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Minimum Credit Card Payments Going Up, But How Much?

By Mark Huffman
ConsumerAffairs.com

December 19, 2005

• Credit Card Companies Fear "Perfect Storm" • GAO Finds Credit Card Statements Could Be Customized • Consumers Ditching Their Credit Cards • Minimum Credit Card Payments Going Up, But How Much? • Higher Minimum Credit Card Payments Add to Consumer Queasiness

A change in banking regulations will mean higher minimum credit card payments for millions of consumers beginning in January. At the urging of federal banking regulators, credit card companies are boosting the minimum payment on balances from two percent to four percent.

The idea is to help consumers. By increasing the minimum payment, the feds reason, consumers will pay down their balances faster, with a greater percentage of their payment going to principal instead of interest. But many cash-strapped consumers may find themselves overwhelmed.

"I have certain funds allocated for certain expenses and if that nearly doubled I would definitely have to realign my budget," Chicago consumer Cetrina Williams told WBBM-TV.

But Justin McHenry, Research Director for IndexCreditCards.com, says the new rules will probably be less burdensome to consumers than they fear. He’s seen the media reports of "double credit card payments" and thinks it’s overblown.

"While the government is requiring credit card companies to increase monthly minimum payments, the goal is to help credit card customers pay off balances without undue hardship," McHenry said.

Specifically, where most credit card issuers previously required customers to pay off 2% of their outstanding balances each month, most will now require customers to pay all monthly interest and fees, plus 1% of the outstanding balance.

What does that mean for monthly payments? McHenry said significant monthly increases will occur in only the most extreme cases, those in which very large credit card debt is combined with very high interest rates. Even then, he says the result is not as scary as you may think.

For example, he says, imagine a person with a $10,000 credit card debt and a 19 percent annual interest rate, both higher than the average consumer is carrying.

Using the two percent minimum balance calculation, this person would have a required monthly payment of approximately $203.16. Under new requirements, the monthly payment would be $258.33 ($158.33 in interest, plus $100 of the outstanding balance). This is a difference of roughly $55 – on a balance and interest rate that exceeds what the average consumer is carrying. Most credit card customers will have much smaller minimum payment increases, if any, he said.

"Unless a credit card company has specifically announced raising their minimum payment from two to four percent, it’s almost impossible to think of a realistic scenario in which payments will double," says McHenry.

The upcoming change in minimum payments is a result of guidance from the government’s Office of the Comptroller of the Currency, which told banks they must require minimum payments that allow customers to pay off their debts in a reasonable amount of time.

Under the current industry-standard two percent minimum payment, customers with high balances can conceivably "meet the minimum" without even paying off a full month’s interest, much less taking a chunk out of the principal balance.

"While 'this is for your own good' generally should be met with skepticism," says McHenry, "in this case it's true."

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