Increasing Credit Card Minimums
Have you been hearing some buzz about the new Credit Card
Minimum payments that are coming by some major banks this summer? Does it have
you worried, concerned, or downright terrified? Here is the scoop on just what
this is all about.
What’s it all about?
Recently, and in the very soon future, some Credit Card
issuing banks are increasing their average credit card minimum payments from
2% up to 4%, virtually doubling what people have been required to pay towards
their credit card balances every month. Among the first banks to begin doing
this are Bank of America, Chase, Citibank, Discover, and Providian, with
others soon to follow suit. By early 2006 nearly all Credit Card issuers will
have raised their minimum payment allowances.
Credit Card companies have received a lot of pressure
from several governing bodies concerned about the rate at which debt are being
repaid, which isn’t surprising since with some banks a $10,000 debt could take
up to 30 years to pay back with nearly three times that much going to pay
monthly interest payments and fees. The Office of the Comptroller of the
Currency (OCC), which regulates national banks, the Federal Reserve, The
Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift
Supervision have proposed (pressured) to the Credit Card companies that they
establish reasonable rates and guidelines for paying back Credit Card
balances. The suggestion has been a seven to ten year pay back period. The
program is designed to help consumers get out of debt faster.
Why are they doing this?
The low credit card minimum payments that you have been
used to seeing have enticed consumers to spend like crazy. In fact, many
American’s automatically budget for their minimum payment on their maxed-out
credit card and continue to spend to keep the card at its limit. As long as
they can continue to afford the minimum credit card payments, they continue to
spend regardless of the purchase price of the item!
The increased credit card minimum payments will force
cardholders to pay off their balance faster in addition to saving them of
interest payments.
How is it going to affect me?
The good news is that it is going to save consumers
oodles of money in the long run. For example, if your currently carry a
$10,000 balance on your credit card at an interest rate of 18%, and are only
paying the minimum payment of 2%, you are sending them approximately $200 a
month. Out of your $200 payment, $150 of that is going towards interest, with
only $50 going towards your principal!
However, now that you are paying 4% each month on the
same debt you will now have $250 going towards your principal, which will
eliminate your debt much faster, allowing you to save thousands of dollars in
interest.
The bad news is that you’re going to need to come up with
more money to pay your credit card minimum payment each month. For many
American’s that are already squeezed as tight as they can go, this is going to
be a severe problem. And, with the new bankruptcy laws soon to take affect, it
won’t be as easy as it has in the past to simply wipe out a debt and start
over.
What can I do about it?
Regardless of how difficult this may be, it really is a
good thing they are doing. By forcing higher minimum payments, consumers will
need to start taking a closer look at their finances and stop spending more
than they are able to afford.
Start planning now. Take a look at your budget, if
you don’t have one, download our
Budget Planner for Excel here. If your credit card company hasn’t risen
your payments yet, calculate what 4% of your balance would be and start
planning for it.
Start spending less. If you are concerned about
making your minimum payments you probably shouldn’t be using that, or any
credit card. By living within your means you will force yourself to get out of
debt. It may not be glamorous, impressive to your friends and neighbors, or
even comfortable, but living outside of your means is living a lie, to
yourself and everyone else.
Contact your Credit Card company. If you
absolutely cannot meet your credit card minimum payments you may be able to
negotiate with your credit card company on your own. Simply explain the
situation to them and they may be able to reduce your minimum payment, reduce
your interest rate, drop off any late fees and/penalties, or all three! Credit
Card companies would much rather make a deal with you then for you to file
bankruptcy.
Get Credit Counseling. If you are unable to work
things out with your credit card company on your own you may need to turn to a
reputable Credit Counseling Agency. Some Credit Counseling companies charge
very little for their services (they get rebates from the Credit Card
companies for helping to collect the debt) and provide valuable help to
consumers. Be sure to read our article on
selecting a good Credit Counseling Agency.
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