim got paid, however, she encountered another financial problem: her car needed $ 1,100.00 for repairs. The day after, Kim’s credit card bill came in the mail. Kim had never paid much attention to her credit card bill before that and was relieved to see a box with the headline: minimum payment. Kim had fully decided to pay the $ 1,000.00 on her credit card bill, but after paying cash for her car repairs, she didn’t have the money left to pay down her credit card balance. Kim would not hurt to damage her credit rating and immediately sent the minimum payment.

When Kim received her next credit card bill, she realized there was no decrease in the balance. She wasn’t too worried. Over the next few months, Kim would use her credit card and watch her balance slowly increase, though she always felt in her smallest payment on time. Kim was out for lunch one day with a business client when her credit world began to loosen: her card was rejected. Kim came back to his office and called the credit card company. She was told she exceeded her $ 2000.00 credit limit. The credit card company explained to Kim the following: 1) her minimum payments only covered financing costs on her existing balance 2) in the fourth month they received her payment two days late, which automatically started at a much higher interest rate. Kim learned these facts because she immediately called her credit card company. At the critical time to discover that her card was over the limit, Kim took positive steps to rectify the situation. She and her credit card company agreed on a workable payment plan that reset her credit card balance in twelve months. By communicating with her creditor, Kim did minimal damage to her credit score and was able to build a strong financial future.

To prevent Kim from falling into the trap that Kim fell into, make sure you are fully aware of the terms and conditions of your credit card agreement. Financial institutions are required by law to fully disclose all terms and conditions that increase your interest rates and / or assess late fees. Communicating payment issues as quickly as possible to your creditors will have a minimal impact on your credit history and greatly improve your financial future.