Do you remember back when minimum payments were about 5% of your total credit card debt? Consumers were screaming for relief from high debt payments, and relief from debt payments is what we got…
Since that time, the minimum level for our monthly payments decreased to about 2%, and in some cases, even lower. At the time, many perceived it to be a good thing. Suddenly our budgets loosened up and it seems we have more money each month! What we didnt realize was the long-term affect this would have on our financial situation.
Creditors know many Americans will only pay the amount required. By reducing the minimum amount due, you are paying less toward your balance and still paying the same amount to interest! By doing this, it will take longer to pay off the balance and, in turn, you will pay much more in interest!While this went on for a couple decades, things are starting to change back. A few of the major credit card companies are increasing their minimum payments from the current average of 2% to about 4%. So far, Bank of America, Citigroup, MBNA, and Discover are among some of the names that have already made this change. There will be more to follow suit.
Why is it happening?
Over this period of time where the minimum payments were so low, Americans were encouraged to spend more and pay less or so it would seem. With payments so low, most of your payment only covers the interest rate. There is little left to pay down the balance. That means it will take you MUCH longer to pay off the balance and you will pay MUCH more in interest!Americans have been stuck in this endless debt cycle for years now, with no hope for escape. Regulators with the Office of the Comptroller of the Currency (OCC) began pressuring credit card companies to raise minimum payments. Part of all this is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This requires creditors to place a notice on monthly statements warning debtors of the length of time it would take to pay off a debt by simply paying the minimum due.
So what does this mean?
Well, there is good news and there is bad news.
In hopes to leave on a good note, let’s start with the bad news.
If you are one of the 110 million Americans who pay off their credit cards each month or pay over the minimum payment each month, you may find the bad news isn’t really that bad. However, if you are one of the 45 million Americans today that carry a balance from month to month, you may be in for a surprise! If this is you, you understand there is little room in your budget for a payment increase. Many people use their credit cards only as much as they can while still managing the minimum payment.
The average American household carries about $10,000 in credit card debt. That means you have allowed yourself about $200 a month to pay to your credit cards. With this increase, your new payment will be closer to $400! While that may not seem like a lot to some people, that extra $200 may mean the difference between chicken and Top Ramen for dinner!Let’s look at the bigger scale. The average client in debt management programs carries about $32,000 of debt. They were struggling to make an average payment of about $640. Imagine the problems with those who see their payments increase to over $1,200!This, accompanied with the new bankruptcy laws which make it harder for Americans to file a chapter 7 bankruptcy, can spell trouble for many.
The Good News
The good news is most creditors will be slowly making this increase. This will give many Americans the time they need to adjust to the increasing payments. Even more good news is that Americans will actually be saving MORE money!Let’s say you have a $5,000 balance on one card with a 17% interest rate. Suppose the minimum payment is then increased from 1.67% to 3%. Now, at 3%, you will only pay about $4,000 over 18 years. Had the payment NOT increased, you would be paying on that same debt for over 80 years and paying more than $25,000 of interest!The change is for the benefit of the consumer. Over these past years of low minimum payments, creditor profits has skyrocketed! This new plan is actually going to keep some of that money in your pockets.
This will also keep Americans from over spending so much. With the payments increased, many will not be able to afford to make a payment on the new wide screen T.V. they can’t really afford. It will mean less household debt and higher overall savings!However, for many, it may take time before they realize these benefits. There will be a period of transition many Americans will have to prepare for. Though the other side may be greener, that fence in the way may not be so easy to climb.
What about in the meantime?
If you have been carrying a big credit card balance from month to month and you suddenly need an extra couple hundred bucks, you are going to need to take another look at your finances. Or if think you will need to come up with some extra cash soon, now is a great time to start. Here are some tips on what can help squeeze out a little extra cash:
* First off, if you dont already, track your spending. This is crucial no matter what. Americans spend about 10% more than they make, on average. Tracking where you money goes can give you some great insight as to where you can cut back.
* Along with tracking your spending, take careful note to where that little bit of money is going every day. Cutting back on the little expenses on a daily basis can add up quickly. Making your coffee at home instead of buying that $5 latte every morning can save you over $100 a month. Or try bringing your lunch from home rather than spending $5-$10 a day or more on it. Even the midday soda you buy without even realizing it can make a difference. The small changes in your life can make the biggest difference.
* Fight the urge to buy on credit. Now more than ever, each charge you make on your credit cards will simply add fuel to the fire. A good idea is to remove them from your wallet or purse completely. Sure, you may need to keep one around for emergencies but hide the rest! Dont make them so accessible!
* Call your creditors. It doesnt hurt to give them a call. Find out what their intentions are and if they plan to increase the payments. If so, when? Get the details. Believe it or not, they can help.
* Adjust your withholdings. Sure, many of us like to use that as an out of sight, out of mind type of savings account. But if you are in need, it can be a good resource for some additional monthly income.
* Educate yourself! Learn how credit works, and how each option to get out of debt will affect you; your credit, payments, total cost, time frame and savings, plus the additional positives and negatives that come with each options.
* Make your BEST CHOICE and DO IT; Get out of debt!
Minimum payment increases may be more than inconvenient to many Americans, to say the least, but in the end, it will be beneficial to the economy and consumers. Get a head start, if you still can, or get help if you’re struggling. Get your financial situation in order today and escape the credit card trap.
Cheers to living a happy and debt-free life!
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