Credit Card Minimum Payments

Oct 12, 2009

Has the minimum payment on your credit card suddenly jumped to an unmanageable figure? If so, you’re not alone.

This is the latest in the risk-avoidance tactics being used by credit card companies. Along with other methods to get their money back faster, they’re using both interest rate increases and minimum payment increases to reduce their own risk.

A jump in monthly minimum occurs naturally when your interest rate is increased – and many consumers have seen that happen over the past few months.

If you owe $5,000 at 5.99% you need to pay a percentage of your balance plus the interest each month. That balance percentage has been at about 2% for some time. Under your old terms, you’d have paid $100 toward the principal and $24.96 for interest – for a minimum payment of $125 per month.

When your interest suddenly jumps to 18.99% that interest jumps to $79.13 so your new payment is $180.

You don’t like it, but you can probably manage it. But the new tactic credit card companies are using is to simply increase your minimum monthly percentage of the balance. Where you were expected to pay 2% plus interest, you’re now required to pay 5% plus interest. That means instead of $100 you’ll be paying $250 per month against your principal balance.

Now, even if your interest rate stayed at 5.99% your new payment is $275 per month. For many consumers, especially those hit by the massive layoffs of recent months, that figure could be more than they can handle.

It appears that people who have been targeted for the minimum payment increase are those who carry debt under low fixed rate terms. In other words, the credit card issuer promised that there would be no increase in interest rate for the life of the balance.

Most consumers want to maintain a high credit score and want to pay their debts. Some are struggling to do so in the face of reduced income and higher prices on life’s necessities.

Instead, the profit-generating, risk-avoidance measures being taken by the credit card companies are forcing many of them to give up. Some take bankruptcy and some simply quit paying.

Either way, as a direct result of their actions, the credit card companies take the losses that their measures were designed to prevent. It doesn’t make much sense, and one is tempted to call and ask “What were you thinking?”

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