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.
Fortunately, what I learned in school matched up well with the example I was set at home. :) My parents were of the Depression generation, and perhaps that hard-won example of financial responsibility is hard to find now.
I think it is, unfortunately. I see it with a lot of baby boomers (my "research" is SOLELY related to what I see at work, though, and not meant to stereotype all boomers).
No offense taken; I'm a boomer, and was given the example of parents who could afford to retire before they were 60 years old, because of the good financial decisions they made. I'm hoping to follow their example on that, too!
Vegas wasn't built by winners nor the wealth of the credit card companies.
Our kids have been taught about budgeting and we don't keep our finances a secret from them. I haven't done it lately so they're going to get the pay stub, the bills, and the checkbook next week and make the ends meet (insert evil laugh!).
Paying something off for 30 years at 6% (tax-deductable) seems (on the surface at least) better than 30 years at 18% (non-tax-deductable).
I saw a nauseating TV special on the evil credit card industry, and how they hired a mathematical expert several years back who proved how by LOWERING people's minimum payments, they could vastly increase the balances people were willing to hold, because of the perceived increase in manageability of their account with the lower payment requirements. It worked better than they ever expected. Now they will return it to as before with millions of new people now overextended, and the door to bankruptcy now firmly shut. These people are truly evil and must be stopped. Try reading some online industry-insider article sometime about how they spend much of their time trying to get people to run up balances they can barely afford, and trying to dissuade people who pay on time from doing so. The evil they resort to to f**k up people's lives dwarfs any manipulation the tobacco industry has ever engaged in.
It would be hard to beat my current mortgage interest rate
at 5.95%. Even the cash out equity loan we looked at they could not get the rate below 6.5%.
Then we looked into debt consolidation. they couldnt do anything for us that we could not do for ourselves by buckling down and getting tough on the debt.
On the bright side..we arent renting and our home is increasing in value. We bought our home 6 years ago for 91K. Weve payed it down to 81K while at the same time the value has risen to 113K.
So we have 32k home equity but cant really get to it because in TX they will only loan you 80%. Meanwhile we have 60k in our retirement plans that we cant touch! unggh!
We basically have $92,000 that we cant get access to pay 17k off. But then again, an easy way out might not teach us our lesson well enough.
Parenting makes a difference for sure.
My dad always spent more than he made, money burned a hole in his pocket and we were always in debt.
"Meanwhile we have 60k in our retirement plans that we cant touch! unggh!"
And you should thank heaven for that. People raid their retirement plans too often now, and will not have what they need when they retire. Whatever your age, I sure hope that 60K does not represent your entire retirement savings.
Have a look at this article (it is written from the left-wing point of view, still it is quite good and it provides excellent references to the traditional/conservative sources):
That's 90% of the battle; finding the discipline required to get the job done. Go for it, and good luck! You'll never forget the rush of freedom you feel when you finally pay those debts off.
"Paying something off for 30 years at 6% (tax-deductable) seems (on the surface at least) better than 30 years at 18% (non-tax-deductable)."
Well, that's why it should be a last resort versus not a consideration. If you're in so deep, there's no way out, ok. But, ideally, you'd cut back, budget, and pay the card faster than the 30 year time frame.
That tax write off comes at a cost. The additional debt changes your exposure on your primary residence. If something happens to your income, you have the additonal $XXk tacked on to your mortgage, and the corresponding payments. You can default on a card and keep your house. Default on your mortgage, and you're on the street.
Why should that be the schools' job? It should be up to parents. Each family's financial situation is different, and they should provide guidance as to what is appropriate for theirs!
That may be true, but it doesn't change things.
You really nailed them good. Right on.
They make a living off of robbing people
of their future, granted the people have
to accept the terms.
Texas seems to do little to control the credit card
companies behavior. Im no fan of gov regulation but they need to step in if they are not in bed with them.
Yes, sometimes Im really glad they wont let me touch that retirement or it might be gone.
In 14 yrs I can retire at 56 and get a check representing 80% of my avg 3 largest salary years divided monthly for life. Not too bad.
This was a situation BEFORE bankruptcy reform, when it was easier to discharge the unsecured debts. But now (with some limited exceptions) this advantage got severely reduced or disappeared altogether.
So, now it is advantageous and prudent to shift the debt to equity. This is the key mistake credit card companies made lobbying for the reform. No doubt they will try to keep debtors in servitude by lobbying for the ADDITIONAL laws, prohibiting using equity to pay debt to them. Usurers do not want the debt to be paid, they want the interest ONLY!
Right, thats why I dislike automatic payments to my CC's. They wouldnt care if we were homeless as long as they are paid. If push came to shove I would default on them.
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