In the new year, credit card companies are demanding new higher minimum payments. If you are wondering how to deal with such a change, personal finance adviser Ray Martin has some good advice and he's dropped by The Saturday Early Show to share it.
Why are credit card companies raising their minimum payments?
This increase in the minimum payments comes as a result of guidelines recently issued to the credit card companies by federal banking regulators.
In the past, credit card companies required customers to pay an average of just 2 percent of their total credit card balance, which meant constant debt for many consumers. The 2 percent minimum payment only covered interest and other fees, so it could often take a lifetime to pay off the principal balance.
The new guidelines state that monthly minimums should cover interest, any fees or extra charges and at least 1 percent of the principal amount. So essentially, we're seeing a jump from a minimum payment of 2 percent of the total balance to 4 percent.
Believe it or not, these guidelines are meant to help the consumer get out of debt faster. But it may not seem that way, since you're going to have to dig deeper into your pocket to make the minimum payment each month.
How different will the minimum payments be from what people are paying now?
It really depends on how much you owe. The higher your balance, the more you will be required to pay each month. For those of us with relatively low balances, or if you're the type of person who pays your debts in full each month, don't expect these guidelines to affect you. But if you've got a high balance and are used to paying the minimum each month, this could sting a bit.
Let's say your balance is $10,000 (not far off the average balance of $9,300) and your interest rate is 13 percent.
If your minimum payment is 2 percent of the total balance, minimum payment is $200 a month. At that rate, you would pay off the debt in 33 years and total interest paid would be $11,450.
If your minimum payment doubles to 4 percent of the total balance, minimum payment is $400 a month. At that rate, you would pay off the debt in about 13 years and total interest paid would be $3,664. The end result is that you would pay off your debt 20 years earlier, and save more than $7,700 in interest.
Do you think this is going to be a big deal for a lot of consumers?
It really depends on how much you shell out to your card companies each month. A majority of credit card holders (about 75 percent or so) pay more than the minimum. But for the 13 percent of those who make just the minimum payment each year, this can really be a problem.
Even if you usually make more than the minimum payment, this could still be a problem. Why?
The minimum you have to pay now is higher. So even if you're used to paying more than the minimum, you may rely on that low minimum payment a couple months of out of the year, especially, say, during the winter so you can put more toward your heating bill. But now you can't fall back to the minimum payment because it will no longer be much of a minimal amount to pay. And that will sting.
Tips For People Who Will Be Affected