Paying The Credit Piper

(CBS)  Consumers with credit cards will shoulder higher minimum payments, starting this summer. How will this affect you and what can you do about it? Financial adviser Ray Martin explains as part of his regular appearance on The Early Show.

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Coming this summer to your credit statement is a higher minimum payment that can be more than double the minimum amount that has typically been required.

Right now, credit card issuers are rolling out their response to guidance issued in January 2003 by a federal agency called the Office of the Comptroller of the Currency. This guidance spelled out prudent practices for banks, thrifts and other institutions engaged in credit card lending.

Of particular concern was the general easing of minimum payment requirements found in numerous credit cards in recent years. For an increasing number of credit cards, the minimum payment requirements not only did not require any principal to be paid but allowed some interest to go unpaid as well, allowing unwary consumers to make minimum payments without ever reducing their debt.

The guidance made it clear that credit card lenders should instead set minimum payments that, if made, will ensure that credit card balances are paid down over a reasonable period of time, so as to avoid prolonged unpaid credit card debt by card holders.

This summer, five of the top ten credit card issuers (including Bank of America, Chase, Citibank, Discover and Providian) are rolling out changes to the minimum payment requirements for their credit cards and by next year, most card issuers will have made similar changes.

It's estimated that 40 percent of all credit holders pay their credit card balances in full each month, so this change is not likely to affect them. But for the rest of credit card holders who do not pay off their balances, some of whom make only minimum payments each month, this change is a big deal.

Typically, minimum payments have been set at an amount equal to 2 percent of the current months balance. It is widely advised to avoid paying just the minimum payment on credit card debt because when doing so, it can take more than 30 years to pay off a balance. But the minimum payment provides relief in the form of a small monthly payment that can be made when cash flow is lean, while still keeping the credit card account current.

Since banks and card issuers are left to define a "reasonable minimum payment," they are adopting a variety of formulas to comply with the guidelines.

For example, Bank of America now requires card holders to pay all fees, interest and at least $10 toward the balance. Citibank requires card holders to pay a minimum of all fees and interest, plus 1 percent of the balance each month.

Some card issuers have doubled minimum payments (from 2 percent of the current balance to 4 percent), and others have made no changes at all. MBNA Corp, the credit card issuer to be acquired by Bank of America, rolled out their higher minimum payments to new customers in July, and they are rolling out these to pre-existing customers later this year in October.

Consumer advocates say that this is both good and bad news for credit card holders.

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