Credit cards can be your best friend – unless you can’t make the monthly payment. Then they can become your worst financial enemy.
It’s nice not having to pay the full tab every month, and most people don’t. The Federal Reserve Board says that only 45% of American consumers pay off the balance of their credit cards every month.
That means that more than half of us are chasing a balance month-to-month. So, what happens if you can’t muster even the minimum monthly payment on your credit cards?
Maybe you unexpectedly lost a job. Or suffered a medical emergency that requires a few days in the hospital. Or faced a massive car repair bill and don’t have anemergency fundto bail yourself out.
Minimum payments, after all, are only 2%-3% of the total balance. So, if you owe $1,000 on your cards, we’re talking $20-$30 a month to make a minimum payment.
That could be the case, but if you’ve been using credit cards to fund a lifestyle you suddenly can’t afford, the balance is probably closer to the national average of $6,270.
That means your minimum payment due is more in the $150-$200 range and that kind of payment isn’t just difficult for someone struggling, it may be impossible.
This might feel like the time to push the panic button and take drastic measures like debt settlement or declaringbankruptcy, but slow down. There are ways to lower your credit card payments and maybe even legally stop paying credit cards.
But first things first.
Contact Your Creditor Immediately
The first step to getting out of a problem is admitting you have one. And if you want to get out of this problem, you absolutely have to admit it to the credit card company.
It has the power to make things easier or harder for you. It also wants to help. Really, it does. You are a customer, and customers are the lifeblood of any business. Card companies want your business. They want to find ways to keep you in the family.
Put another way: They want to talk to you. So, give them a call. The number is on the back of your credit card.
Be courteous. Be honest. Don’t try to turn things around and blame them for harassment. You’re the one who didn’t pay. Offer them a plan that sounds both encouraging and doable.
Make a budget and show it to them. Tell them of any efforts you’ve made to increase your income. Explain how you plan tocut expenses. If possible, promise them you’ll have at least the minimum payment next month.
If that’s not possible, fine. The most important thing is simply letting them know you won’t be able to make the minimum payment.
That opens the other potential avenues of relief, such as waiving late fees or lowering the credit card interest rate or entering a hardship program. Any of those are preferable to not admitting you have a problem.
What Happens If You Skip the Payment
Creditors won’t like taking less than they are owed, but they are not going to refuse your payment. It also shows you’re acting in good faith, and it could help avoid penalties.
Offer to make small, weekly payments in any amount you can afford. If you have family or friends who will help out, ask them for small loans. Unless they are members of the mob, you’d rather owe them than the credit card company. Among the consequences of paying nothing are:
Late Fees
Card issuers can charge a late fee of as much as $29 the first time you fail to make a minimum payment on time. Ouch! What’s worse, the fees can escalate as high as $40 for a six-month billing cycle.You could have $200 or more added to your bill without the pleasure of ever actually buying something.
Credit Report Impact
Late payments are like scarlet letters on yourcredit report. If the card company notifies credit bureaus – and it most certainly will – that information will stay on your credit reports from Equifax, Experian and TransUnion for seven years.
That will have a far larger impact on your financial situation than one missed payment. Future lenders will be less likely to give you a loan. And if you get one, the interest rate will be higher than it otherwise would have been.
Penalty Interest Rate
Higher interest rates aren’t just a future problem. The credit card company is likely to raise the interest rate on your account. It can do that after two consecutive missed payments.
The issuer also must inform you how long it will impose the penalty rate. It could be until you have made 12 consecutive on-time payments, or even indefinitely. That you do not want.
The card company has to disclose what the penalty annual percentage rate (APR) will be. It could be five points higher than your previous rate, all the way up to 29.90%. That’s the kind of interest only the mafia usually gets away with.
Know Your Payment Policies
Missing payments will not make you popular with card companies, but it doesn’t mean you should be a target for abuse or harassment. TheCredit Card Accountability and Disclosure Act(CARD Act), was passed to give consumers some protection in both of those areas.
Credit card companies are permitted to raise your interest rates if you are 60 days or more late with payments, but the CARD Act stipulates that you must be notified 45 days before a rate change takes effect. If your interest rate was raised and you make six consecutive months of on-time payments, the card companies must go back to the original interest rate.
If you decide to put your card away while trying to catch up, the card company can’t penalize you by assessing an inactivity fee.
Prioritize Your Bills & Budget
Unfortunately, most American consumers can’t tell you how much they have coming in every month and where it’s going out. We don’t budget, most of us, anyway. Surveys show that only 41% of consumers use a budget and even that number may be high.
If you want to devote money topaying off credit cards, it has to come from somewhere and that somewhere will show up on a budget.
The first move in making a budget is to prioritize your spending. You must have these four and a half things at the top of the list:
- Food
- Rent/mortgage
- Utilities
- Transportation
- Clothing (to a very small degree)
All other spending is optional, meaning you can learn to live without it. That includes money wastes like cable TV; restaurant/entertainment nights out; cell phone service; buying new instead of used cars; bottled water; and clothing (to a very small degree).
Next, decide how much money you have available each month – based on your budget – and commit to making the minimum payment on all cards, but prioritizing the order in which you want to pay off the cards.
The biggest money saver comes from attacking the card with the highest interest rate. That strategy, however, may take you the longest to pay off yourcredit card debtand you could get discouraged too easily.
If that’s the case, put your money toward the card with the lowest balance. When that is paid, use the same approach on the card with the next lowest balance and so on until all balances have zeros in them.
Don’t forget: Budget enough money to make at least the minimum payment on each card so you don’t rack up any more late penalties.
Legal Alternative to Paying Credit Card Debt
Credit cards are anunsecured debt, meaning there is no collateral for lenders to claim if they aren’t repaid. Card companies are taking your word that you will pay what is owed.
If you can’t pay – and have exhausted all other alternative solutions – it may be time toconsider debt settlement.
Debt settlement is something that sounds good – “Pay only a fraction of the credit card debt you owe …” – until you do the math and see what “a fraction” really means and what a hit your credit score takes.
Debt settlement involves negotiating a payout with the card company in which they agree to take less than what is owed. It is suggested you have at least 50% of the total available before starting the negotiations. That usually means putting money into a separate account at a time when you already can’t afford to make a minimum payment on your debts.
Your card company will hem and haw and try to battle you, but in the end, they want to get paid something, so they could accept less than what is owed to close out the account.
Unfortunately, this form of debt relief comes with a long-term cost. Yourcredit scorewill drop anywhere from 50 to 150 points, depending on where you started. That will immediately impact the interest rate you’re paying, if you have other credit cards.
It also will put a stain on your credit report that won’t go away for seven years. Anytime you seek credit, whether for a home, car or just another credit card, the lender will see that red light flashing that says you haven’t paid back everything you borrowed. That likely means you will be paying extremely high interest rates, if you get any credit at all.
Seek Credit Counseling
After notifying the credit card company of your financial situation, there’s another call you should consider making. It’s to anonprofit credit counselingagency.
These nonprofit companies offer free advice on budgeting and help you dig out of your money hole. A counselor might suggest you enroll in a debt management program. They would work with creditors to reduce your interest rates and pay off credit card and other debts in three to five years.
It’s one thing to get out of debt. It’s another to stay there. Ideally, the counseling program will give you the budgeting skills and discipline to stay out of debt. That way you’ll never have to worry again about being unable to make a minimum payment on a credit card.
» Learn More: Debt Payoff Calculator
