"What happens if I make less than the minimum payment due on a credit card?"

I was emailed this question yesterday from a Denver couple who have seen a few of their credit card companies raise the minimum monthly payments from 2% to 4% of the account balance. (Which credit card companies now can legally do).

Good question even though you may not like the answer. The key word here is minimum. Credit card companies consider the minimum amount due each month as the smallest amount they will accept without imposing penalties. And the penalties can be harsh. For example:

-They may report your account as 'late' to the credit bureaus which will negatively impact your credit scores. They get away with this since you agreed to send in at least the minimum amount required monthly in your initial agreement. (Remember that ultra-fine print?)

-They will assess a late payment of up to $39 each month you fall short. Worse, they may add this late payment and the payment shortfall to your minimum amount due next month!

-It is likely that you will have your interest rate jacked up immediately to the highest rate allowable. These days credit card companies will not hesitate to drop the 'default rate' on you which can go as high as 31.5%*. Believe me, if that happens you will not have a chance to re-acquire your initial rate

It is clear that you must do whatever it takes to make at least the minimum amount required each month. If you find you will still fall short I recommend that you proactively call any creditor before your payment is due and try to appeal to their good nature. If you still cannot keep up with the minimum payments consider a refinance loan, credit card balance transfer (watch out for transfer fees), or contact a reputable credit counseling company.


-Bill Burniece

*According to Bankrate.com in their February 2006 survey