If you have taken a look at your credit card minimum payment due and thought it had increased, you aren’t going crazy! Due to pressure being placed on credit card companies by federal guidelines, most credit cards are being forced to increase the minimum payments they require from their cardholders.
Once upon a time, the majority of credit card companies required a minimum payment equal to 2% of the total credit card balance. This minimum was generally only enough to pay for interest and other fees associated with the card. As a result, it could literally take a person a lifetime to pay off a credit card when paying only the minimum due.
The Government Intervenes
In order to prevent having thousands of credit cardholders wading through a lifetime of credit card debt, the Federal government intervened in 2005. At the end of this year, they passed guidelines from credit card companies to boost the minimum payments they require. By bumping up these payments, credit cardholders should be able to pay off their debts in a reasonable amount of time – assuming they don’t keep adding more debt to the card, that is. Most banks responded to these guidelines by making minimum payments equivalent to paying the interest, any fees or charges for the month, and one percent of the principal.
The Impact on Cardholders
Although this minimum payment boost was designed to help consumers, many are having difficulty coping with it. After all, interest rates are rising and bankruptcy laws are becoming stricter. Increasing minimum payments, therefore, has simply placed more financial pressure on the seven percent of Americans who only pay the minimum each month.
In the long run, however, this simple change will go a long way in saving consumers’ money. For example, a credit card with an 18% APR with a balance of $12,000 would take 60 years to pay off and cost $39,931.25 to pay off if only the minimum payment were paid following the old system. With the one percent toward principal guideline, it will take 30 years to pay off the same debt at a cost of $17,683.59.
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