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Fasten Your Seat Belts Because Your Minimum Payments Might Soon Double!

By Michael Redbourn

Republish: EasyPublish™ Published: 28Jul2009 Word count: 907 Viewed: 1268 time(s) Get Free Content For Your Site

Much to the chagrin of Congress and consumer advocates, most credit card companies are rushing to raise their interest rates and fees, and reduce their cardholders' limits before new laws come into effect in around seven months time.

From a banker's point of view however it's not difficult to understand why there is this sudden urgency to increase and protect their profits.

The new law when it's enacted will prevent card companies from raising rates on existing balances unless the borrower is at least 60 days in arrears, and will require the original rate to be restored if payments are received on time for six straight months.

Since customers have to pay a fee if they exceed their limits, the new law will also oblige credit card companies to get the card holder's permission before allowing them to do so.

In August, Chase will raise their minimum payment on selected customers from 2 to 5% of the statement balance, and they have already raised their minimum charge for transferring a balance from 3 or 4% to 5%.

Stephanie Jacobson, who is a spokeswoman for Chase Card Services, said that "Fewer than 1% percent of our customers will see a monthly minimum payment increase. Our desire is to have these balances paid back in a reasonable period of time".

Bank of America raised their transaction fee for balance transfers and cash advances from 3 to 4% last month.

Discover have increased the maximum fee that they charged for transferring a balance to 5% percent of the amount from 3 or 4%.

Both Bank of America and Citibank started to raise their rates and to reduce their limits in January, and they continue to do so.

Since January, Citibank has had the largest increase in rates of all the major banks, and Samuel Wang who is their vice president for public affairs said, "These changes reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit".

And it's not just the big credit card companies that are rushing to make changes.

Kevin C. Langin, who is a spokesman for Atlanta based InfiBank says that the bank will raise the minimum annual percentage rate it charges nearly all of its customers in September, "in order to more effectively manage the profitability of our credit card account portfolio in a very challenging economic environment".

Sen. Charles E. Schumer (D-N.Y.) who has long seen problems with the present bill, recently appealed again to the Federal Reserve to invoke its emergency powers to place a limit on interest rate hikes.

"This is what many of us feared about a law that didn't take effect right away. It was never going to take this long for the credit card companies to get ready for the new reforms. Instead, issuers are using the delay in the effective date to wring more dollars out of their customers. It is against the spirit of the law, and it is just plain wrong", and he's by no means alone in his opposition to the way that the bill is presently framed.

Rep. Carolyn B. Maloney (D-N.Y.) said "Capricious actions like these are why Congress overwhelmingly passed, and President Obama signed, my credit card reform bill. To level the playing field on behalf of consumers. The recent rate and fee hikes were unfair and deceptive and must be stopped".

Scott Talbott, who is senior vice president of government affairs for the industry group, Financial Services Roundtable, said that there are two reasons for the rate increases.

"First, consumer credit scores, which banks use to determine if they should lend and at what price, have decreased. Second, the cost of providing credit has increased. Once the new law is in effect, we anticipate a further reduction in the availability of credit and additional increases in the cost of credit".

Banks have been hit with a record number of charge-offs, which are debts that they consider as uncollectable, and in June, credit card losses reached 10.44% percent which is easily a record loss.

Bank executives have long been warning that the new law would force them to increase their rates and fees, because it would keep them from properly managing borrowers' risk and they argue that if they become prevented from raising rates for their riskiest cardholders that they would have to raise everybody's rates. And there's a logic to that.

John Ulzheimer, who is president of consumer education for Credit.com, which tracks the industry says, "It's what I call the Credit Card Trifecta. Lower limits, higher rates, higher minimum payments.This is a common practice and will continue to be common, because issuers can do these things for really no reason until February.

* A Trifecta means that your three horses must finish first, second and third in exact order, and it would seem that John is a gambling man.

How Much Will These Changes Affect You?

Imagine that you have a credit card with Chase, and they suddenly notify you that starting this August that your minimum payment of $180 is going to be increased to around $450!

Well if you have credit cards, you won't have to use your imagination for very much longer, because that kind of notification or something similar is most likely coming your way real soon.

If the above does happen to you and you know that you won't be able to make the payments, then don't delay but contact a reputable credit counseling service right away.

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