Credit Card Minimum Payments Doubling? It Ain't So

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Credit Card Minimum Payments Doubling? It Ain't So

While "Credit Card Payments to Double" makes an attention-grabbing

headline, the truth about upcoming changes in credit card payments

is much less ominous.

Many media outlets have reported that come January 1, 2006,

credit card customers who are currently required to pay 2% of

their credit card balances monthly will have to pay 4%. According

to these reports, this could mean a serious financial hit for

those suddenly required to pay double.

"Fortunately,

that's rarely going to be the case," says Justin McHenry, Research

Director for IndexCreditCards.com. "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."

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? 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, the result is not as scary as you may think.

For example, imagine a person with a $10,000 credit card debt

and a 19% annual interest rate, both higher than the average

consumer is carrying. Using the 2% 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.

"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."

 

Published 12/15/05 (Modified 05/07/12)