Credit Cards Calling The Shots

In response to a recent article on credit cards closing accounts, a Frugal Dad reader (we’ll call him John) submitted the following scenario and question.  I told him I’d answer his question here with his permission, and solicit feedback from fellow readers who may have more experience with similar situations and be able to add to my response.  Here are the pertinent details of John’s story:

I started my own business 3 years ago.  In that process I got a $15k debt on one credit card.  Since that time I have hardly used it–maybe $500-600 tops.  I make $400-500 or more payments every month.  I have never missed one.  I have been late a few times here recently due to them moving the due date around, and also due to decreased income in the economic crunch. They have raised my rates to 29%.  I have had this card 7 years and been a good customer.  I have never been even 5 days late but they tell me that they can move my due date around by 5 days which they do often now.

I have asked nicely, begged, pleaded, and threatened bankruptcy to them to try to reduce the rate to a reasonable level so I can try to pay it off.  I have made like zero headway in 3 years.

The only option they give me is to cancel the card and they put me on a payment plan which would drop the interest to 4.75% and have no due date as long as I made a payment each month.  Also, if I make the minimum they said it will be paid off in 5 years and I can pay it off sooner with no penalty.  I want all that in writing because I don’t trust them.  Do you know if this would negatively affect my credit score?

John, a couple different things in play here.  I’ll try to address them at a high level and then turn things over for comments.  First of all, kudos to your for starting up your own business.  The entrepreneurial spirit and industriousness of Americans is what built this country, and you had guts for giving it a go.  Having said that, accumulating $15k in credit card debt trying to float your business is not sustainable.  Not much you can do about it now, but I hope others reading this will think twice about funding a business venture on their credit cards.

You mention being late “a few times here recently,” and I suspect that is what triggered the default terms now in effect on your credit card.  Unfortunately, the card issuer was probably within their rights to increase your rate according to the terms you agreed to when you began using the card.  That doesn’t take away from the fact I think charging a 30% interest is borderline usury!

From the sounds of it, the card issuer has offered you a work-out arrangement whereby you surrender your charging privileges in exchange for a lower rate on the remaining balance, and a more manageable minimum payment.  To answer your question, yes, this will probably negatively your credit score, but no more so than being late several times.  I suspect the damage to your FICO score is already done, and if that is the case, having your card canceled by the issuer isn’t going to matter much.

The terms you have described seem reasonable, but your natural instinct to be distrustful is good.  Get everything in writing before agreeing to do anything–especially closing your account! In the near term, I would talk with a local bank or credit union to see if they would be willing to loan you the amount to pay off the card and close it on your own.  Unless you have some collateral to put up, or your FICO score has not been damaged as I suspect, you might not be able to qualify for a signature/personal loan for this purposes.

Another thing to check out is social lending via a provider such as Lending Club.  You may find more favorable rates, and a more forgiving group of lenders (many of whom are entrepreneurs themselves) here than you would at a traditional bank.

If you go the work-out route with the credit issuer, do not allow it to drag on for five years, particularly since there is no early prepayment penalties.  Investigate strategies for getting out of debt and do it with urgency!  I hope this all works out well for you.  Thanks for sharing your story here with us.

Ask the Readers:  Any additional advice you can provide John?

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