June 29,2009
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How to Handle Debt, Pt.2
Increase Your Payment.Ok, so my friend made a lousy decision. She’s now stuck with that large credit card debt and double the interest. Fortunately for her, the interest rate is one of the lower ones that lenders are charging at this time. However, she is concerned that her card company will arbitrarily increase her credit card interest rate. Since the new legislation does not become effective for several months, her lender could very well increase her interest rate even though she has an impeccable payment history. Discover recently sent out notices to their cardholders of a significant interest rate increase. JPMorgan has sent notices out to their customers about interest rate changes on their credit card accounts as well. More banks are sure to follow suit as they scramble to beat the new legislation to the finish line.
The new credit card reform act will help deter some of the unfair practices of the lenders; however, it will not help in reducing any debt. Consumers are responsible for paying off their debt. The act will only serve to give individuals more ability in paying down their credit card debt quicker. The act forces banks to apply any excess payment amount over the minimum required to the highest interest bearing portion first. Therefore, if your minimum payment due is $100 then the amount remaining after the interest it deducted, is applied to the lowest bearing amount. If you have a balance transfer with a 0% interest for six months, the payment is applied to that balance while you continue to build up interest on the higher balance which could be 10% or higher. If you pay $150, the extra $50 would have also gone to the 0% balance. Under the new act, the extra $50 would go toward paying off the higher interest balance.
It becomes clearer now why banks are rushing to increase credit card interest rates before the act goes into effect. The smartest move for consumers is to get that debt paid off as soon as possible and refrain from adding any more debt on their plates. The best way to get the card debt reduced is to stop using the card and repay more than the minimum payment due each month. If you aren’t able to do so, take a look at some other options.