Monday, June 24, 2024

Rising minimum payments

by Scott Bilker
Scott Bilker Scott Bilker is the founder of and author of the best-selling books, Talk Your Way Out of Credit Card DebtCredit Card and Debt Management, and How to be more Credit Card and Debt Smart. Receive the 5-Year Loan Spreadsheet when you subscribe to his email newsletter.

Hi Scott!

I have really enjoyed reading all your great info about credit card debt. However, all this talk about rising minimum payments from 2 percent to 4 percent has got me worried. I’d like to plan for additional purchases like a new car before winter, but I am unsure of my financial situation if my payments jump to 4 percent. I’ve called my banks for an answer, but they have only told me they are in the process of determining whom these changes will affect. How can I find out what the future holds for me so I can move forward in my financial planning? Thanks so much far any assistance with this one!


I’m so glad to hear that you enjoy reading my articles! Thanks for letting me know that!

This is certainly a hot topic. In fact, I was recently on CNN American Morning with Miles O’Brien, talking about this specific issue.

Yes, minimum payments are on the rise! There is one thing you can be sure of though, and that is the banks don’t want to do it. They don’t want to raise your minimum payment because that means you’ll pay off your debts more quickly and pay less interest. Additionally, you may not do as much spending because of the increased payments.

So why are banks raising the payments?

In 2003, the federal Office of the Comptroller of the Currency (part of the Treasury Department) issued guidance requiring banks to have monthly minimum payments cover interest, any fees incurred, and to pay down principal. But many banks are just now implementing the changes.

I’ve been receiving change-of-terms notices from my credit card banks regarding this change in minimum payment. Here are the details from MBNA: “The new minimum payment calculation focuses on paying a higher percentage of your balance. Generally, it will be 1 percent of the balance, plus finance charges, plus late fees, if any. It will never be more than 5 percent of the balance. We will also round the payment down to the nearest dollar.”

So let’s do the math on a simple example: Balance is $2,000 with an APR of 15 percent.

Minimum payment=1 percent of balance + finance charges + additional fees.

Finance charges are equal to 15 percent APR, which is 1.25 percent monthly (15 percent divided by 12 months).

That means the minimum payment is 2.25 percent of the balance, which is still pretty small. I remember some of my credit cards having a minimum payment policy of 1/33rd of the balance about 10 years ago. That’s more than 3 percent!

Of course, if there were late fees, overlimit fees, or other rip-off fees included in the payment, it would increase the minimum payment percentage.

Using the above guidelines, you would have to have an interest rate of 36 percent APR to have a minimum payment equal to 4 percent of your balance! Believe it or not, there are people whose rates are greater than 30 percent because of penalty rates.

Still, my feeling is that for most people, the minimum payment will still be relatively low. So, if your banks decide to increase your minimum, the worst case is that you will save money by paying your debts off more quickly.