Credit card minimum payments rising
Good news: Credit card companies
are increasing their minimum payments.
Bad news: Credit card companies are increasing
their minimum payments.
Under pressure from federal regulators, MBNA, Citibank, and Bank of America have
announced they are increasing minimum monthly payments on credit
card balances and others are expected to follow suit in the near
future. To some cardholders that could be seen as a good thing.
To others it could be devastating.
If you can handle the increased payment it's good.
Let's face it, if you pay only a 2-percent minimum each month, your
debt would probably last longer than most marriages. Hiking your
minimum might put you back on the financial straight and narrow.
Ostensibly designed to help consumers get out of debt faster, the
increased minimums will force cardholders to pay off fees, interest
and at least a portion of the principal each month.
But if you simply can't make that increased minimum
month after month, it could put you and many other debtors in over
Cause for change
Over the past few years, low minimum payback rates of between 2
and 2.5 percent have encouraged Americans to spend, spend, spend
-- and to rack up an average credit card debt of close to $10,000
per household. For the estimated 40 percent of cardholders that
carry a balance from month to month, the low minimums free up cash.
But paying off a big charge little by ever-so-little also means
that a $1,000 debt can turn into a 22-year commitment -- and that
you'll accumulate thousands more in interest in the meantime.
"People are now in a revolving debt cycle that
they'll never escape," says Adam Brauer, a debtor advocate
and in-house counsel for Debt
Settlement USA in Scottsdale, Ariz. "So the government
nudged credit card companies into saying, 'This isn't working.'"
Specifically, regulators with the Office of the Comptroller
of the Currency began pressuring credit card companies to hike up
minimum payments. Another incentive for change: The newly enacted
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,
which requires credit card companies to post a kind of Surgeon General's
warning on monthly statements that notifies consumers about how
long they'll be in debt if they make minimum payments.
Help for big spenders
Although increased minimum payments aren't a panacea for consumer
debt, most financial experts think they'll help.
"If you pay more per month, you'll get
out of debt quicker and you'll pay less interest," explains
Mike Peterson, vice president and co-founder of American Credit
Foundation, in Midvale, Utah.
Take the $2,000 Hawaiian cruise you charged
to a card with an 18-percent interest rate. If you faithfully make
minimum payments and never add another dime to the balance, it'll
still take you about 30 years to pay off the trip -- and you'll
end up forking over almost $5,000 in interest. By making 4-percent
minimum payments on the same debt, you'll finish up in 10 years,
and your interest payments will be around $1,100. "It's a huge
saving in time as well as interest," says Peterson.