Despite fixed introductory interest rate deals on credit cards that often last for several months to a year, most credit card interest rates are variable and subject to change. If this is the case, your agreement will stipulate this. Therefore, the credit card company has the ability to raise your rate when and if it sees fit. One reason they may decide to do so is if you are paying the minimum payment every month and they do not deem you as a good risk.
When attempting to get other new forms of credit whether it is a mortgage, auto, or personal loan, you may encounter some issues if you’ve only been paying minimum monthly credit card payments. Lenders may view your payment behavior as risky for them, questioning your financial status. Are you having trouble paying your existing bills? Will you be able to repay an additional debt? And, even if you are able to obtain the loan, it may be at a higher interest rate than you had hoped.
In today’s volatile economy, credit card companies are less generous than they once were in terms of credit limits. Cardholders who pay larger monthly payments are rewarded with larger credit lines whereas those making minimum payments may be viewed as financially unstable resulting in reduced lines.
The amount of overall debt you owe, including credit card balances, directly impacts your credit score. In order to pay off outstanding balances and improve your score, it is important to pay more than the minimum. By doing so, your debt will decline more quickly giving you a better debt to credit ratio and thus a higher score.
It is always best to pay your credit card balance if you can, and if not, at least pay something towards your principal even if it is just a few dollars above the minimum. Some credit card companies rate customers in categories related to minimum payment. In this case, if you pay beyond that, you will be bumped up to a higher category which translates better on your credit report. Plus, if you are consistently paying the minimum, you would be shocked to find out how long it might take you to pay off your credit card debt and how much of your hard-earned money you’ll be throwing away on interest payments. Therefore, pay as much as you can possibly afford on a monthly basis until your balance is zero. This may be easier said than done but is the key to becoming and staying debt-free.
If you have more than one card, but cannot afford to pay entire balances on all of them, figure out a sensible payment strategy. Determine which card has the highest interest rate, pay that balance and pay minimum payments on the others in order to avoid late fees. Slowly but surely you will get your debt under control.
If you begin to feel you are struggling with your credit card bills, don’t panic. Review your statements and spending habits to get an idea of where you stand. If you determine that your debt is greater than 20% of your annual income, it is probably a good idea to get some help from a professional credit counselor.
These expert advisors can help you develop a plan for getting spending under control and paying back your debt. Although the National Foundation for Credit Counseling can set you up with a low-cost counselor, you may want to first contact your credit union. Often, credit unions offer free, confidential financial counseling, education, and debt management – these programs offer certified counselors who will help you review your credit report, build a structured repayment plan, and figure out a money management solution.