Credit Card companies recently doubled their minimum payments from 2% to 4%. This is both a blessing and a curse for some people.
MBNA, Citibank and Bank of America have announced they are doubling minimum monthly payments on credit card balances, with the other companies soon to follow.
The good side: The doubled rates will only help you get out of debt faster and in the long run you'll end up losing less money to finance charges.
The bad:If you just can't make the payments, then a doubled rate is just going to cause your financial situation to worsen.
Low payback rates have caused americans to spend money that they don't have. The average american is in debt by about $10,000 per household. Almost half of all cardholders don't pay their total balance every month. For them the low payback rate allows for more liquidity in their financial situation. However, paying off slowly means that you could be paying back two to three times more than you owed to begin with, or even more.
This turns into a vicious cycle where people can never escape credit card debt. They get stuck.
The Office of the Comptroller of the Currency began pressuring credit card companies to raise minimum paymentsot try to get people out of this cycle. In addition, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires credit card companies to post a warning on monthly statements that notifies consumers about how long they'll be in debt if they make minimum payments.
Raising minimum payments isn't going to be the end all be all for credit card debt, but to the majority of people it will help.
The more you pay, the quicker you'll get out of debt, and the less you'll end up paying.
A $2,000 charge to your card with an 18% interest rate will take about 30 years to pay off and you'll end up paying about $7,000 back when all is said in done. By making double payments on the same debt, you'll finish up in 10 years, and you'll end up paying back about $3,100, less than half the amount in 1/3 the time!
Another way increased minimums can help debt is by forcing cardholders to manage their money better. Buyers will be more likely to purchase items they can only afford and be less likey to fall into debt at all. If you want to buy a flat screen TV, you'll now have to pay twice as much every month.
Of course, if your finances are tight to begin with, the rate hike is going to be very painful.
If you're living from paycheck to paycheck and your credit card payments go from $200/month to $400/month, you're going to have to find a way to make some extra cash, or cut back on spending.
Credit card companies will always prefer to be paid late, then not be paid at all. So if you don't think you can handle the new monthly rates, then you should call your credit card company to try to come to some sort of an agreement on monthly payments.
If you've been carrying a big credit card balance and suddenly need an extra $300 a month to make your minimum payments, it's probably a good time to take a look at your finances. Readjustments to spending might free up 10% of your income a month.
Here are some suggestions:
Make less small purchases. Not buying that coke, or that candy bar every once in a while can free up about 10% of your cash a month.
See a credit counselor.
Control your cards. Don't add more debt if you can help it. Lock away your cards if you have to.
