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.
Did anyone happen to catch the FrontLine special on PBS about Credit Cards? It was recently shown and then replayed. A real eye opener about how credit cards got started, etc.... A totally unregulated industry.
I know it is easy to get into credit card debt. Keep the faith and you will get out of it.
Are you sure that CC companies loose when one pays off the card in full every month? It is hard to imagine that with the 3% of the charges they get from retailers, that they would loose - it shouldn't cost very much to service an account these days.
Damn, I pay off my CC's every month. Does this mean I'll have to pay double the amount I owe?
Remember too, if you set up automatic payments - your payment is a CONSTANT amount - helping you knock down that balance quicker than if you just pay the minimum. I would suggest another tip - pay an extra 10% more per payment on the card with the HIGHEST interest until the balance is paid, then move that monthly payment amount to the next highest interest debt.
Also, if you've an opportunity to moonlight, receive extra income, or bonuses, put at least 10% of those amounts on the higher interest debts FIRST.
Regards....
Take your interest rate and divide by 12. Then add 1 to that number. Your minimum payment will equal that number in percentage terms.
Examples at 18% (18/12) = 1.5 add 1 and you get 2.5% an increase from the original 2 or 2.2% of your balance.
At 12% (12/12) = 1, add 1, you get 2%>
At 6%, (6/12)= .5, add 1 and you get 1.5% a significant drop from the current 2 to 2.2% of the balance.
If your rate is less than 6%, your minimum is still 1.5% of the balance.
Thank you. I didnt catch the PBS show but the other side of the story is the CC companies often charge inhumane interest rates, bombard you with other offers, constantly send checks, and raise to higher limits...regardless of how much you make.
But they cant take advantage of people without those peoples assistance.
Although its my opinion that the laws in Texas should forbid some of their practices.
At least have a reasonable interest rate limit for the state.
I heard a preacher say once-- "Get raptured, and leave the credit card debt to the antichrist."
ha ha
True :), but those who are industrious and frugal are priceless beyond any measure!
Who can find a virtuous woman? for her price is far above rubies.
The heart of her husband doth safely trust in her, so that he shall have no need of spoil.
She will do him good and not evil all the days of her life.
She seeketh wool, and flax, and worketh willingly with her hands.
She is like the merchants' ships; she bringeth her food from afar.
She riseth also while it is yet night, and giveth meat to her household, and a portion to her maidens.
She considereth a field, and buyeth it: with the fruit of her hands she planteth a vineyard.
She girdeth her loins with strength, and strengtheneth her arms.
She perceiveth that her merchandise is good: her candle goeth not out by night.
She layeth her hands to the spindle, and her hands hold the distaff.
She stretcheth out her hand to the poor; yea, she reacheth forth her hands to the needy.
She is not afraid of the snow for her household: for all her household are clothed with scarlet.
She maketh herself coverings of tapestry; her clothing is silk and purple.
Her husband is known in the gates, when he sitteth among the elders of the land.
She maketh fine linen, and selleth it; and delivereth girdles unto the merchant.
Strength and honour are her clothing; and she shall rejoice in time to come.
She openeth her mouth with wisdom; and in her tongue is the law of kindness.
She looketh well to the ways of her household, and eateth not the bread of idleness.
Her children arise up, and call her blessed; her husband also, and he praiseth her.
Many daughters have done virtuously, but thou excellest them all.
Favour is deceitful, and beauty is vain: but a woman that feareth the Lord, she shall be praised.
Give her of the fruit of her hands; and let her own works praise her in the gates.
(Book of Proverbs, chapter 31)
Great advice. One of the things we plan to do is send the same total amount (or more) regardless of how low the minimum goes as the balance goes down.
The income tax check will knock 2k off the high one. :)
Trouble is Proverbs was written long before Visa and Mastercard came along.
That doesnt sound so bad there. All of my payments will not double, but its probably a good idea to do it anyway if possible.Thanks for the info and formula.
LOL!!
Yes. This article and ones like it were mostly fear mongering by the media.
Of course, people should pay off their credit cards as much as possible, paying the highest interest rates ones off first.
I work in the industry on the IT side as a contractor (ironic, considering my credit rating is in the toilet and I'm drowning in debt), and at least where I work, minimum payments now range from 2% to 3% of the outstanding balance per month. There is an indirect relationship between APR and minimum payment, in that it is illegal to have a minimum payment so low that your balance would go up (this is called "negative amortization" in credit-card-speak). So when your APR goes up, your minimum payment percentage must go up so that you're always making at least a tiny amount of headway on it. APRs and minimum payments can be adjusted independently, but certain APR adjustments will always trigger a minimum payment percentage increase to prevent negative amortization.
Your formula works out pretty close to how things go behind the scenes, from my limited knowledge.
}:-)4
Also, this is way off topic but I must say that when my husband and I tithe to our church the way The Bible instructs, we seem to do better with our finances. God will provide, trust in Him. (Please know that this is a personal observation and I am not trying to tell anyone what to do with their money.)
I wish you the best of luck!
Actually the usury was well established in these times. There are plenty of Bible passages about usury. Credit cards are just modern version of it.
Absolutely correct. Our children aren't even taught the miracle of compound interest, much less the disaster of the "miracle" of compound interest in reverse, like cc debt.
Dave Ramsey uses the "debt snowball". His theory is to knock out the debts from smallest to largest without paying attention to interest rate. By doing it that way he says it gives you a sense of accomplishment, and keeps you going, rather than tackling a large debt first. Once the smaller debt is gone take that money and roll it on the the next larger debt, and so on, till all are gone.
It really is amazing the difference in saving in your 20s than it is to start saving in your 30s.
I was a bill collector in a previous life. I do not, and have never owned a credit card, and you can get along just fine; there are other ways to earn credit. If you have cards, pay them off every month. It's really no more complicated than that.
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