Taking the Minimum Payment to the Max
Credit card companies are poised to raise their minimum payments
Consumers making minimum payments on their credit card balances are about to get a New Year’s resolution to pay off more of their debt, courtesy of the O.C.C. (Office of the Comptroller of the Currency). Effective January 1st, 2006, minimum payments are required to be high enough to cover interest, fees, and at least a portion of the actual balance. Many credit card issuers have already complied, raising minimum payments that were typically around 2% of the outstanding balance to approximately 4%, effectively doubling the minimum.
Believe it or not, these new federal rules are being enacted with the consumer in mind. With credit card debt and interest rates on the rise, and payments being applied to interest charges and fees first, it has become tougher for consumers to make a dent in their outstanding balances. In some cases, it’s even possible for cardholders to get caught up in negative amortization, where they actually end up owing more than they did before they made a payment.
By raising the minimum payment, the O.C.C. hopes to save consumers money in interest by reducing the amount of time it takes cardholders to pay off balances. They’re also anticipating that increased minimum payments will help keep consumers from adding to existing credit card balances. The hope is that consumers will think twice about charging items they can’t necessarily afford, knowing they’ll have to pay a higher minimum payment when the bill comes due.
Optimistic predictions aside, there are some real concerns with this rise in minimum payments—both from consumers and banks. Many consumers who are just getting by may be pushed over the edge by this increase. Especially considering the timing of the increase, with rising interest rates and record-setting energy prices taking a bigger chunk out of consumer paychecks. As a result, many banks are anticipating an increase in the number of defaults, and some have set aside millions of dollars in their budgets to deal with the expected rise in the default level.
The bright side is, because they recognize this increase may cause many cardholders undue hardship, as well as affect their credit scores, credit card companies may be more willing to work with consumers who are struggling. Most experts recommend trying to negotiate a reasonable payment with the credit card company rather than making late payments, skipping payments, or defaulting altogether, all of which can take a toll on a credit score. Working with the card issuer could buy cardholders enough time to get back on their feet. Experts also recommend checking your credit score and credit report often to stay as up to date and on top of your credit as possible.
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