Monthly credit card statements offer the opportunity to make minimum monthly payments. It sounds good, but this is a costly trap. It would take many years to pay off the current debt and adds significant interest charges. In the past, minimum payments were typically 2% of the balance.
Today, many credit cards have raised these minimum payments up to 4%. The new guidelines suggest the payments should cover interest and fees plus 1% of the principle. The change is result of pressure from the Office of the Comptroller of Currency which advocates for consumer protection from abusive and deceptive credit card practices. This call to credit card companies to raise the minimum payment is a step towards helping consumers get out of burdensome debt.
The increase of the minimum monthly payment certainly lowers the overall interest cost and allows the debt to be paid much sooner. Using the on-line payment calculator at www.bankrate.com , consider the difference between paying 2% vs 4% minimum monthly payments on $6,000 at 18% interest. The 2% monthly minimum payment is $120. It will take 589 months (49 years) to be rid of the debt. In that time, $16,931.58 is paid in interest alone. If $240.00 were to be devoted to the debt every month, it would be paid off in 32 months, and would cost only $1,576.76 in interest.
According to the Federal Reserve, the carrying of credit card balances is widespread, but notably lower among the highest and lowest income groups, the highest wealth group, and families headed by persons aged 65 or older or are retired. From 2001 to 2004, the proportion of families carrying a balance rose 1.8 percentage points, to 46.2 percent. Overall, the median balance being carried (middle of the survey group) rose 10 percent to $2,200. The mean average, however, rose 15.9 percent to $5,100. Many families with credit cards do not carry balances. Of the 74.9 percent of families with credit cards in 2004, only 58 percent had a balance at the time of the survey interview.
According to financial advisors, there are several steps that may be taken to get out of credit card debt. Paying off several thousand dollars or more in credit card debt takes time, so discipline is a must:
1) If you have several cards, your first goal is to pay off the card with the highest interest rate.
2) Pay more money toward that credit card and slightly less toward the other cards, and eventually you can rip it up. Then you move onto the next card, and so on.
3) One proven way to pay more toward the most expensive card – and to get rid of it faster – is to make a separate payment every 14 days to the credit card company. Mark your calendar every 14 days and write that check or send your on-line payment that day. Making a payment every 14 days equals one extra month’s payment you’ve made at the end of the year. Work these payments around your statement cycle to avoid paying late fees.
The Federal Reserve has an on-line brochure on selecting a credit card at: http://www.federalreserve.gov/pubs/shop/default.htm .