The increase in minimum monthly payments for credit cards issued by major banks has both positives and negatives for consumers.
In an effort to help consumers get out of debt faster, regulators have pushed credit card issuers to increase their minimum monthly payments.
The change came in 2005, as major banks reacted to pressure from the Federal Reserve, Office of the Comptroller of the Currency (which regulates national banks), the Federal Deposit Insurance Corp., and the Office of Thrift Supervision.
The federal regulators did not issue hard-and-fast rules. Instead, they offered guidance, urging the issuers to set minimums that allowed consumers to pay off their credit card balances in a “reasonable” time. Issuers were free to set their own minimums, but many shifted to a “1 percent plus” policy. Those that embraced that standard set minimums so that each monthly payment covers 1 percent of the principal balance, plus interest and any fees.
New minimum payment downside
For consumers, one major downside to the higher minimum credit card payments is that they will have to come up with more cash every month to service their credit card debts.
Additionally, since lenders consider consumers’ existing monthly financial obligations when deciding whether to extend credit, there is the potential for higher minimum monthly credit card payments to impact some consumers’ abilities to secure loans.
Minimum payment boost: Good medicine?
But regulators and other supporters of the plan see it as a beneficial change for consumers. In the past, consumers who only made minimum payments on their credit card barely covered the interest, with hardly anything left over to apply to the actual credit card balance.
As a result, consumers who just make the minimum monthly payment will get out of debt faster while also paying significantly less interest over the years — which can amount to thousands of dollars in savings for many people.
With the knowledge that it can take years and thousands of dollars in interest to pay for a major credit card purchase, it is important to consider the true cost of every transaction.
For consumers who generally make the minimum monthly payment on their credit cards, they should find out which cards are costing them more than necessary. One strategy worth considering is using a balance transfer credit card to consolidate debt.
To see how changing your payments will affect how swiftly you pay off your credit card debt, please see the CreditCards.com credit card calculators.