Higher Minimum Payments Squeeze Consumers

Credit card companies make most of their money from interest. That being said, it only makes sense that they allow you to carry considerable balances from month to month. The higher your balance, the more interest they stand to make. As a result, many minimum payments were barely enough to cover the monthly finance charges. Some store cards required minimum payments so low that the balance actually increased, even if they made no additional charges (negative amortization).

In 2003, an order was given to credit card issuers to change the way they were calculating minimum payments. Creditors had to be in compliance by the end of 2005, although many phased these changes in during previous months. The bottom line is that federal regulators require that minimum payments are set so that the consumer can pay off the balance in a "reasonable" period of time. For many people just making minimum payments, this increase in minimum payments could allow them to pay their accounts off in half the time. Still, that could take many years, depending on their balance.

For many Americans, this will be a much needed policy to keep them from paying on a debt forever. For others, this will be the straw that breaks the camel's back. Some minimum payments could potentially double. For families living at the brink of insolvency, this will surely push them over the edge. Should they decide to seek bankruptcy protection, they will have to contend with the new bankruptcy law.

Tough love policy

Many consumers are fuming over the changes. Indeed, for a family already struggling to make minimum payments, this has come at a bad time. Still, most experts agree that this was a long overdue change that will benefit most consumers in the long run, especially those that have yet to run up balances.

For those who have high balances, many could see their minimum payments go from 2% to 4% almost overnight. On a $10,000 balance, this would mean a change from a $200 minimum payment to a $400 monthly minimum. Combine this with other cost of living increases including higher transportation costs and many families will not be able to get by without a boost in income. Families that cannot make the higher minimum payments should consider credit counseling. These agencies can frequently reduce the interest and the minimum payments, allowing the debt to be repaid in full within 3 to 5 years.

Some families may be able to use a home equity line to repay the debt and avoid minimum payment increases. This is an option for some homeowners that still have decent credit. This option should be used cautiously, because it calls for securing an unsecured debt with a family's most important asset. For many consumers already dealing with high debt and possibly a late payment or more, debt consolidation may come at a substantial cost. The one certainty is that higher minimum payments will put a sting in many budgets over the next few years.

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