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Monthly Minimum Credit Card Payments to Nearly Double
Major credit-card lenders have announced they are doubling minimum monthly payments on credit card balances from 2 percent to 4 percent. Others lenders are expected to follow. This is going to be an adjustment period for everybody.
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 doubled minimum month after month, it could put you and many other debtors in over your head.
Over the past few years, low minimum pay back rates of between 2 percent and 2.5 percent have encouraged Americans to spend, spend, spend -- and to accrue an average credit card debt of almost $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 with such small payments means that a $1,000 debt can turn into a 22-year commitment.
The government thought that people were in a revolving debt cycle that they'll never escape. So Congress urged credit card companies into the move."
Specifically, regulators with the Office of the Comptroller of the Currency began pressuring credit card companies to hike 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.
If you pay more per month, you'll get out of debt quicker and pay less interest.
Take the $2,000 Florida trip you charged to a card with an 18-percent interest rate. If you 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 paying 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, a huge difference.
Another way increased minimums may cut debt is by forcing buyers who think in terms of monthly installments to take a second look at what they can afford. The new minimums will effectively double the monthly price of a purchase, turning a $40-a-month payment for a new sofa into an $80-a-month one.
If you're living paycheck to paycheck and your minimum payment goes from $200 to $275, spread over five cards, that's an extra $375 a month. This will be very hard for some families.
As always, if you have trouble paying the minimum, give your credit card company a call to see if you can either negotiate a reasonable payment arrangement or reduce your interest rate. Otherwise, missing a payment will result in phone calls from collections agencies.
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