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Credit card minimums not doubling, but might still hurt
Executives at Debt Shield, Inc., a Maryland-based debt
settlement firm, said that the increased minimum monthly
payments on credit card balances will most likely not double, as
it is widely reported, but that the increase might push
financially struggling cardholders into bankruptcy or bankruptcy
alternatives, like debt settlement.
"While credit industry experts and the media claim that credit
card companies are doubling their minimum monthly payments from
2% of the outstanding balance to 4%, the actual minimum payment
increase is more complicated and less drastic for most
cardholders," explains Mark Baylis, President of Debt Shield.
"The new rules require credit card banks to set their minimum
payments to cover all interest and fees plus 1% of the
outstanding balance, which will result in significant increases
for high-interest accounts."
Baylis said that a cardholder with $10,000 on a credit card at
18% Annual Percentage Rate (1.5% monthly) pays $200 under the 2%
minimum requirement. Out of that $200 payment, $150 (1.5%) goes
towards interest and only $50 (0.5%) goes towards the
outstanding balance. Under the new rule, the minimum payment
will increase so that the amount applied to the outstanding
balance in this example is at least $100 (1%), so the minimum
monthly payment must increase by $50 (0.5%) to $250 (2.5%).
The average APR is currently just under 14% (1.17% monthly),
but credit card companies increase the APR to 27% or higher if
the cardholder makes one late payment. This means that the
reality of the new rule will punish low- to medium-income
families struggling with credit card
debt more than high-income
families who are able to avoid paying late. Baylis said that
even a small increase can have drastic consequences for families
struggling to make the existing payments and manage inflation
combined with stagnating income.
The MMP on a credit card debt with the above-average 18% APR
will increase by $50 while the same $10,000 debt with a 27%
penalty APR will increase by $75. Also, the 27% APR charges $75
more in monthly interest than the 18% APR. Baylis said that this
clearly demonstrates the financially destructive power of high
interest rates.
"The increased minimums will be good in the long term because
it should encourage less debt," Baylis continued. "But if the
credit card companies want to help consumers, they need to stop
punishing cardholders with outrageously high interest rates."
About Debt Shield, Inc.
Debt Shield, Inc., is a debt settlement company dedicated to
helping consumers resolve their unsecured debt through mutually
agreeable and discounted lump sum settlements in consideration
of legitimate financial hardships. By helping consumers avoid
bankruptcy, Debt Shield provides a service for both debtors and
creditors. For more information about Debt Shield, call
1-888-397-7546 or visit the website at www.debtshield.com.
About the author:
John Janney is president of the National Financial Awareness
Network, Inc., a financial literacy company based in Columbia,
Maryland, that offers educational products and services to debt
relief agencies, their clients and the general public.