Posted on 12/27/2005 7:13:51 AM PST by No Blue States
Your Monthly Credit Card Minimum Payments May Double
The Good News and the Bad
If, like many Americans, you've been incurring credit card debt based on being able to afford the monthly minimum payment rather than whether your income and expenses can support the purchase of a particular item, you may be in trouble. For years, low monthly minimum credit card payments have encouraged us to spend more than we really can afford. Now it's time to pay the piper. Under pressure from the Office of the Comptroller of the Currency (which regulates national banks), the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, some national banks will soon be increasing minimum monthly credit card payments so they are closer to 4% rather than the current average of around 2%. Some major banks have already increased the minimum payments and others are about to follow suit.
In the long run, an increase is actually good news for consumers, but in the short-term, it could be devastating for people who have overextended themselves.
The Bad News
The bad news is that you soon may have to come up with more cash each month in order to make your monthly minimum credit card payments. If you're the average American, with $10,000 in credit card debt, your minimum monthly payments are probably currently around $200 (2% of your balance). Under the new guidelines, sometime this year, your minimum payments may go up to as much as 4% of your balance, or $400 on a $10,000 credit card balance. If that's the case, will you be able to come up with the additional $200? In addition, minimum payments and your interest costs will continue to rise as interest rates go up.
The Good News
Paying 2% of your balance each month barely covers the interest, and leaves very little to apply to your actual balance. That's why, if you owe $2,000 or more, and you only pay the minimum balance of 2% each month, it will take you approximately 30 years to pay off your balance even if you never charge another penny.
Under the new guidelines, the minimum payment will have to cover the interest and have enough left over so you could pay off your balance in 10 to 12 years if you didn't add any new charges. This is good because you'll get out of debt sooner and you'll pay a lot less interest over the years (thousands of dollars for many people).
What To Do
First, think twice before you add that purchase to your credit card. If you charged your $2500 spring break trip to your credit card or if you and your spouse just splurged for a $2500 flat screen television and charged it to your credit card, at 18% interest it would take you 34 years and six months to pay it off if you paid a 2% minimum balance and never charged another penny to your credit card. In that time, you'd pay $6,421 in interest in addition to the $2500 original cost. When you make a purchase on credit, know what the true cost to you will be if you don't pay it off right away.
Second, if you're in the habit of paying the minimum monthly payment on your credit cards, now is the time to go through your budget with a fine-toothed comb and identify areas to cut costs so you'll be prepared for the increased minimum payments if your credit card company puts them into effect.
Finally, calculate your current minimum payment percentage on each major credit card. Divide the minimum payment from your last statement by the most recent balance. Then you may want to call your credit card company and ask them what their intentions are regarding the recommended increase in the minimum payment percentage.
Credit-card free here and never been happier about it.
This is the 1st Christmas I remember that we didnt charge a single penny. We are very proud of that and encouraged by our accomplisment. Next month our total debt will go down for the 1st time in years. :)
Im going to study his site more. I know financially it makes more sense to pay the highest interest.
But paying an individual card off is also a big boost.
I will be too within 4 yrs, it must be a great feeling and Im looking very forward to it. My kids will be taught to understand their money better for sure.
You know its funny how before I ever owned a CC somehow we always made it to payday without them.
Any newspapers carrying this story???
If there is a point to those two statements, it eluded me...
Don't forget that there are considerable quantitites of debt which were incurred responsibly, but which is reported in the same way as consumer debt.
For example, I was able to refinance a significant slug of my law school loans at 3.99% with no expiration date on the rate -- far better than even my prior official refinance rate, particularly given that I lost the student loan interest deduction due to phase out. While these low-single-digit, no-expiration-date transfers are limited to those with good credit, they're very attractive when you can get them. I know plenty of people who've done those trades with higher interest student loans, car loans, and other big debts. (In addition to cheaper interest, the trade also gives you a far better downside protection: the credit card issuer can't repossess the car, and doesn't have the benefit of non-dischargability in bankruptcy that the student loan lender had.)
Nevertheless, credit card issuers report those large slugs of cheap, long-term debt the same way as it reports people who've been borrowing at 18% to buy groceries for two years straight, even though the debts are (economically) unrelated.
It hasnt got the exposure it deserves. I heard something about it a few months ago, then again on the radio this morning. I searched the web and there are numerous stories on it, yes.
here are some:
http://search.yahoo.com/search?p=minimum+credit+card+doubles&fr=FP-tab-web-t&toggle=1&cop=&ei=UTF-8
"PS: Is it a coincidence that they made this double the old minimum move only after tightening bankruptcy laws? I think not.
If there is a point to those two statements, it eluded me..."
My point was that if they did this before the bankruptcy laws were tightened the doubling of minimum payments would likely cause some people in deep debt to file for banruptcy.
Credit cards are all about encouring bad financial judgements on the part of the customer, and arranging it so those bad judgements inure to the benefit of the lender. There's only one way for the customer to truly "win" in that sort of arrangement and that's not to be involved at all!
The ultimate point was the laws were written to benefit the cc companies, and give them a circuit subsidy.
Yes, that is what my point was. Only I couldnt make it as well as you. Thanks.
I do think the schools should be teaching this, if only because so many parents do so badly at money management they are not really fit to teach it themselves. Am I the only one here who is old enough to remember having a savings account at school? It was a passbook account, and you brought your passbook with you to class on certain days.
If they are working wives, they sure do. ;)
My credit card debt is zero (0.00).
If I don't have the money to pay for it, I don't buy it.
Only use credit cards for the air miles; Always...ALWAYS PAY THE BALANCE IN FULL!
Better use would be drinking, gambling, and food....
Nice, glad you have no credit cards...more for me...
Im glad for you. :)
When you pull money out of your billfold to pay for something it amazing how serious you take the purchase compared to using a credit card.
Schools are teaching this. I remember lots of lessons on compound interest, balancing checkbooks, etc. But it totally conflicts with the "instant gratification" message. Also, parents don't lead by example. What a parent does is WAY more powerful than any lesson learned in a classroom setting.
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