The Finch Formerly Known As Gold

19 September 2005

Not to mention toil and trouble

In years gone by, if you ran up late fees on your credit cards, it might actually be impossible ever to pay off a balance if you stuck to the minimum required payment, which is one reason why the Feds this year leaned on big banks to increase the minimum monthly payments on credit-card debt. It was widely reported that the minimums would in fact double, from the common industry practice of 2 percent of the balance, to a full 4 percent. This is not necessarily true, although they will certainly increase a bit; the goal is to get these things paid off within seven to ten years even at the minimum-payment level.

I have now seen the first of the new formulas, from one of the bigger banks, and it's interesting. The new minimum payment, starting December 2005, will be 1 percent of the balance, plus any finance charges incurred during the month, plus any late fees, rounded down to the nearest dollar. The example they gave: a balance of $3500 would produce a payment of $35 (1 percent) plus $49.55 (finance charges at some unspecified interest rate), or $84 when rounded down. If there are any late fees, they go on top. Under this bank's old system, the minimum payment would have been $64. (There is a minimum of $15 regardless, and a cap of 5 percent of the balance.)

The timing of this, of course, is perfect, what with the new rules for bankruptcy kicking in.

Posted at 6:03 PM to Common Cents

Some of them already do. Even though the payment is kinda high it is nice to see a decrease in the balance for a change. I have another card with a similar balance and it's minimum payment is a lot less. It also never seems to go down either :(

Posted by: ms7168 at 11:48 AM on 20 September 2005

I checked half a dozen card issuers. Five of them haven't yet announced their new schedule. Three of them currently set the minimum at 2 percent of balance; the other two, at 2½ percent.

I rather suspect a lot of them will come up with formulas similar to the one in this example, since (1) banks tend to follow rather than lead and (2) it meets the letter of the law without making a huge dent in the amount of interest they will ultimately collect from cardholders.

Posted by: CGHill at 2:23 PM on 20 September 2005