Minimum Payment Rising
The studies show that one out of every four Americans pays only the minimum payment on their credit card balances each month. Making bad financial decisions and paying interest through nose has become an American pastime.
The Office of the Comptroller of Currency (OCC) has asked credit card companies to increase the minimum monthly payment they are requiring consumers to pay each month. Most credit card companies currently set the minimum payment at 2% of the outstanding balance. Although the OCC has not specified a new minimum percentage, several credit card companies – Bank of America, Citigroup, Discover & MBNA – have doubled the minimum payment to 4% of the balance. Many others are expected to follow suit.
Under the old 2% minimum payment, a $10,000 balance would require a minimum payment of $200 each month. The new 4% minimum would require a $400 minimum payment each month.
The actual recommendation to increase the minimum payment was made jointly by the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and Office of Thrift Supervision in March 2003. The new OCC guidelines propose that by October 2005 credit card companies must adjust the minimum payment calculation to fit an approximately 10-year repayment schedule. For comparison, it would take nearly 30 years to pay off a debt with 2% minimum payments!
For those financially overextended individuals who can barely afford the current minimum, the increase could spell trouble. In the long run, however, the change will be beneficial to consumers.
If you’ve done your homework, you should know that the key to paying down debt is to make payments for the largest amount you can afford. The change to 4% will shave years off the repayment period. A debt that would have taken 30 years to pay off with 2% minimum payments will take only 10 to 12 years with a 4% minimum. It’s still not ideal, but a definite improvement.
For those who normally pay only the minimum can afford the hike, you’re being forced to do what you should already be doing. For those of you who can’t afford to have your minimum payments double, begin thinking of ways to increase your income and/or cut your expenses. It may be painful at first, but it will help your situation tremendously in the long run.
