Credit Card Minimum Payment on Increase

The minimum required payment on monthly credit card bills has increased from 2% to 4% of the balance owed. Even though this may create a hardship at first, the long-term impact will be positive.

In April 2005, the Office of the Comptroller of the Currency requested banks to increase the minimum payments on credit cards. Many banks have already made the change, while others will be doing so shortly. The change should be seen on all credit cards by early 2006.

The change is intended to help consumers get out of debt faster. It is estimated that out of the 109 million credit card holders, approximately 35 million pay only the minimum amount required each month. The remaining either pay-off the balance in full or pay more than the minimum.

Positive Impact - Interest Saved and Debt Paid Off Earlier

When a payment is received by the credit card company, it first goes to pay off fees, then interest, then the remainder goes to principal. The larger minimum payment will increase the amount going to pay the principal each month. As a result, you will be paying off the credit card balance earlier and the total interest that you pay will be less.

For example, let's assume you have a $10,000 balance on a credit card with an interest rate of 18%. Let's also assume that there are no late fees incurred and that the minimum payment is 2% of the outstanding balance, but never less than $25 each month. Under this scenario, it will take over 42 years to pay off the $10,000 debt and the total interest paid over the period will be over $27,000.

Given the same credit card features, but the minimum payment increases to 4%, you pay off the $10,000 in about 12 years with less than $6,000 of total interest. The increase in the minimum payment requires you to pay off the debt 30 years faster and saves you $21,000 in interest payments!

Negative Impact - Increased Payments will Impact Cash Flow

For individuals that are making the minimum payments as a means of stretching their cash flow, the additional amount required may cause significant hardship. For those who carry a balance on multiple cards, the impact may be more than the budget can bear. Most families use five to eight different credit cards.

Let's assume that a family has three credit cards with outstanding balances of $3,000, $5,000, and $8,000. The total minimum payment for the three cards would increase from $320 per month at a 2% minimum payment to $640 per month at 4%.

If you have extra funds in a savings or investment account, a portion of it should be used to reduce or totally pay-off the credit card balances. If this is not possible, you will need to consider ways to manage the increased payments. The following should be considered:

-Since interest rates on credit cards vary, consolidate your balances to the card with the lowest rate and reduce your number of active credit cards to one.

-Stop spending with your credit card. Use only cash to make your purchases. Keep your credit card for emergencies only.

-Review your monthly budget to look for ways to reduce your spending so you can make the larger credit card payments. Your goal should be to pay more than the minimum each month.

-If you generally receive a refund on your taxes, file early and use the refund to reduce or eliminate the credit card balances. You can increase your cash flow through the year by reducing the amount of tax withheld from each paycheck. The extra funds each month can be used to make your credit card payment.

-If you have equity in your home, you can refinance or secure a line of credit to pay off the total of the credit card balances. However, you now must make monthly payments on the line of credit or a larger mortgage payment. Be sure to evaluate the final cost before you make the change. If you can't make these payments, you may lose your house.

After you exhaust all potential means of making the extra payments, call the credit card companies. They may be willing to reduce your interest rate and/or create a workable payment plan. If you need additional help, contact a credit counselor who can review your specific situation. The decision to declare bankruptcy should be considered only as a last resort.

Additional Information to be Provided

The new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 included a requirement that the credit card companies notify consumers regarding the amount of time it will take to pay off the balance on the credit card if only the minimum is paid each month. This "warning" is meant to encourage consumers to make better spending decisions.

Summary

Credit cards can provide a convenient means of purchasing products and services. However, the convenience requires each of us to use our credit cards wisely. The higher minimum payment is a reminder of the importance of managing our finances responsibly.

[此贴子已经被作者于2005-12-27 17:20:45编辑过]