In an effort to drive down outstanding credit card balances, the Office of the Comptroller asked banks to institute new standards when calculating minimum required credit card payments. While the change resulted in higher monthly minimums for some cardholders, it's helping to lower credit card debt too.
In this article, we're going to briefly discuss the background leading up to the change in minimum payment requirements instituted back in 2005. We're also going to talk about the potential impacts this change had on consumers, as well as ways to deal with these new minimums. Finally, we'll explain the new calculation, so everyone can see how it impacts the amount due each month.
Minimum Payments on Credit Cards
In August 2020, statistics published by the Federal Reserve indicate the average household in America carries $7,660 in credit card debt. Consumer advocates like the idea of higher minimum monthly payments, since they help families lower their credit card debt. These same advocates were very critical of the industry for waiting so long to make a change, since the deadline and guidance were offered in early 2003.
Minimum Payment Formula
While it was widely reported the new minimum payments would increase from 2% to 4% of outstanding card balances, the new formula's not quite that simple. Several card issuing companies had already adopted the minimum payment formula suggested by the Office of the Comptroller, or OCC, prior to the deadline.
The factors used in today's formula include interest charges, fees, and the pay down of 1% of the outstanding credit card balance. The previous formula consisted of interest expense and fees. The difference between the old value, and the formula used today, is the required 1% credit card balance pay down.
Variations
The card issuing entities that adopted the OCC guidance includes companies such as Bank of America, MBNA (acquired by Bank of America), Citibank and Wells Fargo. Other credit card issuers have chosen to adopt a variation of the OCC formula.
For example, JPMorgan Chase uses a minimum payment formula that is the greater of the new standard formula, or 2% of the balance due. Capital One Financial Corp. retained their old formula, which is the larger of 3% of the outstanding balance, or $15.
Impact of the New Formula
While initial reports indicate these new minimum payments would double a cardholder's existing monthly bill, that wasn't true in every case. The Consumer Credit Counseling Service is a firm that specializes in helping consumers deal with credit card debt. Typical clients are carrying credit card balances that are nearly twice the national average. In their review of monthly statements, this debt counseling service found the average required payment increase was around 10 to 15%.
While an increase of 10 to 15% may seem substantial for some individuals, most consumers hardly noticed the change. According to a survey conducted by the American Bankers Association back in 2005, 42% of consumers pay off their credit card balances in full each month. Another 33% claimed they always pay off more than the minimum payment due. That left roughly 25% of consumers directly impacted by the new formula.
Lowering Card Balances
While it may be true the new credit card minimums are not driving thousands of families into bankruptcy court, they will make life a bit less enjoyable for some families. Listed below are the tactics individuals can adopt to help lower their card balances:
Budgeting: perhaps the single most effective, and lasting, strategy to deal with credit card debt is building a household budget that allows families to operate their home in a "profitable" manner. This website has a budget spreadsheet that can help everyone get started down the road to a balanced budget.
Credit Counseling: individuals that are not good with spreadsheets, or don't know how to build a budget, might want to seek the services of a credit counselor.
Debt Consolidation: if the debt problem is across several cards, it might be time to consider debt consolidation. A larger loan should command a lower rate of interest when compared to credit cards, and one monthly payment can make managing the bills easier too.
Calculating Minimum Credit Card Payments
Anyone interested in seeing the impact of these various formulas can use our minimum credit card payment calculator to run through some scenarios. That calculator provides a side-by-side comparison of the two variations of the formula used by some of today's largest card issuing companies.
Additional Resources
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