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Around Our Town...Family Finance

Straight Talk On Credit Card Minimum Payments

02/01/2006 - You've probably heard – maybe panicked – about changes in credit card minimum payment charges. Well, don't panic – read on. Not everything you've heard is accurate.

In 2003, federal regulators, in their never-ending quest to make your life better, decided to set some guidelines for credit card minimum payments. They were concerned that growing credit card debt might bode ill for those lenders and growing credit card loan levels would increase the risk of loan defaults.

So, they issued the following guidelines – not rules – to take effect the first of 2006. Even though they are only guidelines, it's expected that credit card issuers will adopt those guidelines. Here they are:

At the beginning of 2006, nearly all credit cards issuers set monthly minimum payments to: cover interest plus any fees and at least 1 percent of the principal.

The rumor that minimum payments are doubling from 2 percent to 4 percent is not correct. In fact, some issuers' policies already comply with the guidelines, so those customers will not be affected. To find out about your own credit cards, you should check with your specific card issuer to get details, or read their statements. Generally, credit card companies will notify their customers about payment increases 15 to 30 days in advance.

One of the other misconceptions is that banks and other credit card issuers really don't want customers to pay more than the minimum on their credit card bill in order to make more money. The fact is that it's in the best interest of the bank for customers to make more than minimum payments every month since credit card loans are the riskiest form of consumer lending. If the cardholder is paying just the minimum, that's an indication that the cardholder is struggling with debt and may default on the loan.

For the most part, you and I and everyone else who has a credit card do a good job in meeting their financial obligations. In fact, each month more than 95 percent of credit card accounts are paid on time, according to American Bankers' Association Consumer Loan Delinquency Bulletin. This flies in the face of the semi-hysterical rhetoric you've heard recently that most consumers will have a hard time making the increased minimum payments. Of course, in those news bites, it is true that 100% of the people appearing in them are, unfortunately, facing financial difficulty. That does tend to skew our perceptions.

The vast majority of consumers will not be impacted by the increase in minimum payments. According to a recent ABA consumer survey, seventy-five percent of consumers either pay off their credit card balances in full or pay more than the minimum each month; six percent occasionally pay the minimum, and 4 percent only make minimum payments each month.

The last thing I want to mention is the misrepresentation that increased minimum payments will push consumers to the financial breaking point, forcing them into bankruptcy. However, keep in mind that credit card debt represents just 5 percent of all consumer debt, hardly enough to push cardholders into bankruptcy.

For those folks who will actually notice payment increases that make their family budgets uncomfortable, go talk to your bank. It's entirely possible you may be able to refinance those credit card bills into longer term, lower payments, generally using some sort of real estate loan. If that isn't a possibility, go talk to a consumer credit counseling agency. If you take this last option, don't be shy about asking up front about their fees and charges.

And, just for a change, give the credit card a rest – the holidays are over.

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