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Credit Cards Raising Minimum Balances
Bankruptcy filings will rise when this happens. A lot of people are
already struggling with just making minimum payments, usually 2% of the
outstanding balance. Imagine when this goes up to 4%, and then the late
fees and over-the-limit fees also start to kick in.
When interest rates go up and the so-called real estate bubble starts to
burst, a lot of people will be in MAJOR TROUBLE. High mortgage payments
and credit card payments they cannot afford will drive these people into
filing Bankruptcy.
This is sure to happen. It's only a matter of time....
Ray Bulaon
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First off, thanks to those that answered my Chap 13 buyout question:
Lou, David and Steven. I appreciate the guidance.
I found this news article interesting, in light of the upcoming reform
changes, etc. Short-term pain, indeed.
Hale
Credit Cards Are Raising Minimum Payments
By EILEEN ALT POWELL AP Business Writer
(AP) - NEW YORK-Don't be surprised if the minimum payment on your
credit card suddenly goes up. Under pressure from federal regulators,
credit card issuers are raising the minimum payments consumers must
make on their monthly bills. In the long run, it's good for consumers
because it means they'll pay down their balances faster, so they'll
pay less in interest. But in the short run, consumers already
struggling to keep up with minimum payments on several cards could
feel squeezed.
"It's a little like a diet," said Greg McBride, a financial analyst
with Bankrate.com in North Palm Beach, Fla. "To get to that long-term
benefit, you have to go through that short-term pain."
The changes being phased in this year are the result of a directive
issued by federal banking regulators, including the Treasury
Department's Office of the Comptroller of the Currency, in 2003.
Barbara Grunkemeyer, deputy comptroller for credit risk, said the
regulators were concerned that when the minimums were set too low,
consumers' payments were barely covering the interest and fees on the
cards and not making a dent on the principal amount that was owed.
"It took the banks and other issuers a while to deal with minimum
payments because there were such broad implications," Grunkemeyer said.
Higher minimum payment requirements may make it harder for some
consumers to pay their bills, she said. At the same time, financial
institutions may have to raise their reserves against late payments
and defaults, she added.
In recent years, the minimum payment required of consumers averaged
about 2 percent of their outstanding card balances, or $200 a month on
a $10,000 balance.
A consumer who paid just the minimum each month on a $10,000 balance
on a card carrying a 13 percent interest rate would need nearly 33
years to clear the bill - at a cost of more than $11,450 in interest,
according to Bankrate.com calculations.
If the minimum is raised to 4 percent, a consumer could clear that
$10,000 balance in under 13 years, with interest totaling about
$3,664, Bankrate.com said.
Consumers will have to check with their own credit card issuers to
determine the new terms on their cards because banks and financial
institutions are adopting a variety of formulas to comply with the
federal guidelines.
Bank of America Corp. in Charlotte, N.C., for example, had a minimum
payment of 2.2 percent on some of its cards. Last year, it raised the
minimum payment to $10 plus all fees and interest.
"We'll be making additional changes later this year that will result
in the reduction in the length of customers' repayment periods," said
Bank of America spokeswoman Betty Riess. She said the details still
were being worked out.
At Citigroup Inc. in New York, the minimum payment has been set at all
finance charges and fees plus 1 percent of the outstanding balance,
according to Citigroup spokeswoman Elizabeth Fogarty . A similar
formula is to be phased in at MBNA Corp. of Wilmington, Del., starting
with new accounts in the third quarter and existing accounts in the
fourth quarter.
The credit card issuers say a majority of their customers pay more
than the minimum each month. Still, an analysis last year by
CardWeb.com, an online publisher of information about payment cards,
found that about one in four card holders was making only minimum
payments some months.
Kerry Smith, an attorney specializing in consumer issues with the
state Public Interest Research Groups, said raising the minimum
payment requirements is a good step because card issuers "shouldn't be
engaging in practices that put consumers in a cycle of debt they're
never going to be able to get out of."
Still, consumers with hefty balances may want to begin taking steps
now to try to reduce the impact.
"You can shop around for cards with low, perhaps introductory, rates
and transfer your balances," Smith said. "But do watch out because
sometimes there are transaction fees."
Smith also advised consumers to call their credit card issuers and ask
for a lower interest rate, which will reduce monthly finance charges.
Bankrate.com's McBride suggested consumers try to reduce their
balances before the new minimums take effect.
"First, you have to put those cards on ice," he said. "You can't add
to those balances anymore."
Then, shop for cards with a lower interest rate, he said.
"You could consolidate on a single card," McBride said. "But reducing
the rate on even one or two cards will make the minimum payments
you'll be making that much more productive."
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