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Credit card companies increase minimum payments

Government pressure on credit card companies has forced some of the major players to raise minimum payments from the existing required 2 percent of the outstanding balance to 4 percent. MBNA, Citibank and Bank of America have all announced the increase, and given that industry history seems to demonstrate creditors follow each other's leads, it's a safe bet others will follow suit shortly. Bank of America just purchased MBNA's credit card portfolio, making them the largest credit card issuer in the United States.

An estimated one-third to one-half of American families carry credit card debt, many of whom make the minimum monthly payment because that's all they can afford to make. Soon, the minimum payment will be doubled and these families will be forced to analyze their budget to find the extra cash to meet new minimum payment requirements!

Is raising the minimum payment good or bad news?

The reasoning

With the new bankruptcy laws in place, the government continues to look for ways to keep consumers out of bankruptcy. Much of the law created regulations seemingly unrelated to consumer bankruptcy, but designed to keep consumers out of it.

For instance, the new laws require credit counseling prior to bankruptcy, which hopefully results in a debt management program rather than filing with the courts. Credit card issuers are also required to tell consumers on their monthly statement how long it will take to pay a debt off at the minimum payment, and how much interest they will pay over time, hopefully to discourage minimum payments.

Your minimum payment is calculated at a percentage of the balance you owe, usually around 2 percent. When your balance goes up, so does your payment. With the increase to 4 percent, your payment will double. This increase occurred to help consumers get out of debt faster: now you will be paying your balance off more quickly.

However, if you are already struggling to make minimum payments, this could be a major concern for you.

Big surprises

Increased payments will catch many families by surprise. These increased costs may be more than many low- to moderate-income families will be able to bear, since many, especially in an expensive market like San Diego, use credit cards for emergencies or simply to get ahead.

Further, credit cards simply make it easy to spend money we don't have, because a $2,000 purchase can be paid back at $50 per month, allowing us to purchase items we wouldn't normally be able to afford.

Credit card companies will notify cardholders in the coming months of when to expect higher monthly payments -- and how much higher they will be. In any event, the increase will force many cardholders to make hard choices.

Analyze your budget, cut back on expenses

The time is now to look at your budget and find ways to cut miscellaneous expenses out - the best way to free up some money. If you are hitting up the local coffee shop for a mocha and a muffin every morning, you are spending $5 a day. That adds up to $20 a week and $80 over the course of a month.

Review your budget and you will find other things to help you cut back on the miscellaneous expenses, like bringing your lunch to work more often and renting one DVD a week instead of three.

Call your creditors

If you find that the higher payments are hard for you to take, call your creditors and let them know your financial difficulties. Most will be willing to work out some sort of plan for you. Remember, they want to collect what's owed to them. They may put you on a short-term hardship plan to give you some time to adjust your budget.

Adjust your withholdings

Talk to your employer about adjusting your withholdings to free up more of your income. According to Bankrate.com, in 2004, 80 percent of taxpayer got a refund at an average of $2,400 per person. By adjusting, you can keep that money in your pocket each paycheck instead, and use it toward your debt.

Control impulse buying

When trying to get out of debt, it is imperative to control the urge to buy things on a whim. Remember you have a budget now, so you can only spend what your budget allows for.

Get help

A debt management program (DMP) can help you get your credit card debt under control. When you enroll in a DMP your creditors will often require a payment less than 2 percent of the balance, so a DMP can help reduce monthly expenses above and beyond your budgeting and cutting back on frivolities.

A DMP also forces you to make the same payment throughout the life of the program, rather than reducing your monthly payment as your balance reduces. Creditors usually reward your efforts to pay your debts back through reducing your interest rates as well, allowing more of your payment to get applied to your balance rather than monthly interest charges. All of these benefits allow payback of debt within three to five years.

Debt-Free America is a 501(c)3 nonprofit, community service organization offering confidential and professional credit counseling, debt management programs and financial education to consumers nationwide. The company has been in the business since 1997 and serves more than 16,000 clients nationwide.

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