Credit Card Catastrophe

From the comments section in the most recent post:

"Additionally, many cards will soon be charging 5% minimum payment instead of 2%, which is more than doubling what you would be paying per month -- some people just aren't going to be able to afford this, especially with the economic conditions going on now."

This is one of the smarter regulations put in by the government. It is not the credit card companies that want people to pay more, they realize when individuals only pay the minimum 2% balance on their cards now they are not touching the principal portion of their debt and will never be able to pay off their balance. So, they have a consumer right where they want them a lifelong slave to the credit card company. By increasing the minimum payment balance to 5 percent it is ensuring that individuals who should've never put themselves in financial crisis to begin with by using credit instead of actually spending money they had, will actually begin to put a dent in the financial mess they created for themselves.

Anon, your first statement is simply wrong. The government did not put this regulation in place, and for good reason. The credit card companies put that new rule in place, although some like Bank of America have recently come out to say they will not raise the minimum payment percentage. Yes, it forces people to pay more on their principle and in theory that would get them out of debt faster. And I would agree with you that much of the debt Americans have gotten themselves into shouldn't have been racked up in the first place. But you have your facts wrong, and I'm afraid you're not thinking about the actual financial implications of this decision.

The government actually ruled that credit card companies could NOT impose rate hikes on customers (who weren't in default), and that law kicks in February 2010. To make sure they could get more money out of people, the credit card companies decided to hike the minimum pay back percentage to 5% during the grace period before the new rule takes effect, because the new law says nothing about raising the minimum payments, only stipulating that cc companies give 45 days notice to customers before changes are made. The only way out of the situation is to call the cc company and "opt out" -- but that means you must close the card down and make no new charges, which ultimately hurts your FICO credit score, because it is partly a measure of how much credit you have access to. You reduce that amount when you close a card down, which is why it is better to pay it off and leave it open rather than close it. A damaged FICO score means you will have a harder time qualifying for a good credit deal on everything from insurance for your car to the percentage you have to pay on a bank loan.

Mandatorily raising the minimum repayment amount is not the bright idea you think it is. The average American household has about $8300 in credit card debt. At a 2.5% minimum payment, they are paying on average a little over $200/month as a minimum balance. They can always pay more, but they have to pay at least that much. With this increase, it means that the average household must now pay $415/month minimum, without choice. If they cannot pay this 100% increase in minimum payments, then they will be hit by penalties and automatically fall out of the protection of the federal rule that does not allow cc companies to jack interest rates to 32%. Once they have defaulted once on a payment, that 32% kicks in.

Now how hard will it be to get out of debt, with your minimum payment at $415, and the interest rate at 32%? Do the math for a typical American household on 32% interest for $8300, and you'll discover that raising the minimum payment to 5% won't help these people get out of debt -- once the twin problems of 32% and 5% minimum are in play. With the number of people having difficulty paying their debts, with all the unemployed folks out there, could there be a worse time to raise the minimum payment? This is a catastrophe waiting to happen. And this is just on the personal level -- think of the small businesses that use their credit cards as a line of credit for growth and development. Who, in fact, have been explicitly encouraged to think of their cards as a business line of credit by credit card commercials! Doubling their minimum payments hurts small business owners at a time when small businesses are being forced into bankruptcy right and left. It's a piss poor idea.

People who can get out of credit card debt and can pay more than the minimum payments often do. Once you are forced to pay that much more, you'll have to start digging the money out of some place else. Maybe it'll come out of the "right" spots. Maybe you'll eat out less or stop going to the spa. And those folks who live above their budgets are one thing, sure. But there are lots of Americans who are living within their means, and this move is going to drive some of them to default on their credit cards, which is going to drive up the interest rates on their other financial products like car insurance, mortgage loans, car financing, student loan payback percentages, etc. The market is all interconnected. We'll see the ripples from this shortly after it becomes permanent for a lot of people.

Personal note, my Bank of America card raised my APR by several unacceptable percentage points several months ago. I didn't have a lot on the card, I hadn't missed payments or made late payments. So I called to find out why I was being punished, and they couldn't give me a good answer. They said that they were having to raise rates on everybody in order to collect form the few people they couldn't get money from. I promptly closed the account, and told them they had permanently lost any future money from me, once the balance was paid off. If that's how they want to treat good customers, I don't want to do business with them. I wouldn't touch a Chase card with somebody else's wallet. That's why I'm sticking to my credit union credit card -- which has done absolutely none of the things that the giant banks (who took your tax dollars in the form of bailout money) are doing to people during one of the worst economic disasters in our history.

Screw them. Go to a credit union.

-- DV