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.
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