Understanding the Credit Card Minimum Payment Increase

Were you shocked to see your credit card minimum payment increase when you opened your credit card statement? Before you jump to conclusions and think that your credit card company is picking on you, realize that this is a federally mandated increase. Back in 2003, due concern over consumers not making any headway in paying off loans, it was proposed that credit card companies establish a 10-12 year payback period for reducing or eliminating credit card balances.

Who is responsible for the change?

To accomplish the accelerated payback schedule, the Office of the Comptroller of the Currency (OCC) in conjunction with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision established some guidelines. They proposed that the credit card minimum payment increase to cover all fees and interest charges, as well reduce the principal by 1% each month. Starting at the end of 2005, credit card companies began raising the minimum payment rate on their accounts to comply with the guidelines.

Why the credit card minimum payment increase was needed

The intent of these guidelines is to help prevent consumers from paying on credit card balances for 20-30 years. Before the guidelines were instituted, the monthly minimum payment on most credit cards was generally 2% of the outstanding balance. This barely covers the interest charges, and leaves very little to apply to towards the actual balance.

For example, if you only paid the minimum 2% on a $2000 balance that charges 18% interest, it would take you about 30 years to pay off your credit card. And that's considering that you never charge on that card again. Using the same example, if the minimum payment increases to 4%, then it will only take about 10 years to pay off the balance, which will save you $3800 in interest fees.

How the changes will affect you

Under the new guidelines, minimum payments will increase to somewhere between 3 to 4% of the outstanding balance. An individual's minimum payment may vary somewhat due to such factors such as late payment and over-the-limit fees, as well that the interest rate for that particular account.

While the increase in the minimum payment will come as a shock to many people, it is actually a good thing. This is because you'll get out of debt sooner and you'll pay a lot less interest over the years (thousands of dollars for many people). In the short-term though, it could be a bad thing for people who have overextended themselves.

This is because Americans are facing both higher interest rates and a new bankruptcy law that makes it harder for consumers to write off their unsecured debts. The new bankruptcy act tightened the requirements under which people can file bankruptcy and prevents lenders from using practices that allow consumers to get into a never-ending loop of revolving debt. Towards this end, credit card companies are required to post disclosures on monthly statements of the consequences of only making minimum payments. For more information, read about the minimum credit card payment trap.

What if you can't afford the credit card minimum payment increase?

Even though the increased minimum payment is good in the long run, if you're like most people, you may not have the money to cover the increase right now. Below are some ideas to help you save money to cover the increase:

  1. Brown-bag your lunch at work a couple of times a week. This can easily save you $40 a month.
  2. Stop using your credit cards for everyday purchases to prevent your payment from increasing even more.
  3. Save your pocket change instead of spending it.
  4. Car-pool with a friend.
  5. Call your utility companies to be put on a monthly average billing plan to prevent seasonal fluctuations.
  6. If you don't watch many movies through your premium satellite or cable channels, consider dropping this option from your plan. This can easily save you $10 a month.
  7. Subscribe to your favorite magazines instead of buying them at the grocery store. If you have friends with the same interests (but different subscriptions), consider exchanging magazines at the end of the month. Everyone benefits this way and saves money as well.
  8. Clip coupons and stock up on sale items at the grocery store.

These are just a few ideas to get you started saving enough money for your increased payments. Even if you can't manage the new credit card minimum payment increase, there are still options. If you honestly can't make the minimum payment, call your credit card company to see if they will negotiate a more reasonable payment arrangement, or reduce your interest rate. Most creditors would rather adjust the payment schedule temporarily than to have you default on the account.