CONSUMER CREDIT CARD MINIMUM PAYMENT DOUBLES
Thursday, February 09, 2006
- Organization: Los Angeles Center for Law and Justice
Consumers will notice that their monthly minimum credit card payments double from 2% to 4% resulting in an immediate increase to nearly double their previous monthly payment.
During difficult financial times and after the holiday season, many consumers may default on debts, especially when the average credit card debt per household in the United States is $9,312. Yet many struggling consumers are not aware that bankruptcy continues to be an option, despite statements to the contrary by businesses profiting in debt consolidation.
Due to pressure from government regulators, credit card companies must now require minimum payments to cover fees and finance charges, in addition to one percent of principal. Government regulators acted in response to a rise in "negative amortization." This occurs when a consumer's required minimum payment on a debt is less than the amount of interest and fees due, resulting in an increase to the principal debt. The interest and fees are compounded to the principal in the next billing cycle.
Consumers are hurt because the principal debt continues to grow without additional spending and it takes longer to pay off the debt because the minimum payment never reduces the debt. For example, a consumer with $10,000 in credit card debt, with an interest rate of 18% who pays only the minimum 2% payments ($200) will have to pay $28,930.64 in interest over 57 years to repay the debt. Under the new increased minimum payment guidelines, a 4% minimum payment ($400) enables the consumer to pay off the debt in 14 years and pay $5,915.67 in interest.
Higher minimum credit card payments may cause more consumers to default on their credit card debts. Although the increased minimum payments will help consumers avoid negative amortization and pay off their debts within a reasonable amount of time, today's consumer has an average of 9 credit cards. A doubled monthly payment on several credit cards will have a huge impact on their monthly budgets. To compound the problem, many consumers falsely believe that they cannot file for bankruptcy under the new bankruptcy laws and continue to flounder in debt and pay additional fees and costs in default.
Consumers can still file for a Chapter 7 bankruptcy despite changes to the law that went into effect in October 2005. Under the new bankruptcy laws, there are additional requirements to discharge debts. Under the new bankruptcy law, consumers will now complete a credit counseling course, a financial management course and undergo a "means test." The "means test" compares the filer's income to the state's median income. For example, California's median income for a single person is $42,012 and for a family of four is $68,310. If a filer's income is above the state median income then additional information must be provided to determine whether the filer is eligible for Chapter 7 bankruptcy relief. If a filer's income is below the median income, then they may apply for Chapter 7 bankruptcy.
Many consumers, including clients seen at the Los Angeles Center for Law and Justice and the Legal Aid Foundation of Los Angeles, mistakenly believe that they cannot file for bankruptcy after the new law. In fact, there is no requirement under the new bankruptcy law that consumers filing for bankruptcy be unemployed, homeless, or have no property. It is possible to file for bankruptcy without having lost a job, giving up a home or having property taken away. In fact, consumers are often able to protect their assets when filing for bankruptcy relief.
The Los Angeles Center for Law and Justice (LACLJ) is a non-profit legal services organization that provides free advice and representation to eligible low-income residents in the areas of family law, special education, housing law and consumer law. LACLJ is a member of the Los Angeles Bar Association's Pro Bono Bankruptcy Committee. The Community Outreach Subcommittee focuses on providing consumers education, pro bono representation and affordable representation for Chapter 7 Bankruptcies.
To find out if you qualify for free or affordable services, call the Legal Aid Foundation of Los Angeles's Affordable Bankruptcy Center at (323) 801-7914. ###
During difficult financial times and after the holiday season, many consumers may default on debts, especially when the average credit card debt per household in the United States is $9,312. Yet many struggling consumers are not aware that bankruptcy continues to be an option, despite statements to the contrary by businesses profiting in debt consolidation.
Due to pressure from government regulators, credit card companies must now require minimum payments to cover fees and finance charges, in addition to one percent of principal. Government regulators acted in response to a rise in "negative amortization." This occurs when a consumer's required minimum payment on a debt is less than the amount of interest and fees due, resulting in an increase to the principal debt. The interest and fees are compounded to the principal in the next billing cycle.
Consumers are hurt because the principal debt continues to grow without additional spending and it takes longer to pay off the debt because the minimum payment never reduces the debt. For example, a consumer with $10,000 in credit card debt, with an interest rate of 18% who pays only the minimum 2% payments ($200) will have to pay $28,930.64 in interest over 57 years to repay the debt. Under the new increased minimum payment guidelines, a 4% minimum payment ($400) enables the consumer to pay off the debt in 14 years and pay $5,915.67 in interest.
Higher minimum credit card payments may cause more consumers to default on their credit card debts. Although the increased minimum payments will help consumers avoid negative amortization and pay off their debts within a reasonable amount of time, today's consumer has an average of 9 credit cards. A doubled monthly payment on several credit cards will have a huge impact on their monthly budgets. To compound the problem, many consumers falsely believe that they cannot file for bankruptcy under the new bankruptcy laws and continue to flounder in debt and pay additional fees and costs in default.
Consumers can still file for a Chapter 7 bankruptcy despite changes to the law that went into effect in October 2005. Under the new bankruptcy laws, there are additional requirements to discharge debts. Under the new bankruptcy law, consumers will now complete a credit counseling course, a financial management course and undergo a "means test." The "means test" compares the filer's income to the state's median income. For example, California's median income for a single person is $42,012 and for a family of four is $68,310. If a filer's income is above the state median income then additional information must be provided to determine whether the filer is eligible for Chapter 7 bankruptcy relief. If a filer's income is below the median income, then they may apply for Chapter 7 bankruptcy.
Many consumers, including clients seen at the Los Angeles Center for Law and Justice and the Legal Aid Foundation of Los Angeles, mistakenly believe that they cannot file for bankruptcy after the new law. In fact, there is no requirement under the new bankruptcy law that consumers filing for bankruptcy be unemployed, homeless, or have no property. It is possible to file for bankruptcy without having lost a job, giving up a home or having property taken away. In fact, consumers are often able to protect their assets when filing for bankruptcy relief.
The Los Angeles Center for Law and Justice (LACLJ) is a non-profit legal services organization that provides free advice and representation to eligible low-income residents in the areas of family law, special education, housing law and consumer law. LACLJ is a member of the Los Angeles Bar Association's Pro Bono Bankruptcy Committee. The Community Outreach Subcommittee focuses on providing consumers education, pro bono representation and affordable representation for Chapter 7 Bankruptcies.
To find out if you qualify for free or affordable services, call the Legal Aid Foundation of Los Angeles's Affordable Bankruptcy Center at (323) 801-7914. ###
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