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Your Credit Card Payment Is Rising
By: Joel Walsh, Mon Sep 4th, 2006
Summary: Did you know your minimum credit card payment is
rising? A new government program working to get Americans out of
credit card debt is pushing credit card issuers to raise minimum
monthly payments. Will you be able to make the higher monthly
payment? Here are some tips for getting by.
If you're an American, your minimum monthly credit card payment
may soon be doubling. If you're only paying the minimums now,
you'll have to be careful to adjust your budgeting to pay more.
Who's Raising Your Monthly Minimum Credit Card Payment?
Whose idea was it to increase credit card minimum monthly
payments? The Office of the Comptroller of the Currency, a
bureau of the U.S. Treasury Department that has become more and
more involved with reigning in the abuses of credit card
companies. Yes, this credit card minimum payment increase was
thought up by people trying to help you.
Who will be raising their monthly minimums? So far, some of the
largest credit card issuers have agreed to the new standards.
Bank of America has already been asking for the higher monthly
minimum payment. MBNA, Citigroup (a.k.a. Citbank), Discover, and
Chase (on some of its cards) will be breaking the news to their
cardholders as Fall 2005 progresses.
How Much Will Credit Card Minimums Increase?
For many credit cards, such as MBNA and Bank of America, the new
rates mean that monthly minimum payments will double.
Right now, the monthly minimum payment is only 2% of the balance
on most of these cards. The new rate will be around 4% (the
actual number may vary from card issuer to card issuer). This
means that if you have the average American credit card balance
of about $10,000, your minimum monthly payment will go from
$200/month to $400/month.
Of course, if you have any additional fees, whether a late fee
or a cash advance fee or any of the other fees that the credit
card guys cook up, you will have to pay that, too.
Why the Credit Card Minimum Payment Increase?
You may be wondering why anyone would want to make you pay a
higher minimum monthly payment. The basic reason for making you
pay more is: for your own good.
According to Mike Peterson, co-founder of American Credit
Foundation, by doubling the amount you pay per month toward
credit card debt, you will cut down on what you pay toward
interest by much more. Look:
Old monthly minimum payment of 2% of balance, $2,000 credit card
debt at 18% percent interest:
* Time to pay off debt in full: about 30 years. * Interest paid:
about $5,000–two and a half times what you initially borrowed!
New monthly minimum payment of 4% of balance, same debt:
* Time to pay off debt in full: about 10 years. Time saved vs.
old payment: 20 years. * Interest paid: about $1,100–slightly
more than half what you originally borrowed. Amount saved vs.
old payment: $3,900.
Tips for Paying Double Easily
How do you pay off your new, higher credit card balance?
Stop Charging
Yes, you will have to make major sacrifices to stop using your
credit card. But just look at all the money you'll have in ten
or thirty years that you wouldn't have if you had to pay all
that credit card interest. If you have trouble resisting the
temptation to charge, here are some solutions that have actually
worked:
* Give your credit cards to a friend or family member to hold in
safe keeping. * Freeze the cards in a block of ice. * Never
carry more than one credit card with you.
Economize on the Small Things
According to Michael Peterson of the American Credit Foundation,
even tiny savings really add up when it comes to debt. His
favorite example is the Diet Coke example:
* If you buy one Diet Coke a day at $1/day, that's $365/year.
* If you instead invested that one dollar a day at 10% interest
(the average yearly return on major stocks over the last half
century), you would be a millionaire within 56 years.
* Of course, with credit cards, this logic works in reverse: if
you are lucky enough to be paying only 10% interest, fifty years
of charging Diet Coke to your credit card will mean you've lost
the same amount, not only in interest paid, but in the lost
opportunity to save and invest.
* You don't have to put aside one dollar a day for fifty years
to see a big difference. One dollar a day is $30/month, 15% of
the average $200 increase in credit card minimum monthly
payments.
* In order to get that entire $200 increase out of your daily
budget, you would only have to save $200/30 or less than $7 a
day. OK, maybe you aren't drinking seven Diet Cokes a day. But
there are very few credit-card-holding Americans who can't cut
$7 a day out of their spending.
* Saving weekly rather than daily, $200/month works out to about
$45/week, or the cost of a restaurant meal for a small
family--another luxury you might want to skip until you're
debt-free.
Bigger Savings
* Taxes. Most Americans could pay hundreds of dollars less tax
each year if they just took all the deductions they were
eligible for upfront, rather than waiting to get a refund in
April. By April, you will have spent a big chunk of money on
interest on debt that you wouldn't have spent if you'd had the
money at hand.
* Pleading. Call the credit card companies and ask if they can
allow you to set up a payment plan, or at least provide a brief
extension. Simply calling and letting them know you haven't
forgotten about them can help keep you out of the worst trouble.
* Credit counseling. Credit counselors can talk with credit card
issuers to help you get a repayment plan you can keep up with.
They can also open your eyes to untapped sources of income you
never knew you had, like kicking the $1,000,000 Diet Coke habit.
In short, don't panic. With only a little bit of planning, you
can make the higher minimum monthly payment work to your
advantage, just as the policy's authors intended.
About the author:
Joel Walsh has written more articles on credit card debt
counseling: http://www.debtguru.com
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