WARNING! Raising the Minimum Payment
Though I applaud raising CC minimum payment, I cannot help but be angry.
Minimum payment on credit cards is being raised! It is raising from the existing 2% of the outstanding balance to 4%. Is raising minimum payment good news or bad news? It depends on which side of the credit card balance you are sitting. This issue will be more thoroughly discussed below but I cannot resist inserting a few comments to begin the discussion of raising credit card minimum payments.
Though I applaud the credit card minimum payment increase, I cannot help but chastise the credit industry and Comptroller of the Currency (OCC) for the timing. I believe there is far too much coincidence that the new bankruptcy law just happens to occur at the same time as raising minimum payment rates. Allow me to ellaborate:
Bank of America was the first to raise minimum payments in the second quarter of 2004. I praise their efforts because I think their move was oriented towards consumer benefit. Their charge-offs for bad loans sky rocketed to 63% ($691 million).
The new bankruptcy law will be in affect October 2005 and the credit industry is keeping the rise of minimum credit card payments as quiet as possible.
This is BIG, BIG NEWS! Yet except by accident, have you heard any major announcement about raising minimum payments? Did you see it blaring on the primary news channels? Your credit card payment just doubled. Isn't that newsworthy?. Don't you think this should be shouted from the house top? But instead it is spoken of in whispers... until the new bankruptcy plan is neatly in place. Coincidence? I don't think so.
And why has it been so "unannounced"? First of all it is very unpopular with the industry's "best customers"... those are the ones so deep into credit card debt that they cannot see the top. Secondly, bottom line profit loss is at stake if these "best customers" can more easily declare bankruptcy and have this debt written off before the new law takes affect.
Now I will get off my soap box.
THE GOOD NEWS
In a 1999 article, Balance Transfer and Consolidation, is the following: "[Examine a] minimum payment based upon a $5000 balance and a 17% interest rate. By increasing the minimum payment from 1.67% to 3% the total interest paid is reduced from over $25,000 to just over $4000.... the amount of time to pay this debt off is reduced from 81 years to 18 years.
Similarly, an interest rate of 13.5% but a minimum payment of 1.67% will cost you $9538 in interest and take 41 years to pay off. On the other hand, a higher interest rate of 19.8% but a minimum payment of 3% will cost you only $5858 in interest and take only 21 years to payoff.
So you can see often times interest rates have far less affect than the amount of minimum payment. For this reason I applaud the new standard that is on its way in.
According to the business week article Tough Love For Debtors: "most banks and credit-card issuers will ratchet up required minimum monthly payments over the next 12 months or so. In the future, the payments must cover all fees and interest and pay down at least some of the outstanding borrowing.... So far, BofA, Citigroup (C ), Discover Card (MWD ), and MBNA (KRB ) -- which together issue some 275 million of the 658 million general purpose cards in circulation -- are among those with timetables for raising their minimums. JPMorgan Chase (JPM ), with roughly 96 million cards, will 'experiment' with higher minimums later this year on a 'small portion' of its customers.... "
THE BAD NEWS
There is no bad news if you are like the other 109 million credit card holders who pay off their balance monthly or at least pay more than the minimum. However if you are like the 35 million who only pay the minimum... WATCH OUT! Your payment will soon (if not already) double from 2% up to a possible 4% of the balance. See Minimum Payments On The Rise.
But I would be hesitant to be angry with this, though. As it happens, before the credit industry greed dropped the minimum monthly payment to 2%, it use to be 5%. Why the OCC permitted this drop, I will never know. But I am guessing like the bankruptcy law, it was caused by significant pressure from the credit card industry.
Who says money can't buy government... though at least now the OCC is trying to correct itself. You may wish to correct your errors as well by applying any extra money possible to paying down your credit card before th minimum payment is raised.
Consider this: higher minimum payments rid balances much faster and save $$$ on interest. A $10,000 balance at 18% would require about 58 years to pay off and cost $28,930.64 in interest at the 2% minimum payment rate. If the minimum payment were 4%, it would take 15 years to pay off and cost $5,915.67 in interest... a savings of over $23,000.
Get out of the credit card trap! I encourage you to read the article I wrote on this subject when first starting out over 8 years ago: Credit Cards... They're Just Like Drugs.