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?


  1. I think you handled the advice fine. I would like to comment though– It is a really nasty practice that credit card companies of changing due dates. They seem to purposely do this sort of thing. They also like to make due dates not coincide with any logical time that people would be paying other bills. If you are running a business you generally have a schedule for paying bills. I would not blame this guy for being late. I think what happened most likely is that he didn’t know his due date had again been changed–due to maybe not opening/reading his bills every single day–perhaps as he was too busy. Credit card companies are NOT our friends. I agree–if you start a business–don’t do it on credit. They make it seem so easy and smart at the beginning but this is the result for most folks.

  2. My mother has had a certain credit card for over three decades. The company has had a practice for a while now of sending out the statement “late.” Not technically late, since it does get to her “on time.” But when it finally does arrive, she has to sit down, write the check, and mail it out immediately. Otherwise, she is concerned she will be penalized for being overdue out of no fault of her own.

    I suspect (a) the credit card company wants her to pay online so they can stop mailing her paper statements; or (b) they want her to be overdue so they can penalize her, while still being within the letter of the law for billing her; or (c) they know she is retirement age and not working, so they are trying to irk her into cancelling so they can erase her as a liability.

    She has complained to the credit card company, but I doubt anything will change. I told her to cancel the account.

  3. I think that especially with these new laws that are being put into effect, and with the economic downturn, and all the big banks getting bailout money the credit card industry are being much tougher and more ruthless than before.

  4. I’ve had a similar experience with Bank of America. I had a 10% interest rate on the card and they suddenly raised it to 25%. I paid on time and all of my other credit cards with other companies on time.

    By do so, they’re losing a customer. I’m transferring my balance to my other credit card companies who have been flexible to me. I am in the process of closing all my savings and checking accounts with them as well. I don’t want them to suddenly change the fee schedule and start showering me with fees.

    Bank of America’s loss is Chase’s gain.

  5. @Markemmanuel
    Just a note, that other banks and companies do the same thing too.

    Advice to “John”: Online banking is your friend in this instance. Hopefully you’re with a company that offers online statements and email reminders of when your bill is due. This way, no matter what due date they change it to, you will know in enough time.

    Also, a card I have had the option of selecting a payment date, I believe. I know they have the right to change it as they wish, but you might want to call and see if they’d be willing to work with you.

    I’m no credit expert, by any means, but I think closing the account should not be your first choice. You have the card for a while, and length of credit history does count toward your score. You don’t want to compound dings from late payments with elimination of a longstanding credit history that, according to you, has been good for almost its entire duration.

    Look into getting another card (note: applying for more cards can hurt your score).

    Again, I’m no expert. Just someone who has negotiated with card companies 🙂

  6. I have been in business for the past 28 years. I am a lousy business man. I always paid my bills first and me last. The last four business cycle down times had no effect on me.This will have non either. My advice-cancel ALL credit cards-you do not need them! Cash is king. Grow the business as you can afford to-if not get out.

  7. I’ve been able to work out a “due date” for all of my utilities, the college loans (kids) and whatever credit or store cards I may use. I am on a fixed income of Social Security and long term disability. The LTD check can’t be cashed before the last day of the month and the SS is deposited in my account on the 4th Wednesday. So, I have all bills come due on the 5th. Most places will accomodate these requests.

  8. Worst case scenario if you cannot get the agreement in writing, seek assistance from your local Consumer Credit Counseling agency. They regularly work with the large credit card companies and can arrange a formal work out to pay the credit card off in 5 years or less with a low interest rates, no late fees, no over the limit fees, and the payment would be required within each 30 days. This works for individual cards and most business cards. It would depend on the card company whether the card would actually have to be closed, but no purchases may be made while on the program.

  9. I think your advice to “John” was excellent. I started my own business 15 years ago, but fortunately did not go into credit card debt to do so. However, during trying economic times I’ve found myself in credit card debt.

    I love Frugal Dad – and I’m also a big fan of Dave Ramsey, having completed Financial Peace University about six months ago.

    Ramsey’s debt pay down snowball process is amazing and very effective.

    After years of being a debtor, I’ve finally wrapped my brain around being debt free and living within my means. No more of being a slave to the lender.

    I will be debt free, except for my mortgage, by the end of the year – thanks to tips and guidance from Frugal Dad and Dave Ramsey.

  10. In my experience, credit card companies will play tough as long as they have the upper hand. I once had an AT&T Platinum Master Card. I got it because the rate was 10.99%, which is decent for a credit card. After years of on time payments, one payment showed up 1 day late thanks to the U.S. Post Office or even the credit card company’s mail room. It was paid and sent in plenty of time, but somehow got there a day late. My rate was automatically jacked up to 25.99%. I called to complain, but got no result. About the same time, we had the same thing happen on another card.

    We did a second mortgage, and put both cards on it. After the balance was zeroed out, I called to close the accounts. When I was transferred to the cancellation department, they asked what they could do to keep me as a customer. I explained that I was canceling because my interest rate was jacked up to an unreasonable level because of a 1 day late payment. At that point, the offer was made to lower my rate down to 9.99%. I demanded the account be closed and stated that I would not do business with them again.

    From listening to Dave Ramsey, it seems that credit card companies are not above declaring payments late even when they’re not just to get an extra $30 in late fees. As long as they have the upper hand, they can pretty much do whatever they want. The only way to get the upper hand is to threaten to close the account and actually have the means to do so.

  11. (As per my usual) A few things to mention:

    1) Paying late on a card is NOT the same as a late mark on your credit report. Late payments that are reflected on your credit report MUST be at least 30 days late or more. Slightly late payments to a credit card company will invoke their “late fee”, the “rate adjustment” clause and cause them to basically be unfriendly to you from then on. They will jack your rate to just under 32% (which is just below what would invoke many states usury laws) and probably move your payment date up toward the beginning of the month. I have had the same thing happen to me on my Chase card. I only keep the card so I don’t lose the 10 years of credit history with them. I haven’t used it in almost 2 years because the rate is 29%. Bleh.

    2) Closing your account and paying off the remaining balance does not reflect negatively on your credit report except in the “average credit life” part of the score. Since the card holder would be requesting the account to be closed, it would appear as “Card holder closed account” on his credit report. This is different from the credit card company closing the account due to non-payment, death, etc and shows up differently on the credit report.

    3) Yes, you should get the terms of the “pay-off deal” stated in writing before doing it, but don’t be surprised if they don’t do that. About the only thing that has to be done in the agreement is that they have to send you a bill with the due date stated clearly on the bill. They have to send it to you with enough time for you to pay it and you have to pay it. Other than that, the “terms and conditions” are all up in the air. I would recommend taking out a simple payment consolidation loan, or using the Lending Club as FrugalDad suggests to pay off the card in full and close it. One the balance is paid off and he’s made major payments on the loan, then apply for another credit card somewhere else. (If he does have any “30 day late” red marks on his credit report, he won’t get a very good card limit but you will probably get better terms.

    I have had this happen to me as well. I’ve had a Chase Platinum Visa for over 10 years now and in the early days had been late a couple of times. Unbeknownst to be, they jacked my rate up to ).99. (This was before I was bit by the frugal bug and watched my credit card bills like a hawk.) Ever since then, I’ve tried getting them to lower my rate with the only success being that they will lower it by one point every 4-6 months. So far I’m down to &.99 — not the greatest but I have also transferred the entire balance to another card. When that credit card company wanted to jack my rate on the transferred balance from %4 to .99, I transferred it back to the Chase card at %3.99. Ironically, Chase hasn’t done anything to the terms and is glad to collect my minor interest payments every month. In this time of card companies losing what little minds they have, I highly recommend having several cards you can use as the chances of getting bit in the butt by all of them are low.
    Gah, long post. I’m done. I hope this helps someone out there in the “huge series of tubes”.

  12. “I haven’t used it in almost 2 years because the rate is 29%.”

    I meant to say I haven’t used it to purchase anything in almost 4 years. I’m not firing on all cylinders this morning.

  13. Years ago when I was getting married, we had put all the wedding expenses on my credit cards, my fiance passed away unexpectedly.
    Now I had about $15,000 in debt on my cards and was trying to work out a plan with the companies. I was offered a 1% finance charge on the balance of one card for a period of 1 year, but it had to come out of my bank acct automatically – which was fine – only they did not send a bill once the 1 year period was over – after several calls, I did get a bill for a years worth of late charges and they jacked my rate up to 32% – get everything in writing and take names – you never know what they will try and do next!

  14. I think that there are some great comments in here. I agree that the credit card companies are some of the worst crooks. If in my business I did what they do to people there would be huge lawsuits looming and we would have no customers.
    It would be awesome to have people take bake their financial health and make credit card companies go into extinction!

  15. It’s easy to take back control from all of these evil credit-card companies. STOP USING CREDIT CARDS. If you cannot discipline yourself to paying them off 100% each and every month, cut them up.

    Yes this guy should take the 4.75% deal, and he should use the experience as a lesson rather than as a springboard to more borrowing.

    Our entire nation is addicted to debt. Did anyone really believe that could go on forever, without ever having to pay the piper?

  16. This is all good advice. My husband and I also own a small business and unfortunately got into credit card debt shortly after we opened. We would never carry a balance on a card personally, but being in a business situation was totally different. If we cannot afford something personally, we just make do and do without. But with the business, there are certain things that you cannot do without or you cannot be open. We didn’t really think about this much before we opened. Our biggest mistake was undercapitalizing with our SBA loan in the first place. We simply underestimated start up costs and had to start putting things on credit cards or close. We are in about 3 years right now with a business that seems to be successful outside of the debt. It’s going to be so freeing when we can see that debt paid off, have a little breathing room, and really start to see the profits soar.

  17. Yes,a ll good advice here. First of all I know it can be easy to use credit cards to get a small business off the ground. Often it can seem like one of the few options when you start out but you need to think about the repayments. Close to 30% interest sounds criminal, if you spotted this situation earlier then perhaps a balance transfer to a low interest card would be good. Need to look for ongoing low interest not just intro offers. The issuers offer sounds like a big improvement but I think many of us have learnt from past experiences, if it’s not in writing it’s not worth a thing. Get them to confirm and then take the offer.