Can you imagine paying on the same credit card debt for 58 years? That is how long a debtor would be paying on a credit card balance of $10,000 at 18 percent interest if they only made the minimum payment of 2 percent of the outstanding balance.
The total interest paid during the nearly 58 years to pay the debts off, would be about $28,931, assuming a person stuck to the minimum payment each month. Now the same person paying 4 percent of outstanding balance each month would pay off the debt in 15 years and would pay only $5,916 in interest.
Minimum payments on credit cards have increased, some two years after the January 2003 guidelines issued by the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Regulators didn't require minimum payments to rise by a fixed amount. The guidelines said payments should cover fees and finance charges, plus 1 percent of principal. Until now, some minimums didn't even cover the interest owed, so debt would just keep growing.
The federal agencies said they were acting after years of seeing credit card issuers lower minimum payments because of competitive pressures and a desire to preserve outstanding balances.
Some card holders could see their minimum payment double, from 2 percent of the balance to 4 percent. On a $10,000 balance, the payment could jump from $200 to $400.
The changes affect millions of credit card holders who do not pay their balances in full each month. A survey conducted by the American Bankers Association earlier in 2005 indicated that 43 percent of consumers carry balances each month.
When credit and charge cards first appeared in the 1950s, the minimum payment was 10 percent of the outstanding balance. Back then, cardholders had little difficulty paying off their credit card balances.
Over the years, as the availability and use of credit increased, banks and other credit card issuers quietly began lowering their minimum payments for the credit cards they issued. This lowering of the minimum payments kept cardholders in debt longer and caused them to pay more interest and also some new fees.
The big explosion in credit cards came in the 1990s when AT&T and General Motors, among numerous others, decided to get into the credit card business. Consumers were assaulted with numerous promotions and advertising all aimed at getting people, young and old alike, to acquire either their first or another charge card. It was not uncommon for someone to carry as many as eight or 10 different credit cards.
In the early part of 2003, the Institute of Consumer Financial Education (ICFE) discovered and reported on the so called Universal Default clauses, which began to appear in new credit card offerings. Universal default simply means if a debtor is late making a payment to another creditor and it appears on the debtor's credit report, other card issuers and creditors who have included universal default into their credit card and other loan agreements, could also declare a debtor in default, assess higher fees and raise the annual percentage rate to higher rates, usually 29.99 percent.
As part of the universal default declaration, creditors may lower the credit limits and should the debtor be over the newer, lower credit limit, the debtor will begin to receive over-limit notices and fees. This practice also occurs when a debtor makes a purchase, which may take them over their limit. The issuer approves the purchase and it results in the debtor being over their credit limit, and so it creates another over-limit notice and, of course, another fee.
The Comptroller of the Currency has not ruled that universal default is illegal, however he did warn banks and other credit card issuers under its regulatory powers who incorporate universal default into their credit card offers and agreements to properly notify consumers in writing and with a larger type size on the offers and agreements when discussing default and universal default.
In the short run, higher minimum credit card payments will put the squeeze on many households, causing more than a few to go into default status. The American Bankruptcy Institute expects more filings from low-income consumers who can't handle higher credit card payments. Yet it may not be feasible for some to declare bankruptcy because of the stricter bankruptcy rules that have taken effect.
In the long run, it should enable more consumers who carry credit card balances to pay them off quicker and pay less interest and other fees.
