San Diego, CA - "Who can imagine paying on the same credit card debt for 58 years? Not me. That is how long a debtor would be paying on a credit card balance of $10,000, at 18 percent interest, if they were only to make the minimum payment of just two percent of the outstanding balance, which was the old minimum payment schedule for way too many years.
The nearly 58 years to pay this off, assuming that person stuck to the minimum payment each month, (according to Bankrate.com's credit card calculator, at BankRate.com). The total interest paid during that time would be about $28,931. Now, the same person paying 4% of outstanding balance each month would pay off the debt in a more reasonable 15 years and would pay much less in interest: $5,916.

Minimum payments on credit cards have increased, some two years after the January 2003 guidelines issued by the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Card issuers are supposed to adopt higher minimums by the end of 2005.

Still, "with a few exceptions, we expect the issuers to be in compliance by year's end," says Barbara Grunkemeyer of the Office of the Comptroller of the Currency, one of the agencies that issued the guidelines.

Regulators didn't require minimum payments to rise by a fixed amount. The guidelines said payments should cover fees and finance charges, plus 1% of principal. Until now, some minimums didn't even cover the interest owed, so debt would just keep growing.

The federal agencies said they were acting after years of seeing credit card issuers lower minimum payments because of "competitive pressures and a desire to preserve outstanding balances." The agencies also expressed alarm that some banks were setting minimum credit card payments at levels that didn't even cover interest. The result: The debt loads for some consumers surged.

Some card holders could see their minimum payment double, to 4% of the balance from 2%. On a $10,000 balance, the payment could jump to $400 from $200.

The changes affect the millions of credit card holders who do not pay their balances in full each month. A survey conducted by the American Bankers Association earlier in 2005 indicated that 43 percent of consumers carry balances each month. As energy prices soar, these unfortunate consumers will now have to pay double on their charge accounts.

When credit and charge cards first began to appear in the 1950s, the minimum payment was ten percent of the outstanding balance. Back then, cardholders had little difficulty paying off their credit card balances.

What happened? Over the years, as the availability and use of credit increased dramatically, banks and other credit card issuers, quietly began to lower their minimum payments for the credit cards they issued. This lowering of the minimum payments over the years kept cardholders in debt longer and caused them to pay more interest and also some new fees.

The big explosion in credit cards came in the 1990s when AT&T and General Motors, among numerous others, decided to get into the credit card business. Consumers were assaulted with numerous promotions and advertising all aimed at getting people, young and old alike, to acquire either their first or yet another charge card. It was not uncommon to have friends who carried as many as eight or ten different credit cards.

In the early part of 2003, the ICFE discovered and was the first to report on the so called Universal Default clauses which began to appear in new credit card offerings. Universal default simply means if a debtor is late making a payment to another creditor and it appears on the debtor's credit report, other card issuers and creditors who have included universal default into their credit card and other loan agreements, could also declare this particular debtor in default and access higher fees, raise the annual percentage rate to the higher rates, usually 29.99%.

As part of the universal default declaration, creditors may lower the credit limits and should the debtor be over the newer, lower credit limit, they will begin to receive over-limit notices and fees. This practice also occurs when a debtor makes a purchase, which may take them over their limit, the issuer approves the purchase and it results in the debtor being over their credit limit, and so therefore, it creates another over-limit notice and, of course, another fee.

The Comptroller of the Currency has not ruled that Universal Default is illegal, however they did warn banks and other credit card issuers under its regulatory powers who incorporate universal default into their credit card offers and agreements to properly notify consumers in writing and with a larger type size on the offers and agreements when discussing default and universal default.
In the short run, higher minimum credit card payments will put the squeeze on many households, no doubt causing more than a few to go into default status. The American Bankruptcy Institute expects more filings from low-income consumers who can't handle higher credit card payments. Yet it may not be feasible for some to declare bankruptcy because of the stricter bankruptcy rules that have taken effect.

In the long run, however, it should enable more consumers who do carry credit card balances to pay them off quicker and therefore pay less interest and other fees.
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