Paying The Credit Piper

Your Minimum Payment Is Going Up This Summer

(CBS)  This is good news for consumers, because higher minimum payments can dramatically reduce the amount of time and interest that is required to pay off credit card debt.

For example, assume you carry a $10,000 balance on a credit card that charges 13 percent interest (the national average is approximately $9,300 and 15 percent). If you pay the minimum payment of 2 percent of the balance each month (which starts off at $200 each month), it will take you about 33 years to pay off the balance, and you would have paid interest totaling about $11,450.

With a higher minimum payment of 4 percent, the initial monthly payment would double to become $400. When you pay the higher minimum payment, it will take only 13 years to pay off the balance, with total interest paid of about $3,664. In this example, with the higher minimum payment, you would save more than $7,700 in interest charges and pay off the balance 20 years sooner!

This is bad news for some consumers because the minimum payments for their credit card debt can double. For consumers who are already struggling to make minimum payments on their credit cards, these higher minimum payments come at a time of rising energy prices and mortgage payments and when bankruptcy protection laws are getting tougher. Consumers who have high credit card balances, balances on multiple cards or whose cash flow is lean are apt to feel the most pain from increased minimum payment standards.

Industry experts say this is also not good for the card issuers. Credit card companies will collect less income from interest charges paid by their credit card customers. They also say that increased minimum payment standards will drive more marginal borrowers into default, requiring credit card issuers to absorb increased charge-offs for accounts that go unpaid.

Credit card issuers are required to notify customers by sending a legal notice of change in their terms at least 15 days before any change is applicable. It’s a safe bet that these legal notices will go unread by most card holders.

What should all credit card holders do now? Here are a few suggestions:

• Call your credit card issuer and inquire what the new minimum payment formula will be and when it applies to your account. Also read your monthly credit card statements carefully for any notice of changes in payment terms.
  
  
• If you schedule automatic payments from a bank account to your credit card account, review to ensure that the scheduled payments will be sufficient to cover the new, higher minimum payment.
  
  
• Shop for a credit card that offers a lower interest rate at www.bankrate.com or www.cardratings.com. If you get a card with a lower rate, the minimum payment should also be lower.
  
  
• Call your credit card company and ask for a lower interest rate on your card – you are more likely to get a lower rate if you are a loyal customer with a long history of making payments on time.
  
  
• Avoid making any new charges on a credit card account you are trying to pay down.