A recent segment by CNBC's Bill Griffith on increasing minimum credit card payments contained some interesting viewpoints. In case you're not aware, minimum payments by various card issuers have started rising, in some cases even doubling, thanks to a mandate set forth by the Office of the Comptroller of the Currency (OCC). The segment featured opposing viewpoints from Michael McAuliffe, President of Family Credit Counseling Service, and Dr. Robert Manning, author of Credit Card Nation and Professor of Finance at Rochester Institute of Technology.
Mr. McAuliffe is generally supportive of increased minimum card payments from a consumer standpoint. He cites the fact that minimum payments will help consumers pay off their card debt in a more timely fashion and in turn lower credit card finance charges.
Dr. Manning, however, opposes the increase and suggests that credit card debt is largely caused by the aggressive lending practices of financial institutions. He claims that aggressive lending practices by card issuers has resulted in consumers being overextended and that now the OCC is trying to correct such lending problems by burdening consumers with higher minimum payments.
Dr. Manning offers some points to substantiate his claim. He cites the fact that creditors have had 4 years of exceptionally low interest charged to them (by the Feds), yet this lower interest has never been passed on to consumers. There have been 7 years of exceptional profitability for the credit card industry, yet consumers are burdened beyond precedent.
I spoke on the phone with Dr. Manning concerning this interview and asked him if there were other issues that have contributed to 7 years of profitability besides the lower interest charged to the creditor. Professor Manning was very direct in his response:
"Besides not passing on their lowered interest borrowing power of the last 4 years, credit card fees have increased while processing administration costs are down. Marketing costs are the only administration cost which has increased and only because of the increase in cross marketing for insurance sales. These other areas have additionally boosted profits. Similarly, fraud expenditure has gone down and some of the fraud costs are even passed on to the consumer. Yet none of these savings have been passed on to the consumer!"
Dr. Manning continued,
"If the consumer is burdened with exceptional credit card payments, why can't the industry reduce his interest rate and thereby reduce his payment [instead of increasing minimum payments]."
Michael McAuliffe suggested that interest reduction was the purpose of a Debt Management Program (DMP). Dr Manning had strong opposing views on this issue as well. He agreed that a fair share concept was pretty much a thing of the past but suggested that creditor rates as stated by Accelerated Debt Consolidation's minimum required monthly payments chart were only optimal and subject to the relationship between the creditor and credit counselor.
I followed-up on this issue with the creator of the above chart, CEO Jim Young, who has been providing credit counseling services for over 7 years. According to Mr. Young,
"The only major difference from one counseling agency to another is not the rate that can be accepted, but the customer service and satisfaction provided by the agency. Rates that the creditors give to the clients are all the same no matter which credit counseling firm the consumer uses. For example, if a client owes Chase $10,000 and we send a proposal for $199, it will be denied because it is $1 short of the required amount [per the referenced chart]. When we resubmit the proposal for $200 it will be accepted. It is that simple".
It would seem controversy among experts on these issues will continue. But one thing all seem to agree upon is that consumers are clearly overburdened with debt, yet credit card profits have continued to surge. Only time will tell whether or not increased minimum payments will actually help...
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