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Minimum Credit Card Payments Increase

Beginning this year, many consumers will see the required monthly minimum payment on their credit card balance double. In January 2003, The Office of the Comptroller of the Currency directed financial institutions to increase cardholders' minimum monthly payments in order to "amortize the current balance over a reasonable period of time, consistent with the unsecured, consumer-oriented nature of the underlying debt and the borrower's documented creditworthiness."

Major banks, including Citibank, Chase, MBNA Corp. and Bank of America Corp., are now beginning to raise minimum payment amounts. Minimum payments are currently in the 2% range; as a result of the increase, they will generally be about 4%, according to Cate Williams, Vice President of Financial Literacy at the Chicago-based Money Management International (MMI), a nonprofit financial guidance company.

Under the old rules, consumers' minimum payments covered interest and fees, but didn't make much headway in reducing the principal amount. "If you are making a 2% minimum payment, we're only getting just a tiny bit towards principal reduction," Williams said.

Banks are implementing the new minimum payment policy to help cardholders pay off more of the principal, rather than only the interest. Increased minimum payments might put a dent in the average consumer's wallet because many people will spend less in order to meet the higher payment requirement.

Williams sees credit card usage decreasing, albeit not right away. Consumers will take "from one part of the budget to meet these new minimum payments, and I think that it will take a few months ... to stop the spending, so the credit cards' balance[s] cease to increase," she said.

How will this affect processors? In a June 3, 2005 research report, financial advisory firm Thomas Weisel Partners predicts that if card issuers see their profits affected in the long term, they might seek to keep more transaction processing revenue. According to the card tracking service, about 17%, roughly 19 million households, make the minimum payment on their credit cards every month. In 2004, 43% of cardholders paid their balances in full each month, up 5% from 2003. The average payment hovers between 17% - 18% of the monthly balance.

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