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Hi Scott!
I have really enjoyed reading all your great
info about credit card debt. However, all this talk about rising minimum
payments from 2 percent to 4 percent has got me worried. I'd like to plan for
additional purchases like a new car before winter, but I am unsure of my
financial situation if my payments jump to 4 percent. I've called my banks for
an answer, but they have only told me they are in the process of determining whom
these changes will affect. How can I find out what the future holds for me so I
can move forward in my financial planning? Thanks so much far any assistance
with this one!
John
I’m so glad to hear that you enjoy reading my
articles! Thanks for letting me know that!
This is certainly a hot topic. In fact, I was
recently on
CNN American Morning with Miles O'Brien, talking about this specific
issue.
Yes, minimum payments are on the rise! There is
one thing you can be sure of though, and that is the banks don’t want to do
it. They don’t want to raise your minimum payment because that means you’ll pay
off your debts more quickly and pay less interest. Additionally, you may not do
as much spending because of the increased payments.
So why are banks raising the payments?
In 2003, the federal Office of the Comptroller of
the Currency (part of the Treasury Department) issued guidance requiring banks
to have monthly minimum payments cover interest, any fees incurred, and to pay down
principal. But many banks are just now implementing the changes.
I’ve been receiving
change-of-terms notices from
my credit card banks regarding this change in minimum payment. Here are the
details from MBNA: “The new minimum payment calculation focuses on paying a
higher percentage of your balance. Generally, it will be 1 percent of the
balance, plus finance charges, plus late fees, if any. It will never be more
than 5 percent of the balance. We will also round the payment down to the
nearest dollar.”
So let’s do the math on a simple example: Balance
is $2,000 with an APR of 15 percent.
Minimum payment=1 percent of balance + finance
charges + additional fees.
Finance charges are equal to 15 percent APR,
which is 1.25 percent monthly (15 percent divided by 12 months).
That means the minimum payment is 2.25 percent of
the balance, which is still pretty small. I remember some of my credit cards
having a minimum payment policy of 1/33rd of the balance about 10 years ago.
That’s more than 3 percent!
Of course, if there were late fees, overlimit
fees, or other rip-off fees included in the payment, it would increase the
minimum payment percentage.
Using the above guidelines, you would have to have
an interest rate of 36 percent APR to have a minimum payment equal to 4 percent of
your balance! Believe it or not, there are people whose rates are greater than 30
percent because of penalty rates.
Still, my feeling is that for most people, the
minimum payment will still be relatively low. So, if your banks decide to
increase your minimum, the worst
case is that you will save money by paying your debts off more quickly.
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