| December 21, 2005
Before you even start to read this article, here's the
disclaimer. This is my opinion. I got it from living
life and working and talking to real, live people in real, live life.
I took no formal surveys, and I cite few, if any, statistics. If
this article piques your interest, good. If you want
statistics, do the research -- there are plenty of statistics available. Now --
it's My Turn.
Depending on which credit cards you have, you are about to get a surprise -- and it's not
from Santa Claus. Effective January 2006, minimum payments on many credit
cards are increasing. According to IndexCreditCards.com (the article
at the right), this may not be cause for great concern. I
respectfully disagree.
HERE'S WHY
Without being too facetious, have you ever seen anything
promoted by the government that works the way it was supposed
to? Have you ever seen any profit-oriented company that had your
best interests at heart (as opposed to its own)?
Business is business. Our capitalistic economy
provides a competitive environment where everyone has a chance to
succeed. It's a wonderful place to live. On the other hand, it
can breed characters like Jay Gould and Boss Tweed (read your
history). That's were government and watch-dog groups are supposed
to come in.
Government is government. Politicians grease the
squeakiest wheel, but more often than not it's the quiet deals made with
the residents of Gucci Gulch that carry the most political weight.
And when the government changes course, the changes are often made without
sufficient regard to the real effect on the affected populace. Take
a look at how tax laws were changed concerning the deduction for personal
interest. Overnight, we went from being encouraged to borrow to
being penalized for having borrowed.
People are people. Most of us live our lives in
quiet dedication to earning a living, raising a family, and trying to
survive each day with our skin intact. More often than not, we
borrow because we don't have the money right now for something we need to
buy right now. Sure, sometimes we buy a car because we want a new
one, but often it's because the old one is beginning to fall
apart. These days even groceries are bought on credit --some
purchases may be to get credit card incentives, but I suspect once again
that purchases are often made on credit just to make it to the next
paycheck.
Not too long ago, farmers were lured by exuberant banks
offering all sorts of credit -- only to be nailed when the loans were
suddenly accelerated. Overnight, the farmer went from being
encouraged to borrow to being penalized for having borrowed (notice a
pattern?). Now the credit card-wielding consumer is getting a
similar surprise.
Bankruptcy laws were recently tightened for two main
reasons:
First, and unfortunately, they needed to be. A
number of enterprising attorneys had found an entirely new revenue stream
at the expense of the credit industry. The laws meant to help those
in real financial need were being exploited by the less scrupulous -- and
in many cases those in need of help who were lured into ever higher credit
card balances were now lured into bankruptcy by the promise of a quick
fix. Change was needed to prevent rising costs for the rest of us
who continued to try to make our monthly payments.
Second, credit industry players are not stupid.
They knew that increasing minimum payments would also increase the default
rate. To prevent this likelihood, bankruptcy laws were tightened and
the credit card minimum payment increase was quietly slipped in the
door. Don't think for a moment that the timing of these two
occurrences is coincidental.
According to the article at right, "...the goal is
to help credit card customers pay off balances without undue
hardship" and significant increases in the monthly payment
"...will occur in only the most extreme cases, those in which very
large credit card debt is combined with very high interest rates."
Good to know, huh?
Some articles on this subject quote government
statistics. Government statistics typically lag the economy, and
credit card statistics are no different. Right now, the most recent
figures are for 2002. And just like anything else, results can
vary. Regardless of what articles and whose statistics you read, the
trick is to remember that many of these statistics will be in the form of
percentages -- and percentages are often a neat way of masking the true
magnitude of the real, live people affected.
If you are one of those affected by the increase in
credit card minimum payment requirements, it doesn't matter if you are in
the upper 1% or the upper 10% -- and it's little comfort to be assured of
the altruistic motives of this move. You probably are already struggling
to make ends meet, using credit to help get to the end of the month and
trying to figure out how to pay next month's bill. You may even be
working two or three jobs just to make sure there's food on the table and
gas in the car. These folks who
have your best interests at heart seem to think you are spending your
money unwisely and not meeting your obligations. So they are going
to "help" you by insisting you become more responsible.
After all, you didn't need the house you financed at lower interest
rates. You don't need the car you just bought with dealer financing
incentives. Of course, you have them now and maybe you would
have made different decisions if you had known about the increase in your
monthly minimum credit card payments, but that's your
problem. You should have budgeted better. What about
groceries, clothing, and the like? Surely your kids can wear those
shoes just a little longer. And day-old bread is better than none at
all. After all, you have to meet your responsibilities to your
creditors.
Yes, I'm being somewhat facetious and
cynical. Folks in the credit industry and in the government are not
monsters working for the forces of evil -- they're just people, and most
of them are doing the best job they can. And I'm not suggesting we should blame our decisions on others
and attempt to escape our responsibility. This situation
occurred because of greed -- a primary component of
capitalism. The credit industry, greedy to increase the number and
balance of credit receivables, pressured the government to lower credit
card minimum payment requirements from 5% to 2%. Consumers, greedy
for more "things", bought more on credit after succumbing to
being inundated by credit card company offers and incentives. Sooner
or later purchases stopped being for luxuries and started being for
necessities. Even working extra jobs was not enough. The
consumer was now in deep and couldn't see a way out. Bankruptcy attorneys, greedy to increase their
revenue, lured many consumers into escaping their debts by taking
advantage of bankruptcy laws. The credit industry, greedy to retain
their revenue stream, petitioned the government to tighten bankruptcy laws
and agreed with the government to increase minimum payment
requirements. Government officials, greedy to retain their jobs,
enacted these politically-charged changes with as little fanfare and as
much justification as possible.. The circle is complete. Of course, scaling in
such changes is out of the question. The tap is either on or
off. And the consumer pays the bill.
Becoming less debt-ridden is a wonderful idea and in the
long-run this may actually benefit consumers. In the short-run, all
the laudable goals in the world won't help if they break you in order to
fix you.
Again, I'm not suggesting that you shouldn't be
responsible about your debts. I am suggesting that we use our
power as voters and consumers. Learn
how to repair your credit Maybe
contact
your congressman. Maybe remember this lesson the next time you
get a credit card offer in the mail -- and you will.
|
From IndexCreditCards.com:
While “Credit Card Payments to Double” makes an
attention-grabbing headline, the truth about upcoming changes in credit
card payments is much less ominous, according to financial information
site IndexCreditCards.com.
Cleveland, OH (PRWEB) December 15, 2005 -- While “Credit Card
Payments to Double” makes an attention-grabbing headline, the truth
about upcoming changes in credit card payments is much less ominous,
according to financial information site IndexCreditCards.com.
Many media outlets have reported that come January 1, 2006, credit card
customers who are currently required to pay 2% of their credit card
balances monthly will have to pay 4%. According to these reports, this
could mean a serious financial hit for those suddenly required to pay
double.
“Fortunately, that’s rarely going to be the case,” says Justin
McHenry, Research Director for IndexCreditCards.com. “While the
government is requiring credit card companies to increase monthly minimum
payments, the goal is to help credit card customers pay off balances
without undue hardship.”
Specifically, where most credit card issuers previously required customers
to pay off 2% of their outstanding balances each month, most will now
require customers to pay all monthly interest and fees, plus 1% of the
outstanding balance.
What does that mean for monthly payments? Significant monthly increases
will occur in only the most extreme cases, those in which very large
credit card debt is combined with very high interest rates. Even then, the
result is not as scary as you may think.
For example, imagine a person with a $10,000 credit card debt and a 19%
annual interest rate, both higher than the average consumer is carrying.
Using the 2% minimum balance calculation, this person would have a
required monthly payment of approximately $203.16. Under new requirements,
the monthly payment would be $258.33 ($158.33 in interest, plus $100 of
the outstanding balance). This is a difference of roughly $55 – on a
balance and interest rate that exceeds what the average consumer is
carrying. Most credit card customers will have much smaller minimum
payment increases, if any.
“Unless a credit card company has specifically announced raising their
minimum payment from two to four percent, it’s almost impossible to
think of a realistic scenario in which payments will double,” says
McHenry.
The upcoming change in minimum payments is a result of guidance from the
government’s Office of the Comptroller of the Currency, which told banks
they must require minimum payments that allow customers to pay off their
debts in a reasonable amount of time. Under the current industry standard
two percent minimum payment, customers with high balances can conceivably
“meet the minimum” without even paying off a full month’s interest,
much less taking a chunk out of the principal balance.
“While ‘this is for your own good’ generally should be met with
skepticism,” says McHenry, “in this case it’s true.”
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