Minimum payments on credit cards going up

NEW YORK — Don't be surprised if the minimum payment on your credit card suddenly goes up.

Under pressure from federal regulators, credit-card issuers are raising the minimum payments consumers must make on their monthly bills.

In the long run, it's good for consumers because it means they'll pay down their balances faster, so they'll pay less in interest. But in the short run, consumers already struggling to keep up with minimum payments on several cards could feel squeezed.

"It's a little like a diet," said Greg McBride, a financial analyst with Bankrate.com. "To get to that long-term benefit, you have to go through that short-term pain."

The changes being phased in this year are the result of a directive issued by federal banking regulators, including the Treasury Department's Office of the Comptroller of the Currency, in 2003.

Barbara Grunkemeyer, deputy comptroller for credit risk, said the regulators were concerned that when the minimums were set too low, consumers' payments were barely covering the interest and fees on the cards and not making a dent on the principal amount that was owed.

"It took the banks and other issuers a while to deal with minimum payments because there were such broad implications," Grunkemeyer said.

Higher minimum-payment requirements may make it harder for some consumers to pay their bills, she said. At the same time, financial institutions may have to raise their reserves against late payments and defaults, she added.

In recent years, the minimum payment required of consumers averaged about 2 percent of their outstanding card balances, or $200 a month on a $10,000 balance.

A consumer who paid the minimum each month on a $10,000 balance with a 13 percent interest rate would need nearly 33 years to clear the bill — at more than $11,450 in interest, according to Bankrate.com calculations.

If the minimum is raised to 4 percent, a consumer could clear that $10,000 balance in under 13 years, with interest totaling about $3,664, Bankrate.com said.

Consumers will have to check with their credit-card issuers to determine the new terms because banks and financial institutions are adopting a variety of formulas to comply with the federal guidelines.

The credit-card issuers say a majority of their customers pay more than the minimum each month.

Still, an analysis last year by CardWeb.com, a publisher of information about payment cards, found that about one in four cardholders was making only minimum payments some months.

Kerry Smith, an attorney specializing in consumer issues with the state Public Interest Research Groups, said raising the minimum-payment requirements is a good step because card issuers "shouldn't be engaging in practices that put consumers in a cycle of debt they're never going to be able to get out of."