Don’t be surprised if the minimum payment on your credit card suddenly goes up.
Under pressure from federal regulators, credit card issuers are raising the minimum payments consumers must make on their monthly bills. In the long run, it’s good for consumers because it means they’ll pay down their balances faster, so they’ll pay less in interest. But in the short run, consumers already struggling to keep up with minimum payments on several cards could feel squeezed.
“It’s a little like a diet,” said Greg McBride, a financial analyst with Bankrate.com in North Palm Beach, Fla. “To get to that long-term benefit, you have to go through that short-term pain.”
The changes being phased in this year are the result of a directive issued by federal banking regulators, including the Treasury Department’s Office of the Comptroller of the Currency, in 2003.
Barbara Grunkemeyer, deputy comptroller for credit risk, said regulators were concerned that when the minimums were set too low, consumers’ payments were barely covering the interest and fees on the cards and not making a dent on the principal amount that was owed.
“It took the banks and other issuers a while to deal with minimum payments because there were such broad implications,” Grunkemeyer said.
Higher minimum payment requirements may make it harder for some consumers to pay their bills, she said. At the same time, financial institutions may have to raise their reserves against late payments and defaults, she added.
In recent years, the minimum payment required of consumers averaged about 2 percent of their outstanding card balances, or $200 a month on a $10,000 balance.
A consumer who paid just the minimum each month on a $10,000 balance on a card carrying a 13 percent interest rate would need nearly 33 years to clear the bill — at a cost of more than $11,450 in interest, according to Bankrate.com calculations.
If the minimum is raised to 4 percent, a consumer could clear that $10,000 balance in under 13 years, with interest totaling about $3,664, Bankrate.com said.
Consumers will have to check with their own credit card issuers to determine the new terms on their cards because banks and financial institutions are adopting a variety of formulas to comply with the federal guidelines.
Bank of America Corp. in Charlotte, N.C., for example, had a minimum payment of 2.2 percent on some of its cards. Last year, it raised the minimum payment to $10 plus all fees and interest.
“We’ll be making additional changes later this year that will result in the reduction in the length of customers’ repayment periods,” said Bank of America spokeswoman Betty Riess. She said the details still were being worked out.
At Citigroup Inc. in New York, the minimum payment has been set at all finance charges and fees plus 1 percent of the outstanding balance, according to Citigroup spokeswoman Elizabeth Fogarty . A similar formula is to be phased in at MBNA Corp. of Wilmington, Del., starting with new accounts in the third quarter and existing accounts in the fourth quarter.
The credit card issuers say a majority of their customers pay more than the minimum each month. Still, an analysis last year by CardWeb.com, an online publisher of information about payment cards, found that about one in four card holders was making only minimum payments some months.
Kerry Smith, an attorney specializing in consumer issues with the state Public Interest Research Groups, said raising the minimum payment requirements is a good step because card issuers “shouldn’t be engaging in practices that put consumers in a cycle of debt they’re never going to be able to get out of.”
Still, consumers with hefty balances may want to begin taking steps now to try to reduce the impact.
“You can shop around for cards with low, perhaps introductory, rates and transfer your balances,” Smith said. “But do watch out because sometimes there are transaction fees.”
Smith also advised consumers to call their credit card issuers and ask for a lower interest rate, which will reduce monthly finance charges.
Bankrate.com’s McBride suggested consumers try to reduce their balances before the new minimums take effect.
“First, you have to put those cards on ice,” he said. “You can’t add to those balances anymore.”
Then, shop for cards with a lower interest rate, he said.
“You could consolidate on a single card,” McBride said. “But reducing the rate on even one or two cards will make the minimum payments you’ll be making that much more productive.”