Credit cards are there to put you in debt and keep you in debt. When they do it, they have one tool at their disposal that is more effective than all the others. It’s called the minimum payment.

What’s a Minimum Payment?

Your minimum payment is the absolute minimum that you must pay off each month to avoid defaulting on the debt. If you don’t pay your minimum, they’ll come after you – but don’t make the mistake of thinking it’s just fine to only ever pay that much.

Why are Minimums Bad?

They never used to be. Minimum payments used to be set at relatively high percentages, anywhere from 5% to 10%. This meant that you paid more, but your debt would get paid back faster.

Credit card lenders realised, though, that they could set the minimum payments lower, and collect a smaller amount of money each month for a much longer period of time. This would let them tell people that debts on their cards were ‘affordable’, while they raked in the cash over the long term, thanks to the power of compound interest.

Here’s an Example.

Let’s say you owed $1000 at an interest rate of 12.7% per year (1% per month). Your minimum payment is 5% per month. Remember that your payment goes towards the interest first, and then the debt. In this example, $10 out of the $50 you paid would disappear as interest – but $40 would still go towards paying off the debt, meaning that your debt the next month would be $960.

What happens if you change the minimum payment to only 2%? Well, the difference is enormous. Sure, you’re only paying an ‘affordable’ $20 – but $10 of it is still going on interest. That means that your $20 has only paid back $10 towards the debt, and you still owe $990!

There are so many people who just look at the interest rates they’re being charged, and don’t understand the terrible difference it can make if you only ever pay the minimum payment. In our example (which is relatively typical), 50% of the payment was going on interest – meaning that paying the minimum gets you an effective 50% interest rate, even though your APR was only 12.7%. For higher interest rates, it only gets worse: there are cards out there where only making the minimum payments will actually cause you to owe more each month, not less!

So What Should You Do?

The answers aren’t fun, but they are true. Firstly, look for a card with a high minimum payment – this is a good way to discipline yourself into paying off the debt faster.

Secondly, always pay more than the minimum if you can afford to. I know it feels like money for nothing, but isn’t it better to pay it now and get it over with, instead of paying it for the rest of your life?

Once you’ve been paying off a credit card for a while, you might be offered a ‘payment holiday’. You’ll get a letter, saying that since the company knows it’s difficult for some families around Christmas (or whatever other excuse they think up), they’re offering you a month off from paying, as a ‘special present’.

Why Would They Do That?

Offers of payment holidays typically have a very high acceptance rate. People think it’s great that they can take a month off from the stress of paying back debt. What they don’t usually realise is that these ‘holidays’ aren’t a present at all – they’re a great money-spinner for the credit card company. For the company, it’s a win-win situation: they get to make big profits just by making their poorer customers happy.

How Can Letting Me Off Paying Earn Them Money?

Well, that’s where the trick comes in. If you read the small print, you’ll find that the payment holiday isn’t interest free! You’re still being charged interest – and since you’re not paying anything back that month, the interest will be there next month for you to pay interest on (compound interest, you see).

That might feel a little hard to grasp, so here’s an example. Let’s say you were paying back $1000 of debt at 1.5% per month (about 19.5% per year). Your minimum payment each month is 2% (26.82% per year).

If you pay the minimum for all 12 months of the year, then you will pay back $233.51, and owe $941.62 at the end of the year. Your debt has been reduced by $58.38, and you’ve lost $175.13 in interest.

With the payment holiday, though, you pay 2% per month for only 11 months (so you pay 24.3% back on the debt over the year). That’s $217.80, and you’d owe $960.55 at the end of the year. Overall, you’ve paid $37.86 for your payment holiday from a payment of about $20. In other words, your month off cost you almost two months of payments.

Don’t worry if you don’t understand all the maths involved here – it’s been deliberately designed by mathematicians and marketers to be as confusing as possible, to stop you working out what a bad deal you’re getting. After all, if you haven’t read this, would you really ever turn down a month off paying your bills? Just remember: don’t fall for it. The more you owe, the more that ‘holiday’ will cost you. Wouldn’t you rather take your money and go on a real holiday, instead of spending it all on repaying credit card debt?

If It Sounds Too Good to Be True…

In all things in life, remember that no-one gives you anything for nothing – least of all credit card companies. Anytime they offer you anything, it’s because they’re going to make a profit on it. If you can’t see where their profit is coming from, be suspicious – it’s probably all a big scam that’s going to cost you money, even if you don’t realise it.

There are three reasons that you might have missed a payment on your credit card: either you can’t afford to pay, the payment didn’t get there in time or you just plain forgot. I sympathise: paying credit card bills is a surprisingly difficult thing to do reliably and consistently. Sooner or later, something is bound to go wrong.

Whatever happened, though, there’s one thing you need to do, and quickly – get on the phone.

Phone and Grovel.

Apologise like you’ve never apologised before. Don’t panic, stay calm, but make it clear to whoever you get through to that you’re very sorry, and things like this never happen to you. If you just forgot, then tell the truth about what happened – and if you can’t afford to pay, then you should say that too.

You will be surprised at how lenient credit card companies usually are if you phone and apologise – after all, the sensible ones want to keep you paying interest to them for a long time to come, so it’s not really in their interest to punish you.

Remember to be very grateful when they let you off, and tell them it won’t happen again. Whatever you do, don’t get angry or frustrated. It’s you that’s in the wrong here!

You have to think and act like you’re a model customer, and be willing to transfer your balance elsewhere as a punishment for them if they won’t let you off this one mistake. Transferring your entire balance to another card will make them sit up, take notice, and start making you much better offers than you ever got before.

Try to Keep It Off Your Credit Report.

You need to do everything you can to persuade them not to add your late payment to your credit report, at least if you want to apply for any credit in the next few years. Remember that any late payment could be a black mark against your name for as long as ten years.

On the other hand, if the worst happens and it does get onto your credit report, don’t worry about it too much. As long as there’s only one late payment, it doesn’t matter too much, especially once a year or so has gone by. It’s the people who consistently pay late who get the truly terrible credit ratings.

In the Future, Always Post Early.

This goes especially for the people whose payments didn’t make it in time, but it’s good advice anyway – it saves you trying to find money at the last minute. It is a bad idea to wait until the day before the deadline to make your credit card payment, as there are just too many things that can go wrong.

Also, it’s generally a bad idea to let bills of any kind stack up until you get around to them, because bills aren’t fun, and you just won’t. Pay your bills on the day you get them, and you’ll live a much less stressful life.

When you are in debt the best solution for repairing your credit is to ask for extensions, or arrange payment plans. If you have student loans, you can call your loan officer and request deference on your payments. If you are turned down on deference, you can ask for forbearance. Forbearance is a postponement of your monthly installments. Most times, it is easier to get forbearance than deference. The problem is your interest rates accrue even when no payments are made. The forbearance against your loan often lasts six months to two years and then you are expected to pick up regular payments. If you are suffering debt related problems then this is a great solution for getting out of debt. You can also consolidate your student loans. If you have been turned down for deference, forbearance your next solution is fill out an application for a loan to repay your debts. It is also possible to refinance your student’s loans. If your credit is severe, you might however have difficulty with getting support on consolidation. You also have the option of requesting a flex payment plan. If you have a FFELP Stafford Loan ask for an extension on your loan, or else ask for a renewal on your loan for payments that allow you to pay according to your current income. The downside is when you seek other people's help for resolving your debt issues you are only adding more debts to your plans.

Defaults

It is possible to get out of a default if you have made payments faithfully in the past, but can no longer repay your debts. First, you must apply for a plan that is ‘reasonable and affordable.’ The plan applies to your current financial situation and if you faithfully make six months of payments on time, you may qualify for a default. The default does not excuse you from the debt but allows you to make payments according to your financial situation. If you obtain the default it is important to payoff your dues on times, since it is not possible to obtain a second default. If you faithfully pay toward your default for a year, you can slide through some loopholes and get the default dropped. The downside is when you apply for a default and makes your payments, in the long run your payments increase. This is a temporarily solution for debt relief.

Credit Repair Doctor Bills

If you have doctor, dental, or lawyer debts and need a solution, be aware there is an option available. If you owe a lawyer, doctor or dentist it is wise to contact them as soon as possible and negotiate. Most lawyers, doctors and dentist will work out a payment agreement lowering your monthly installments. Some reduce your bills, while others will completely wipe out interest charges or late fees. Most times lawyers, doctors and dentist will put off sending your debt to a collection agency providing you meet your agreed payment each month on time. If you suspect you will be late sending payment, make sure you contact the creditor immediately to avoid complications. If you make contact with the creditors, it tells them that you are not trying to avoid your problem rather you are delayed.

It is essential to careful review your bills each month searching for errors and disputing them immediately if any occur. After your review your bills and there are no errors found find a resource for paying each bill immediately. This is the ultimate solution for repairing credit or saving your credit. If you have, credit cards make sure you meet monthly installments regularly to avoid paying additional rates per month.

Car Loans

Finally, if you have a car loan and see that you cannot meet monthly installments contact your creditor immediately. Be sure to tell your creditor your situation and ask for an extension or else a lower payment for the month. DO NOT lie to any creditor. Lying only complicates matters worse. If you lender sees that you can make next months payment, or else repay your debt for the month at a later time they may excuse your tardiness. However, if the creditor sees this is a long-term financial issue they may refinance your vehicle providing you lower monthly installments and lower interest rates.

All about credit card rate

What’s the thing that is most prominent on any credit card ad? Well, it’s the credit card rate (or the APR, as we know it). The credit card rate is the most publicized thing in the world of credit cards. A lot of people just compare the credit card rate of various credit cards and just go for the one that is offering the lowest credit card rate (or APR). Credit card rates are, in fact, one of the most important factors in the selection of a credit card (though not the only factor). Therefore, a proper understanding of Credit card rates is even more necessary.

So, what is a credit card rate or APR? Very simply, credit card rate is the rate of interest that the credit card supplier will charge you with on the amount you owe them. The credit card supplier will charge you an interest only if you don’t make full payments in time.  When you receive your credit card bill, it specifies the full amount you owe the credit card supplier. It also specifies the minimum payment that you must make (by a particular date), in order to avoid incurring a late fee and other inconvenience. You have the option of making either a full payment or just the minimum payment. If you make a full payment (by the due date), you are not charged any interest. However, if you decide to go with the minimum payment or some amount that is lesser than the full amount, the credit card supplier will charge interest based on the credit card rate and the balance amount. This credit card rate is the interest rate that you agreed with them at the time of applying for the credit card. The credit card rate or the annual percentage rate, as is obvious, is an annual interest rate. The credit card suppliers use this annual credit card rate to calculate the monthly credit card rate and then they calculate the interest on the balance amount that you owe them. The balance amount here is simply = Full amount – (payment made by you). This interest is added to your balance for the next month (at the time of next billing cycle). If you again make a partial payment, the new balance is calculated again and the credit card rate (monthly one) applied to it for calculation of new interest; and it keeps going on and on until you make the full payment.

That’s how credit card rate acts in this vicious circle. Hence, credit card rate is termed as the most important consideration in choosing a credit card.