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 If you're one of the millions of Americans with credit card debt, recent changes to the credit card minimum payment formulas mean you'll be paying more each month in an effort to drive down outstanding balances. The change comes as a result of a 2003 suggestion from the Office of the Comptroller, which asked banks to match the new standard by December 2005.
In this article we're going to discuss some of the background information leading up to this change in minimum payment requirements. We're also going to discuss the potential impacts of this change on consumers as well as ways to deal with the change. Finally, we're going to provide you with some information on where you go to perform this minimum payment calculation to see how it might affect you.
Minimum Payments on Credit Cards
Many consumers feel quite comfortable making the minimum credit card payments as suggested by their credit card companies. While these individuals may have felt safe and secure making these minimum payments, the fact is the old formula did very little to drive down outstanding balances.
Consumer advocates like the idea of higher minimum monthly payments to help families pay down their credit card debt. However, these same consumer advocates have been critical of the credit card industry for waiting so long before making the formula change, since the deadline and guidance were offered in early 2003.
Minimum Payment Formula
While it has been widely reported that the new minimum credit card payments would jump from 2% to 4% of outstanding balances, the new formula's not quite that simple. Most credit card companies had already adopted a minimum payment formula suggested by the Office of the Comptroller back in 2003.
The new formula consists of interest charges, fees and the pay down of 1% of the outstanding credit card balance. The previous formula used by credit card companies consisted of interest expense and fees. So the difference between the old and the new formula is the required 1% credit card balance pay down.
Variations on the Minimum Payment Formula
Most of the major credit card companies adopted the guidance the OCC recommended back in 2003. This includes companies such as Bank of America, MBNA, Citibank and Wells Fargo. Other credit card issuers have chosen to adopt a variation of the OCC formula.
For example, J.P. Morgan Chase now uses a minimum payment formula that is the greater of the new standard formula, or 2% of the balance due. Capital One Financial Corp. has chosen to keep their old formula which is the greater of 3% of the outstanding balance, or $15.
Impact of the New Minimum Formula
While reports initially indicated these new minimum credit card payments would double a cardholder's existing monthly credit card payment, that's not true in every case. The Consumer Credit Counseling Service is just one firm that specializes in helping consumers deal with credit card debt. Typical clients are carrying credit card debt that's nearly twice the national average of $8,000. In their review of credit card statements, this debt counseling service found the average monthly payment increase to be in the area 10 - 15%.
And while an increase of 10 - 15% may be substantial for those living on the edge of bankruptcy, most consumers will hardly notice the change. According to a survey conducted by the American Bankers Association in 2005, 42% of consumers pay off their credit card balances in full each month. Another 33% claimed they always pay off more than the minimum payment due. That leaves roughly 25% of consumers directly impacted by the new formula.
Dealing with Monthly Credit Card Payments
While it may be true that the new credit card minimums may not be driving thousands of families to bankruptcy; they may make life a bit less enjoyable for some families. If you're struggling to make your monthly payments, here are some strategies you can adopt to help you pay down those credit card balances:
- Budgeting - Perhaps the single most effective and lasting strategy to deal with credit card payments is building a household budget that allows you to operate your home in a "profitable" manner. We've got a budget spreadsheet that can help you get started down the road to a balanced budget.
- Credit Counseling - If you're not good with spreadsheets or don't know how to get started building a budget, you might want to seek the services of a credit counselor. Be careful how you choose one because even nonprofit debt counselors might be interested in more than their fair share of your wallet.
- Debt Consolidation - With the change in the minimum payment formula, now's as good a time as any to consider debt consolidation. If you're going to be paying more each month, consolidating all that debt into one monthly payment may make more sense than ever before.
Calculating Minimum Credit Card Payments
If you're interested in seeing the potential impact of these various minimum payment formulas on your credit card balances, you can use our minimum credit card payment calculator to run through some scenarios. That calculator provides you with a side-by-side comparison of the two variations of this payment formula used by some of today's larger credit card issuing companies.
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