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05/02/2005 Archived Entry: "Warning on Credit Cards"

I received the following "heads-up" from Frugal Life News aimed at everyone who owes money on their credit cards...

A Storm Is Coming...What would you do if your REQUIRED minimum monthly payments on each of your credit cards DOUBLED... without your charging a cent more? For example, suppose you owe $10,000 on a card and your required minimum payment is 2% of your balance or $200. What would you do if your required minimum payment ballooned to $400? Reduce retirement savings? Increase the debt on your home? Decrease your standard of living? Panic?

Twelve months from now this will be a desperate reality for thousands of credit card holders making minimum payments. According to Business Week, April 25 edition, a rule change by the Office of the Comptroller of the Currency, first introduced in January of 2003 is now being strictly enforced, requiring credit-card companies to increase required minimum monthly payments over the next 12 months. Today, typical required minimum monthly payments are 2% of the balance. Some credit-card companies require as little as 1% of the balance. In 12 months, typical required minimum monthly payments will double to 4% of the balance!

This rule change is an attempt to eliminate Black Holes, also called negative amortization, where payments don't cover at least the interest due. It's also an attempt to assure at least some of the principal is paid with each minimum credit card payment. Although well intentioned, a noose is tightening...

The only guaranteed way to avoid this disaster is to start today with a systematic plan to pay off all debt, but especially your credit card debt, as fast as possible. Even paying off 1 or 2 cards will create some cushion to absorb increases 12 months from now. The first warning shot was fired back in January 2003. You have a 12-month window of opportunity. Take it.