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Credit card firms raising
minimum monthly payments


We're quoted in a USA Today story today on banks raising credit card minimum payments. Consumers opening their bills next month may face sticker shock as their minimum payment due could double (if their bank hasn't already complied with a new regulatory requirement). While we strongly support the notion of paying more on credit cards, it's shoddy and embarassing that the regulators have allowed some banks to wait 3 years to comply at the last minute with the new requirement instead of urging them to raise payments gradually over the three year period. Our recommendation: Never pay the minimum on your credit cards. If you can't pay the full balance, always pay as much as you can afford, and pay as early in the month as possible to avoid late fees and penalty interest rates. Here's more:

Three years ago the bank regulators finally became shocked, shocked! at skyrocketing credit card debt (now $800 billion and rising) and ordered banks to raise minimum payments, within three years. Consumer debt had increased -- seemingly exponentially -- due to banks luring consumers onto a perpetual debt treadmill with lower and lower minimum monthly payments -- most at around 2% (or a little more) of the principal owed. With credit card interest rates for many consumers at 24-30% APR, or 2% to 2.5% per month, making that 2% minimum payment literally meant either never gaining ground or actually losing ground. Losing ground? When your interest is 2.5% each month and your payment is 2%, the amount you owe goes up, not down. It's called negative amortization and is entirely inappropriate for most credit card customers.

If you owe the credit card company $5000 at 16% APR and make 2% minimum payments, it would take you 26 years to pay off the card if you never used it again.

In a recent speech to consumer advocates, the nation's chief credit card regulator, John Dugan, Comptroller of the Currency, said that he expected banks to work with consumers who can't make the new increased minimum payments:

...let me make one point perfectly clear. We recognize that the change in required minimum payments will make it more difficult for some existing credit card borrowers to pay the full amount of the increased minimum payments due. We have encouraged lenders to work with these borrowers to the maximum extent possible to avoid writing down the loan and cutting off the customer's credit. Lenders have a variety of tools to do this, including restructuring or deferring payments and, in appropriate circumstances, re-aging accounts. In addition, lenders always have the option of reducing high interest rates charged to delinquent borrowers - sometimes exceeding 30 percent of the outstanding loan balance - and/or waiving fees in order to reduce a minimum payment while still amortizing a modest amount of the outstanding principal.


I remain unconvinced that any banks will lower interest rates to comply. I will be shocked, shocked! Please let me know if yours does. And if you have trouble making the increased payment, and your bank refuses to help you avoid financial disaster, please let me know. More information about credit card tricks is availabel here at our page truthaboutcredit.org. It has links to our most recent testimony, plus links to our report: Deflate Your Rate. That report tells you two ways to reduce credit card debt. (1) call the company and ask for a lower rate. It works, 50% of the time. (2) Pay much more than the minimum due. Here's a report webpage comparing how much you'll owe, and for how long, if you make a 10% of the balance payment instead of a 2% payment.

By the way, I was shocked, shocked, yet again, to find a clear explanation of what is going on with minimum payment increases, including examples, at the MBNA credit card company website. Usually the credit card companies make things as murky as possible.

Watch for future blogs about the implementation of new credit card disclosures about minimum payments, which will be appearing soon on your monthly statements as required by the recently enacted bankruptcy law. They're industry-approved, rather than what we wanted. We had hoped that the new law would require two new boxes to appear on your statement-- one to say how many years it would take to pay off your card if you stopped using it while still making required minimum payments and one to say how much interest would accumulate over that time. We got a more generic, less useful, disclosure, of course. More to follow.

The new regulator guidance requires minimum payments to result in a payoff of the principal within 5 years. In practice, this means a payment of about 4% (instead of 2%) of the principal, plus finance charges and any penalty fees. Note that the guidance does not specifically require a 4% of principal payment, it requires that payments result in a reduction of current principal to zero over 5 years (presuming the card is not used any more). Effectively, that means payments must cover accumulated interest and penalty fees and also reduce principal by 1% per month. As a rule of thumb, a payment of 4% of the amount due (plus fees) meets the 1% reduction in actual principal to zero over 5 years goal.


Posted by Ed Mierzwinski


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