Thursday, June 10, 2010

New Credit Card Minimum Payment Rules

In response to new government regulations on credit cards, credit card companies are changing their minimum payment rules and their interest rates. In general both are going up.

I don’t have many credit cards and only use one regularly, but my rarely-used Sears card is the first one to send me details on changes that will be effective in September. My nominal interest rate will rise from 28.8% per year to 29.9%. The actual yearly rate with monthly compounding is going from 32.9% to 34.4%. These rates are extremely high, but not too different from each other.

For balances over about $1000, the minimum payment is going from 3% of the new balance to the sum of the month’s interest plus 1% of the new balance, which works out to about 3.5% of the new balance. This is about a 17% increase in minimum payment.

The part of the new minimum payment calculation that is 1% of the new balance is actually the maximum of $10 or 1%. This may not seem like a big deal, but it significantly reduces the length of time it takes to pay off a balance assuming no new purchases and only paying the minimum. This has been a common source of criticism of credit cards, and the new minimum payment shortens the pay-off time considerably.

These changes seem quite modest. I suspect that the majority of consumers will find their interest rate and minimum payment changes fairly painless, but there are likely to be outliers who will see big changes that they have difficulty handling. Of course, it is best to pay off cards in full each month, but it seems that many can’t or won’t follow this sage advice.

8 comments:

  1. I always pay mine. Expect for the time when I am a day late and the frustrating part is when it happens on the weekend since it won't take it until the first business day ... I usually automate it as soon as I see the bill now.

    It's unfortunate that the bank don't give us the option to pay it automatically from our bank account (automatic withdrawal). A lot of people who come from the UK always comment on this inefficiency at our banks. I suspect they make too much money on a late fee that they don't want to give the option.

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  2. @Passive Income Earner: Paying in full each month is definitely the way to go. I've heard of banks allowing an automated payment of the minimum amount, but this is little use to most responsible credit card users.

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  3. Michael,

    Agree that the changes are painless, but paying 29% interest is sufficiently painful. Painful enough to last a lifetime.

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  4. @Mark: I've never actually paid any interest on this card. But if I ever have some sort of problem paying on time, the interest rate is definitely punitive.

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  5. I did not believe you had personally paid such interest rates. I just don't see how anyone can pay them.

    It leads to a lifetime struggle to get out of debt.

    I understand that life is a struggle when poor and out of cash. But unless you are buying food or a true necessity, no one can afford to pay these interest rates and ever expect to get out of trouble.

    People must - for their own well-being - learn to avoid those foolish, instant gratification, purchases.

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  6. @ The Passive Income Earner:

    Actually, my MBNA card allows me to either pay my minimum payment or total outstanding balance automatically from an external bank account. I have them pay it in full on my monthly due date.

    Also, my CIBC Visa card allows the same privilege. Again, I take advantage of it.

    That's not to say MBNA is perfect. I like them, but it is surprisingly difficult to find my total balance when logged onto their website. They readily show my available credit and my minimum payment, but finding my total balance on their site requires an extra mouse click and some searching. It's a pretty clear message: they would rather I not pay my entire balance.

    @MJ:

    I heard an interesting tidbit on the Planet Money podcast. Where US state governments have capped interest rates on payday loans, all lenders tend to charge that maximum amount. Where there is no cap, the market is more competitive. Interesting, isn't it?

    The economist they interviewed postulated that in giving a maximum interest rate, the state is somehow encouraging pay day loan companies to collude with each other on that maximum rate. Where there is no maximum, competitors have to experiment to find a sweet spot where they can attract customers while maximizing profits. Here's the podcast and a short summary:

    http://www.npr.org/blogs/money/2010/05/the_tuesday_podcast_payday_len.html

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  7. @Gene: I've heard of that phenomenon in other contexts. I'm not sure what the answer is to protect people who have no regard for their future selves.

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  8. Check with your credit card company and see if they can directly debit your account for your payment.

    We just set that up with Amex, Mastercard and our RBC Visa. RBC was the easiest to deal with. They took care of the whole thing over the phone. We had to provide void cheques to the others.

    It is nice that these are now things we do not have to worry about.

    We have no set up all of our bill for direct debit. It is nice to have the finances automated.

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