New Minimum Payments Equal Tough Love for Debtors
- 2005 12 Aug
If you have credit card debt, there is no gentle way for me to break this to you: Your minimum payment is about to get bigger. And not because your company wants to make your life miserable. If you are carrying credit card debt you’re already doing a good job of that all on your own.
You know by now that your credit card companies prefer you to pay as little as possible each month -— not more! They want to keep you in debt forever. That’s why they’ve been so willing to accept a tiny percentage of your balance each month. But hang onto your fine print because all of this is about to change.
There has been a crackdown by the Office of Comptroller of the Currency (the OCC enforces the rules that regulate banks and credit card companies). Banks and credit card issuers who have been ignoring the rules will be forced to ratchet up required minimum monthly payments so customers pay enough each month to cover all fees, interest and at least some of their outstanding principal balance.
It’s called ‘perma-debt’
Consider the customer who has a $10,000 balance with a 16 percent interest rate and who makes a 2 percent minimum monthly payment. It will take more than 40 years to pay off the balance and cost $19,329 in interest. With a 4 percent minimum, the loan is paid in about 14 years with interest costs of $4,931.
It all comes down to credit card companies taking unfair advantage of consumers. By encouraging smaller and smaller monthly payments while charging higher and higher interest -— and not fully disclosing the foolishness of paying only the minimum monthly payment -— they are in fact tricking consumers into paying more interest and being in debt for decades. No wonder credit card company profits are up by more than 30 percent.
We’ve had it!
Consumer groups and legislators have had it. They’re up in arms and putting pressure on the OCC to do its job and require minimum payments to be at least enough each month to cover all fees and interest and to pay down at least some of the outstanding balance, too.
What’s more, these legislators are pressing credit card companies to disclose the truth about minimums and fees on monthly credit card statements.
The Credit Card Accountability Responsibility & Disclosure Act (just resurrected after a stalemate in 2004), if passed by Congress (it’s looking good), will force credit card companies to state each month how long it will take to pay off your outstanding balance if you just pay the minimum plus how much interest you will pay over the life of the loan.
Of course the companies are freaking out at such a requirement because that’s the last thing they want consumers to see. If customers see this they might be more inclined to pay higher monthly amounts voluntarily -— or not carry balances at all.
What this means for you
If you have no credit card debt this means nothing to you, although it’s important information for you to know and understand so you can pass it on to others.
If you have credit card debt, consider it a loud warning that it’s time for you to take control of your situation. If you are paying 2 percent (likely, but look at your statement and figure out the relationship between your last required minimum payment and the outstanding balance), expect your monthly minimum to double (at least 4 percent). Don’t continue to shoot yourself in the finances by making such tiny payments on such a large outstanding balance.
Hurts them more than you
If facing the possibility of doubled monthly payments is causing you anxiety, take heart. This is hurting them a lot more than it’s hurting you. In a way they’re doing you a favor by pushing you to get out of debt.
Can we talk?
It’s time to get yourself into gear and stop procrastinating. Sit down today and make a tangible plan to pay off those bills -- you could be done with those hefty credit card payments sooner than you think. And you can't put a price on the peace of mind you'll have when you finally obtain financial freedom.
© 2005 The Cheapskate Monthly. All rights reserved. Used with permission.
"The Cheapskate Monthly" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.