I was anxious when asked to write a follow-up for the CardRatings.com feature Credit Card Minimum Payments Rising Soon since this is a pet topic of mine. There has been much confusion in the media regarding this topic and notable fear among consumers. My assignment was to "weed through" the hype and "filter out" the truth.
I interviewed two notable sources. One was Ed Mierzwinski, U.S. Public Interest Research Group (U.S. PIRG) Consumer Program Director, who asked that The Truth About Credit be listed as reference as well as the US PIRG Consumer Blog. The state PIRGs created the U.S. PIRG in 1983 to act as watchdog for the public interest in our nation's capital. The second interview source was Scott Bilker, founder of DebtSmart.com and author of Talk Your Way Out of Debt.
Question: "Many credit card issuers will implement the increased minimum payment with the New Year. Do you see this as a positive or negative considering increased fuel costs and other associated living expenses and why?"
"In the long run very positive but in the short run done very poorly. The bank regulators gave the banks 3 years and many of them coasted until the deadline and raised rates all at once during the holidays. Ideally they should have raised them gradually over the 3-year implementation period. Last month Comptroller John Dugan gave a speech where he said, among other things, banks should consider lowering interest rates to reduce indebtedness and help consumers pay down their debts and also to work with consumers who cannot make the “sudden sticker shock” increase.
I’d be interested to know whether your readers have found their banks to be helpful—are any banks, for instance, not charging late fees if consumers make at least a partial payment? Are banks no longer raising consumers to punitive penalty interest rates [20-30%+ APR range] if they are late due to this? [Comments can be left at the bottom of the Blog US PIRG Raising Payment.]"
"It's a positive for consumers in that it will force people to pay down their debts more quickly, thus saving them money. However, it's negative for those whose paychecks are leveraged. They may need to make some adjustments to their budget. It becomes more important than ever to make sure your interest rates are low and fees are avoided."
Question: "What influence if any will the new bankruptcy law have on increased minimum payments?"
"Well, the bankruptcy law makes it harder and more expensive to file for bankruptcy, so I doubt many consumers will file for bankruptcy to avoid increased payments. On the flip side, in the long run, perhaps fewer consumers will get into credit card debt in the first place due to this new minimum payment rule."
"I don't believe the new bankruptcy law is related to the increase. The Office of the Comptroller of the Currency (OCC) issued the guidance to the national banks back in 2003 prior to the bankruptcy law changes. Credit counselors may have something else to bargain with in that there are exceptions to the OCC guidance for special situations."
Question: "Would you like to add any additional comments regarding this important consumer topic?"
"I am very disappointed in the mind-numbing number of offers for rewards credit cards. These are obviously ok for convenience users but not for consumers who carry balances. But you know as well as I do that the companies are hoping to use the rewards to get people to run up balances."
"The increase in minimum payment is going to be very small. I've read a few articles saying that it could go from 2% to 4%, but that just isn't the case.... When you do the math, excluding late fees, you'd have to have a 36% APR for minimum payments of 4%.... What this change will do is force the banks to raise minimum payments for the low-rate offers."
If you haven't seen your minimum payments rise yet, then you should check your credit card statements very carefully from this point forward. We are pleased to offer an updated list of the current minimum payment requirements for the major card issuers. If your card issuer is not on this list, then you may want to call them directly to inquire. Please note that, despite various reports in the media, not all card issuers will be increasing their minimum payments.
The key thing to remember is that the OCC's guidelines state that minimum payments must not only include all new finance or interest charges and any penalty fees, but must also reduce your principal by 1% each month. The intent here is to prevent consumers for paying on a credit card for 20-30 years, which in my estimation is a good thing.
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