is a nation addicted to credit cards. With nearly 1.5 billion
cards in circulation, there is good reason to believe that its
one facet of our daily existence that encompasses most Americans.
Credit card payments as the name suggests is a piece of plastic
that allows the holder a credit limit. Its like an unsecured
loan. This loan like any other loan has to be repaid back. However
the good news is that this loan need not be paid back in one
lump sum, but the outstanding can be revolved i.e. carried forward
to the next month. In other words you can carry forward the
balance by paying finance and interest charges.
Credit card companies
to encourage greater spend on your card and also to earn more
do not insist on 100% payments. They only stipulate a fraction
of the amount for payment at the end of a month.
For this purpose Credit card
payments companies generate a bill every month. This lists
all your purchases and also the total outstanding on your card.
Many of the companies stipulate a minimum payment of 2 % of
the outstanding amount. This looks nice but the result over
a long period can be catastrophic. You need only to pay the
minimum amount due for you to remain credit worthy. But a payment
of just 2% of the outstanding will allow your debt to linger
for many decades and you can end up paying more in interest
charges than the amount you borrowed. But there is a change
for the better. Credit card companies are doubling their minimum
payments from 2% to 4%.
This is also bad news
for some as the fact that Credit card companies are doubling
their minimum payments means that you will have to fork out
larger payments every month. In case you have multiple cards
the effect on your finances would certainly need streamlining.
So far, MBNA, Citibank
and Bank of America have announced they are doubling minimum
monthly payments on credit card balances from 2% to 4%. There
is a good chance that soon others will follow suit.
If you can handle the
increased payment it's good. Let's face a home truth; if you
pay only a 2% minimum each month, your debt would probably last
a long time. Doubling your minimum can put you back on the financial
path to good health. The increase in minimum payments has been
designed to help consumers get rid of their debt faster.
But if you simply can't
afford to make the doubled minimum every month , it could put
you and many other debtors in a great deal of trouble.
Over the past few years, low minimum payback rates of between
2 and 2.5% have encouraged Americans to spend more and more
on thier Credit card payments.
The result is that an average credit card debt has risen to
nearly $10,000 per household. Its a fact that nearly 40% of
cardholders who carry a balance from month to month, the low
minimum payment does give them some more free cash. However
in case you have a spend of $ 1000 on your credit card and pay
only the minimum amount due, then this debt would need a 22
year period to be liquidated. Thats a sobering thought. You
will also end up paying thousands more in interest charges.
With the massive credit
card debt spiraling upwards the Government has nudged the credit
card companies to increase the minimum payment due upwards.
Regulators with the Office of the Comptroller of the Currency
have specifically started pressuring credit card companies to
raise the minimum payments due on the outstanding. Another reason
for raising the minimum payments is the newly enacted Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005. This act
is extremely consumer friendly and requires credit card companies
to post a warning on the monthly statements that must notify
consumers about how long they'll be in debt if they make only
the minimum payments. Its like a warning by the Surgeon General
on a pack of cigarettes.
It must be understood
that increased minimum payments is not a magic wand for all
consumer debt, but it will certainly be help. There is no doubt
that if you pay more per month, you'll get out of debt quicker
and you'll pay less interest. Mike Peterson, vice president
and co-founder of American Credit Foundation, in Midvale, Utah
is a strong supporter of this increase in minimum payment due.
An example will show
the effect of buying an item for e $2,000 and charge it to your
card with an 18% interest rate. If you only make the minimum
payments due as stipulated and do not add to your outstanding
balance, than it'll still take you about 30 years to pay off
the entire debt. By making 4% minimum payments on the same debt,
the entire payment would be over in 10 years, and your interest
payments will also be much less. So one can see which side the
bread is buttered.
Increased minimums may also cut debt by forcing buyers who think
in terms of monthly installments to re-evaluate their purchase.
The new minimums will effectively double the monthly price of
a purchase, turning a $50-a-month payment for a new Divan into
a $100-a-month one. So a buyer will certainly have a rethink
and may go in for a cheaper option and thus incur less debt.As
with all new schemes there is also a negative effect. In case
your finances are already at a breaking point, the rate hike
is a bitter medicine to swallow for the present, though good
as a cure in the long run. There is thus a chance that you could
also default in your payments. The banks are already aware of
this consequence and have planned accordingly. Bank of America,
one of the first to raise minimum payment requirements, had
catered an extra $130 million into its 2005 budget to cover
projected losses from defaulting cardholders.But defaulting
on your new payments isn't your only option. The best options
in that case Credit card payments
is to a call your credit card company and try to either negotiate
a reasonable payment arrangement or reduce your interest rate.
Otherwise, missing a payment can quickly have collection agencies
at your door. At that point you will be alone with no one to
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