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:
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 balancesin 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
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
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
In the long run, however, it should enable more consumers
who do carry credit card balancesto pay them off quicker
and therefore pay less interest and other fees.
About the ICFE:
The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation). The ICFE is dedicated to helping consumers of all ages to improve their spending, increase savings and use credit more wisely.
The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its education programs and Resources. It publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.
The ICFE became an official partner with the Department of Defense/Financial Readiness Campaign in June of 2004.The ICFE was an active partner in the California Student Debt Resource Awareness Project (CASDRAP) which resulted in a new web site: (studentdebthelp.org). CASDRAP disbanded in 2010, shortly after the web site project was completed. In 2011 the ICFE assumed the single sponsorship of the (studentdebthelp.org) web site and is now responsible for its content and operation.
The ICFE is also an on-line help for consumers who spend too much. ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.
Visit the ICFE's other web sites at: www.financial-education-icfe.org and studentdebthelp.org. Both sites helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G, a free eNews, and an online resource center for students, parents and educators, plus financial education learning tools and a book store.