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Credit cards: Minimums on the rise
Issuers will raise monthly minimum payments to comply with guidance from regulators.
June 30, 2005: 12:05 PM EDT
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) Forty-three percent of us pay off our credit card balances in full every month. The rest of us don't.

So if you ever just pay the minimum due, take note: that minimum is likely to go up, if it hasn't already.

This summer, five of the top 10 card issuers Bank of America, Chase, Citibank, Discover and Providian have changes that will take effect in July and August, according to CardWeb.com. By early 2006, virtually all credit card issuers will have raised their minimums to a level that complies with guidance issued by banking regulators in 2003.

Before you start cussing, consider this: it's not a bad thing.

"In the long run, it's a good thing for the consumer," said Ken McEldowney, president of Consumer Action.

The reason is you'll have a better shot at paying off your balance.

In recent years, the typical minimum due has been about 2 percent of your outstanding balance. But if you just paid that, you'd have a hard time ever paying off your debt, particularly if you have a high interest rate and are hit with late fees or over-the-limit fees.

That's because a 2 percent minimum often isn't enough to pay off those interest charges and fees alone. So not only does your principal not get paid down, your balance actually grows after you make your payment.

Say you have a $10,000 balance with an annual interest rate of 30 percent. You'd owe 2.5 percent interest for the month (30 percent annual rate/12 months). That's $250.

But if the minimum due is only 2 percent, you'd owe just $200, which is not enough to cover the $250 in interest. The extra $50 would be added to your balance.

Welcome to the world of negative amortization.

It wasn't always that way. The average minimum payment used to be around 4 percent, which gave you a shot at chipping away at some of your principal balance, McEldowney said.

But that was before the advent of sky-high penalty rates and universal default policies, which let your card issuer hike your rate if your credit score goes down due to your relationship with another lender entirely. So if you're late paying another lender your card rate may go up.

What will the new minimums be?

In their 2003 guidance, the banking regulators said they expect "lenders to require minimum payments that will amortize the current balance over a reasonable period of time."

That means the minimum your card issuer charges has to be enough to pay off any charges and fees AND part of your principal every month.

Say you have that same $10,000 balance with an annual interest rate of 30 percent.

Your issuer would need to raise the minimum to cover the $250 in interest due plus some part of your principal. Say your issuer raised the minimum to 4 percent, you'd owe $400 -- $250 for interest and $150 toward your balance.

To find out when minimum payments on your accounts will be going up, check your mail and read your statements closely. Issuers must give cardholders at least 15 days' notice before changing the terms of their card agreements.

Even though paying a higher minimum may be painful in the near term, it will be a relief in the long run.

Say you have a $5,000 and an interest rate of 15 percent. If you just pay a 2 percent minimum, it will take you nearly 24 years and nearly $7,000 in interest to clear your balance. If the minimum is hiked to 4 percent, it will take you just over 9 years and $2,000 in interest to pay it off.

To see how increasing the minimum due on your credit card balance will affect your pay-down schedule, try out Debt Reduction Planner.  Top of page

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