Jump to navigation
Credit Cardrails
R. Alex Whitlock
At the urging of the government and some advocacy groups, a couple credit card companies have decided to
double required minimum payments:
Over the past few years, low minimum payback rates of between 2 and 2.5% have encouraged Americans to spend, spend, spend -- and to rack up an average credit card debt of close to $10,000 per household. For the estimated 40% of cardholders who carry a balance from month to month, the low minimums free up cash. But paying off a big charge little by ever-so-little also means that a $1,000 debt can turn into a 22-year commitment -- and that you'll accumulate thousands more in interest in the meantime.
"People are now in a revolving debt cycle that they'll never escape," says Adam Brauer, a debtor advocate and in-house counsel for Debt Settlement USA in Scottsdale, Ariz. "So the government nudged credit card companies into saying, 'This isn't working.'"
While part of me objects to these guard-rails of personal finance, I know far too many people that have sunk in to debt with small, innocuous products and services that required small, innocuous payments. So I'm rather conflicted on the matter.
It's my personal belief that except in extenuating circumstances, you shouldn't use a credit to get what you can't buy outright. This on one hand makes me applaud the decision (because it'll bring a lot of people closer, if not close, to my thinking - by necessity), but also makes me fail to see the reason behind it (the minimum payment shouldn't be such a big deal because no one should be paying it).
The article mentions how difficult this could be to big-time debtors and those that can't afford to double their payments, and that's the big downside. I can't help but wonder why they didn't have the new minimum payments only apply to new cards and phase it in rather than hit people with a significant increase in payments that they may not have budgeted for. Is there a law against giving different people different minimum payments? I guess I can see some pretty big logistical issues, but it might make things easier for some.
This is going to cause defaults among the hand-to-mouth set. But I suppose those losses will be offset by fees levied on others who make the payments but make them late or in smaller amounts than required.
I've been pretty ignorant as far as how minimum payments worked (I thought it was just the interest). So if nothing else, I learned something new this week.
Observations
I'm not certain, but I think this story may have slightly gotten the story wrong.
It's been my experience with all of my credit cards that the issuer is REQUIRED to notify you of any changes in the credit card agreement, and that you can retain the old terms simply by closing out the card and retaining your balance. I can't see why that wouldn't apply to the minimum payment part of the agreement.
This would actually be a win-win for many cardholders, as they could close out their cards, work on paying down the debt, and not keep the thing charged up to the ceiling.
Now, I'm no expert on laws governing credit cards, so maybe some of the legal types here can clarify. But this has been my experience on the various credit cards I use.
That would certainly make more sense. Particularly the part about cutting the card up (that would alleviate some of the logistical issues I mentioned).
Couldn't say; never had one.
Yes! Yes! Yes! As my mother (and probably yours) always said: "Why pay for everything twice???"
As someone who briefly got into a fair bit of credit card debt a while back (tough when you're paying rent etc. while out of the country -- and your economic beliefs have you thinking that buying things is a really nice way to help the people you're buying them from!), and who had the Irish panic of debt until it was paid off, I agree with you -- credit should be what it started off as, something used only for extenuating circumstances. Not something used when you really, really want that Mac Mini but know you won't be able to afford it until next year!
I love my credit cards. Not because they make things obtainable that wouldn't be otherwise, but because they store information about every transaction I make with them. I use this info to track my expenses and further reduce my overall spending.
Not exactly what the credit card companies had in mind, I'm sure.
I hate credit card companies, just as I hate rent-to-own stores, pawn shops, payday loan companies, "second-chance finance" automobile lenders, and other businesses that make money off the backs of the poor. Having said that, they do provide a valuable service by lending to those deemed, often accurately, as "high risk." People are ultimately responsible for the decisions that they make, but it's a lot easier for a white, middle-class, well educated person to make good decisions than it is for someone of a lower socioeconomic sphere.
Regarding whether a credit card issuer can unilaterally change the terms of the agreement between it and the cardholder, the answer is no. The issuer cannot change the terms of the agreement between it and the cardholder without the cardholder's assent. What the issuer has to do is notify the cardholder of the proposed changes. However, the issuer can state that use of the card with notice of the proposed changes constitutes acceptance of the new terms.
R. Alex, congrats on your recent engagement to Camille. I have fond memories of the Daily Cougar and am glad to see you're doing well. Drop me a line sometime and let me know what you're up to.
Hey Kevin (P.)! Good to hear from you! I actually google your name periodically to see if you've started a blog. I almost said we should get together for a beer sometimes, but I'm some 1,800 miles away.
Add an Observation
Comment spam is an ongoing problems that we're trying to address. Previously we required people to create accounts and log in. I am thankful to say that is no longer the case. We're giving Captcha another try and are playing around with a text-based Q&A variant of Captcha. So bear with us as we try to figure out how to best get a handle ont he problem. Please note that any comment on a post more than 30 days old will go into the moderation queue, where I will get to it when I can which could be once a week.
