Rising Credit Card Minimums Could Make 2008 a Real Thriller

The good news for credit card borrowers is that if you make it through 2007, you'll probably start 2008 on better financial footing. "Tough Love for Debtors" was the fitting headline in a Business Week article detailing the looming rise in minimum payment requirements on credit card financing. The January 1, 2006, deadline has been upon us where a federal mandate kicks in raising the minimum allowable monthly payments from 2 percent to 4 percent.

When 2 percent is 100 percent
Two percent is no big deal, you say? Well, if your finance charges are currently $300 a month, they could double to $600. If you are only paying a 2% minimum, doubling that to 4% is a 100% increase! However, it is unlikely that your overall finance charges will double because many banks going back to 2004 have already started ratcheting up the minimum payment to avoid a shock to the system. So, if you do typically pay the minimum or close to the minimum each month on your credit card balances, you should probably budget more money to pay down your debt this year.

Figuring how much you'll pay
Keep in mind this change only affects those who only pay the minimum or slightly more. If you are whacking down your debt each month, just continue to do that. But, if we've got your attention and you want to know what you're in store for when your credit card statement arrives this month, simply do the math. Find a recent statement. If you have a balance of $10,000 and in December the minimum payment was only $200, you can expect that to double. Divide the minimum payment required by the total balance like this: $200 divided by $10,000 equals .02 or two percent. If you get something closer to .02 than .04, you should expect a big increase.

No easy way out
Not that bankruptcy was ever a desirable path, it became even less desirable with the change to the bankruptcy laws, which went into effect in October. And as has been widely publicized, interest rates are going up. So higher minimums could leave debtors caught between a rock and hard place. The overall lesson here is one that Debt Matters repeats again and again. Paying down your debt and socking away savings is the best way to build financial security. And what exactly is financial security? It's a buffer that you build to protect yourself from financial stress and discomfort. Only paying the minimum credit card payments makes one vulnerable to a changing environment like we are experiencing now. Building an emergency fund, paying more than the minimum payment and paying off credit cards are all smart steps to building that buffer.