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Credit Card Minimum Payments

By Gary Foreman
Dear Gary,
A couple of months ago I read an article about getting finances under control. According to the article, you can double the minimum monthly payment on a revolving charge and that account will be paid in full in 36 months regardless of the amount. How could that be possible? Especially considering how "minimum" most minimum monthly payments are.
Gail E.

Gail asks a very good question. How much would you need to increase your monthly credit card payments to pay off the debt? The average balance for people who hold at least one credit card is now over $9,000. So a lot of people should be asking the same question!

Let's take a look at the numbers. To allow for a common comparison we'll assume a $1,000 balance and an interest rate of 14%. We also assumed that nothing new was charged to the account and that the smallest payment allowed would be $10.

Most credit card companies require a minimum monthly payment of 2%. That's what they feel earns them the most money. Remember that their goal is to keep you in debt for your entire life.

If Gail were carrying our pretend $1,000 balance and made the minimum 2% payment each month, she'd be making payments for 156 months or 13 years! She'd pay a total of $935 in interest.

Is it possible that she could shrink that to 36 months by doubling the minimum payment on her statement each month? Unfortunately, no. If she were to do that, it would still take 77 months or 6 1/2 years to pay it off. The same is true for different interest rates. Even the lowest of interest rates.

However, it is possible that the article meant doubling the minimum payment the first month and then continuing to pay the same dollar amount every month until the debt was paid off. Let's see how that works on our pretend $1,000 balance.

For instance, if Gail doubled the minimum monthly payment to 4% (or $40.47) and kept paying that same amount every month, she would in fact have it paid off after 30 months! Regardless of the size of the balance. A higher interest rate could add a few months, the but results are still dramatic. So the trick is to double the current minimum payment and then stay at that level until the bill has been paid off.

Soon most credit card users will be facing higher minimums anyway. In 2003 the Office of the Controller of the Currency told banks that minimum payments had to cover all fees, interest owed and pay down some portion of principal. For most credit card issuers that will mean raising the minimum to about 4% of the account balance each month.

The biggest credit card issuers have already started moving in that direction. And most are expected to follow. The resulting changes in minimum payments could have a major impact on some families.

For many people paying more than the 2% minimum doesn't seem possible. Their budget is based on that amount and there's nothing left of their paycheck after the minimums are paid. Unless these families can find a way to squeeze some savings out of other expenses they're heading for trouble.

In fact, the banks expect that some borrowers will not be able to pay the increased minimums. Some have already prepared by increasing the reserves that are used to pay for the write-offs that occur when people can't pay their bills.

What can you do if you're struggling just to meet the monthly minimums now? Begin by looking for expenses that can be cut which will free up more money for the monthly credit card bill.

If there's just not enough money to pay increased monthly minimums, contact your credit card company. They would rather work out an affordable payment plan than have you declare bankruptcy.

Increased minimums are not all bad news for consumers. This could be a good opportunity for borrowers to take control of their finances. Especially those who think that just paying the minimum is an acceptable way to manage credit.

We can already see that budgeting for the monthly minimum puts borrowers at the mercy of the lender. Any increase in interest rate or minimum will cause them trouble. In effect, the amount of their monthly payment is out of their control.

And, as evidenced by Gail's question, paying more than the minimum does allow for credit card balances to be eliminated. When you don't carry a balance you effectively pay less for everything that you buy. It's like buying everything on sale.

Hopefully Gail will be able to adjust her budget and double the minimum payment until her balance is gone.

Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar website and newsletters. If you're short of time or money you'll want to check out the hundreds of articles available.  

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