By James Lambridis, Founder/CEO of DebtMD
For most Americans, spending money using credit cards has become a way of life. From holiday shopping, to booking vacations, to the endless number of subscription services, using credit cards to finance these things has almost become an afterthought. While some people pay off their balances in full each month, others charge more than they can afford, which plays into the hands of the credit card companies. This causes them to be stuck in a never-ending cycle of credit card payments that drains them of their hard-earned money. If you are struggling to keep up with your payments or pay down your balance, here are five things that the credit card companies do not want the general public to know.
1. Fixed Rates are not really fixed.
While many people assume that the rate on their credit card won’t change, the opposite is true. Credit card companies have the right to raise your rate based on payment history and total debt balances. Defaulting on a credit card bill, in most cases, will cause your interest rate to go to the penalty APR. Creditors do have to give you 45 days notice before increasing your interest rate, so if you do miss a payment or incur a large amount of debt, be sure to keep your eyes peeled for any correspondence from the credit card issuer in regard to a rate change.
2. There is no such as thing as having no limit.
Most people are familiar with the traditional credit cards that have a credit limit which you are not supposed to exceed. However, there are many credit cards that are advertised as having “no limit”. The truth is that there is a limit, usually referred to as a “pre-set spending limit.” The credit card will track your spending habits, and this is how a limit is determined. From the creditor’s standpoint, they would never take on the risk of giving a consumer a credit line with no limits. In addition, a card with no limit sounds great for marketing purposes and incentivizes people to apply for the card. If you have such an account, be sure to know what your approximate pre-set spending limit is at all times.
3. Late payments can be catastrophic.
While everyone knows that late payments on a credit card will impact your credit score, there are other effects that are not as widely known. Being late on a credit card payment can have serious negative effects to your credit profile and also impact other things besides that specific credit card. First, the credit card issuer will charge a late fee, usually $35. They also have the right to bump your APR up to the penalty interest rate, typically 30%. In addition, if you happen to have other credit cards, being late on just one account can cause the interest rates on the others to increase as well. This is known as universal default. If you do find yourself behind on one of your credit cards, make sure you monitor your other accounts to ensure your rates have not gone up.
4. Minimum payments will get you nowhere.
If you have ever been struggling just making minimum payments on multiple credit card accounts, you know it can be a vicious cycle that seems to have no end in sight. Credit card companies prey on people who consistently pay the minimum on their cards. To give you an idea of why balances don’t seem to go down when making the minimum payments, a typical minimum payment is 2% of your balance. On a $10,000 balance, this comes out to $200. Assuming a 19% APR, which is the average credit card interest rate, the interest charges come out to $158.33 for a given month. So, on a $200 minimum payment $158.33 goes toward the interest alone, and a little over $40 will go toward paying down the principal. If you have ever looked at your credit card statement closely, you’ll see the payment schedule and the time it will take you to pay off the balance if you continue to make the minimum payment. It will tell you it will take decades to pay off a substantial balance. With so little money going toward paying down the balance, you can see why it takes forever to pay off credit card debt when making just the minimum payment.
5. Everything is negotiable.
If you are in a bind due to credit card bills that have piled up, it never hurts to contact your credit card company to see if they would be willing to work with you. From asking if you can make a partial payment, to asking for a reduced interest rate, most credit card companies are willing to work with consumers who are on the verge of default. If you have a sterling payment history and have been with a credit card company for a long time, this gives them even more reason to compromise. In addition, if you happen to forget to make your monthly payment, and have a spotless payment history with the creditor, you can have them waive any late fees and they more than likely won’t charge you the penalty APR. In the end, if you are experiencing a financial hardship or simply made an honest mistake, you should contact your creditor and be honest and sincere with them. There is a good chance they will cut you a break as long as your payment history checks out and you are in good standing as a customer.
Three Takeaways
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Late payments can cause more problems than just your credit score going down.
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Minimum payments are a recipe for disaster.
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Contact your credit card company if you are in a tough position to see if they are willing to work with you.