Tuesday, October 15, 2013

The Minimum Payment Swamp

Credit cards are great, aren't they? They offer you some freedom, some flexibility . . .and you can pay them off over time rather than having to come up with a big pile of cash all at once. Of course, you pay a price for that that flexibility in the form of interest on the balance. But still, you pay it off in a couple-few months, it's not so bad, right?

OK, but what happens when you can't do that? I mean, suppose you've had a really big expense and now you have a larger balance than you usually like to carry. Suppose your income has gone down recently so now you have to rework your budget, you know, so you can pay rent AND eat this month. Where do the credit card payments fit in?

Of course!!! Minimum payments!!! Our friends at TBTF Bank, NA (To Big To Fail Bank . . .) have generously offered to allow you to pay off your debt in increments called "minimum payments." This is the lowest amount you are required to pay in order to pay off your balance. Paying the minimum payment each month keeps the creditor happy and keeps you from defaulting. Sweet! Right?

Not so fast. When you pay only the minimum each month, you are doing very little to decrease the principal you owe. A lot of that minimum payment is being applied to interest. For example, if you have a $3,000.00 balance on a card that carries an interest rate of 14.99%, a likely monthly minimum payment will about $120.00. This will decrease a bit each month as you pay down the principal. At that rate, it will take you almost 9 years to pay off that balance. And that's assuming you don't use that card at all during that time. Add to that the other minimum payments on your other cards and you could be looking at hundreds of dollars each month going out just to keep the banks off your back. After a while it can feel like your way through a dense, muddy swamp; take a couple of steps forward, sink down into the muck, pull yourself out, couple more steps forward, sink down . . .lather, rinse, repeat.

So . . .what do you do?  If you have regular income and your ordinary living expenses are manageable, you might want to consult with a credit counselor to see if you qualify for a debt management plan. If you qualify, you should be able to pay off the credit card debt at greatly reduced interest over a period of 4 to 5 years. If, however, the debt has become completely unmanageable and you are having to pick and choose between paying a bill and going to the grocery store this week, it may be time to contact a bankruptcy attorney. A bankruptcy practitioner will explain the pros and cons of filing a bankruptcy and will outline the steps necessary to do so. He or she should also explain your non-bankruptcy options.

Or . . .you can just keep slogging through that swamp.