Consumers already have to pay more for energy, and now they have to pay more for their minimum credit card payments as well.
The Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision all put out rules in January 2003 that caused the minimum credit card payments to go up. The Office of the Comptroller of the Currency, or OCC, is in charge of regulating national banks. The OCC is worried that many people will take decades to pay off their credit card debts. To stop this problem, these regulatory agencies suggested that credit card companies set reasonable terms for paying off balances by the end of 2005, such as a seven- to ten-year payback or amortisation period.
The higher minimum payments were supposed to be used by card issuers by the end of 2003. After years of credit card issuers lowering minimum payments because of "competitive pressures" and a desire to keep balances high, the federal agencies in charge of regulating credit cards took action. Federal Reserve data show that big banks always make more money from credit card lending than from other services. But these profits could go down if people pay off their debts faster or stop making payments, which could lead to debts being written off.
The agencies were worried that some banks were making the minimum payments on credit cards so low that they didn't even cover the interest. People thought that these were sneaky ways to lend money to people with low incomes or who didn't know much about money. As a result, it was no surprise that consumer debt went up. Consumers were pushed to take on debts they couldn't pay back, which led to a lot of defaults and bankruptcies.
Before the new government rules came out, many banks only needed 2% of the total balance to be paid off each month. Take the case of a credit card with a $10,000 balance and an 18% interest rate as an example. Bankrate.com's credit card calculator says that it would take almost 58 years to pay off this debt if the cardholder only made the minimum payment each month. During that time, the total amount of interest paid would be almost three times the amount of the original debt, or $28,931. Now, the same cardholder would pay off the debt in a more reasonable 15 years and only pay $5,916 in interest if they paid 4% of the balance each month.
In the past few years, banks have also raised the fees for cash advances, late payments, and going over your credit limit. This has made it easier for people to get deeper into debt. The latest changes are aimed at people who don't pay their credit card bills in full every month. In 2005, the American Bankers Association (ABA) did a survey that showed that 43 percent of cardholders have a balance.
Nearly three years after regulators said that cardholders should be able to pay off their debt in a "reasonable amount of time" with their minimum monthly payments, most banks finally did something about it. In 2005, most of the top 10 credit card companies raised their minimum payments, usually in the last quarter.
The government told banks that they should change their minimum payments by the end of 2005. Due to the banks' slow response to the new rules in January 2003, credit card bills were higher for people during the 2005 holiday season. Together, the increase and the new bankruptcy law have made it harder to get rid of debt through a Chapter 7 bankruptcy. More people can now file only under Chapter 13, which means they have to pay back their debts on a set schedule.
The banks say that the delay was caused by the time it took to update their systems to meet the regulators' demands. Alan Elias, who works as a spokesman for Washington Mutual, said, "These are not simple changes." Still, by the end of 2005, most banks were following the rules.
In spite of what some people said, regulators did not say that minimum payments had to go up by a certain amount. But they said that the payments should cover fees, interest, and 1% of the principal. Some cardholders' minimum payments are going up from 2 percent of the balance to 4 percent. The payment could go up from $200 to $400 on a $10,000 balance.
Long-term, the change is good for consumers because it makes them pay off their credit cards faster. Before now, some banks had minimum payments that didn't even cover the interest owed. This meant that debt would just keep growing, putting more people in debt. But at first, consumers who aren't ready for the higher payments, especially those with lower incomes, may have trouble making ends meet.
