Mellody Hobson: Credit Card Minimum Payments Set to Rise

July 20, 2005 — -- More than 115 million Americans carry monthly credit card debt. And if you're among those paying off a high balance, you may have an unpleasant surprise in next month's bill: a higher minimum payment.

"Good Morning America" Financial Correspondent Mellody Hobson discussed why payments are going up and what you can do about it.

Watchdog Group Cracking Down on Companies

The Office of the Comptroller of the Currency, a bureau of the U.S. Treasury Department as well as a watchdog to protect consumers from abusive and deceptive credit card practices, is cracking down with tougher guidelines on interest rates, marketing tactics and account management practices. According to BusinessWeek, credit card companies had a banner year in 2004, bringing in record profits of $30 billion, in large part due to fees and high balances.

In response to the OCC's call to credit card issuers to help their customers get out from the layers of debt, many national banks and credit card issuers are increasing their monthly payment requirements. For the millions of Americans struggling to pay off their credit cards, the mandated jump in monthly minimum payments may seem a bitter pill to swallow.

However, the change in requirements could just prove to be the best medicine in terms of helping consumers dig their way out of debt. The typical monthly minimum will double from about 2 percent to 4 percent. Under the change, minimum credit card payments will cover not only fees and interest charges, but more importantly, a portion of the original debt. This means that customers paying off their credit card bills should be able to make a dent in their debt and actually pay it off more quickly.

When does the change take effect?

If your credit card company has not already put the new guidelines into effect, most likely you can count on paying a bigger monthly minimum sometime within the next year.

Bank of America has already enacted an increase, and Citigroup, Discover Card and MBNA plan to follow suit. Together, these credit card issuers account for about 40 percent of the 658 million general purpose credit cards out there.

New cardholders at MBNA can expect to pay the increases starting sometime in July, and existing MBNA cardholders will get notices this September and will be expected to step up payments soon after. Additionally, later this year, JPMorgan Chase plans to test drive the increase on close to 100 million credit cards -- which they call a "small portion" of their customer base.

Mellody's Math: Why Paying More Than the Minimum Is Better

The financial return for paying more than the minimum on your credit card balance is "priceless." Take a look at the math.

If you have the accumulated $9,205 on your credit card -- the average debt for cardholders according to Cardweb.com -- it would take you more than 27 years to pay off your debt if you just paid the minimum. Additionally, you would pay more than $10,230 in interest.

But, if you paid roughly double your minimum (around $400) every month, it would take you a little over two years and cost you only $1,863 in interest -- a savings of 25 years and more than $8,300!

Sen. Chris Dodd, D-Conn., has introduced a bill in the Senate that would require credit card companies to clearly state how long it would take a customer to pay off their debt if they only pay their minimum every month.

The Down Side

Nevertheless, many people will no doubt feel squeezed by the monthly increase they will need to pay each month to avoid additional fees. Unfortunately, the average American has about $9,205 in credit card debt, so the expected 2 percent increase in the minimum payment equates to roughly $400. That is a significant additional expense each month many people were not counting on. For consumers just scraping by, this further belt-tightening will be difficult. And unfortunately, it comes at a time when outrageous gas prices and rising inflation are already taking a toll.

Other Changes That Could Benefit Consumers

Helping to weed through disclosure

The OCC is also trying to improve credit card issuers' communications and marketing materials, beyond the fine print. The OCC has encouraged banks to disclose "fully and prominently" in promotional materials when a cardholder's APR would increase. Additionally, the OCC has pushed for language that clearly articulates how a bank has the right to change the APR, fees or other credit terms unilaterally. Both of these enhancements will be very helpful for consumers.

Getting interest rates under control

It is no mystery: APRs can and do skyrocket. The average APR is 16 percent and this rate can soar as high as 30 percent to 40 percent should you make a late payment. On top of this, consumers can get hit with late fees ranging from $25 to $50 and over-the-limit fees ranging from $25 to $39.

So under current credit card structures, financially strapped consumers making minimum payments each month are not able to get out from under the layer of penalties and interest rates. The OCC is pressuring banks to reduce interest rates, which would be a huge victory for consumers.

What Can You Do Now?

Read the fine print. Your credit card agreement is one document you cannot afford to not read. All actions the credit card company is entitled to take with respect to your card will be spelled out in fine print. Pay special attention to wording around interest rates, late fees and payment dates. Additionally, if there are sections or clauses you do not understand, highlight them and call your credit card company before using the card and get clarification on what could be a very costly misunderstanding.

Pay highest balances and high interest rates first. If you have more than one credit card, pay off the card where you are closest to your credit limit. Your credit score takes a hit when credit card balances climb high and approach the maximum. Also, pay off the cards with the highest interest rates as every extra dollar can add up significantly.

Call your credit card company. The best way to navigate the fee maze and negotiate the best rate and fairest payment terms is by calling your credit card company directly. For example, if you have good credit and a track record of paying on time and you miss one payment for any reason, a call to the card company can usually stave off any finance charges or an interest rate increase for a one-time occurrence.

Keep only one credit card. With so many credit card options, it is important to choose the card that best suits your finances. For example, if you know you are definitely going to carry a balance, select a card with a low interest rate, or if you may be tempted to spend beyond your means, go with a card with a low-set spending limit. Additionally, keeping only one card makes it much easier to keep track of the rules and allows you to avoid the paper chase of multiple cards.