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Did your credit card minimum payment increase?

Regulatory guidelines on credit card minimum payments were made three years ago. Read on to find out how this will affect your credit card bill.

Most of the top 10 credit card issuers have raised their minimum payments the last quarter of 2005. The result is that your payments have increased even if you have not added to the card.

The higher minimum credit card payments are the result of guidelines issued in January 2003 by the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Card issuers were to adopt higher minimums by the end of 2005, sooner if feasible.

The federal agencies said they were acting after years of seeing credit card issuers lower minimum payments because of “competitive pressures and a desire to preserve outstanding balances.” The agencies also expressed alarm that some banks were setting minimum credit card payments at levels that didn’t even cover interest. The result: The debt loads for some consumers increased dramatically

Before the guidelines were issued, many banks required only 2% of the outstanding balance be paid each month. Therefore, someone with $10,000 of debt at an 18% interest rate would take nearly 58 years to pay it off. That is with the assumption that the person makes the minimum payment each month. The total interest paid during that time would be $28,931.

Now, the same person paying 4% of outstanding balance each month would pay off the debt in a more reasonable 15 years and would pay much less in interest: $5,916.

Regulators didn’t require minimum payments to rise by a fixed amount. But they said payments should cover fees and finance charges, plus 1% of principal. Until now, some minimums didn’t even cover the interest owed, so debt would just keep growing.

In the long run, the change is healthy for consumers: It means they’ll pay off their credit cards more quickly. But at least at first, the higher payments could create financial hardship.

For some consumers this increase could cause them to declare bankruptcy. Yet it may not be feasible for some to declare bankruptcy since the stricter bankruptcy laws have been put into effect.

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