Last month American Express gave me some horrifying news: The minimum monthly payment had been jacked up from roughly $500, which I’d been making in interest-only payments ever since Amex raised the annual percentage rate on my credit line to a brutal 29.24 percent, to more than $1,200. If I could barely make the minimum payments before, how in the world would I be able to make them now?
Such is the dilemma that many struggling working families are now facing. In response to an advisory issued by the Office of the Comptroller of the Currency, which regulates national banks, banks and credit card companies are significantly increasing the minimum payments they require from their credit card customers each month. Until recently, credit card companies would typically string customers along, allowing a payment schedule that could have no end. Now, when customers make minimum payments, the credit card companies are obligated to charge an amount that includes not only the cost of outstanding fees and finance charges but at least 1 percent of the amount owed. Although responses have varied, credit card issuers have typically doubled their payment minimums from 2 percent to 4 percent.
For those who have been using credit cards to pay for day-to-day living expenses–I racked up an $11,000 debt during a time when I had temporarily lost my income–this increase in the minimum payment is a mixed bag at best. The OCC’s policy forces the one out of seven customers who routinely make minimum-only payments to actively reduce their debt and actually pay less over the life of their debt. At the same time, this “tough love,” as some have called it, throws many cash-strapped consumers, especially those tied to punitively high interest rates, into a short-term crisis. Those families that have been just barely getting by may be forced to default on their credit card debt. Right after Bank of America began to raise the minimum payment, charge-offs on bad loans increased by 63 percent.
It seems that these days working families just can’t seem to catch a break. Short-term interest rates are currently at 4.25 percent. The benchmark rate has been raised thirteen times in a row since the Fed began raising rates in June 2004. Meanwhile, inflation has gone up 3.4 percent since December 2004, and real wages have dropped 0.4 percent over the same period. Recent dips in inflation have helped earnings recover a bit of lost ground, but working families are still not quite as well off as they were just a year ago, much less in November 2001, when the nation began to pull out of recession. Meanwhile, the Bureau of Economic Analysis reported that the nation’s savings rate was negative in the third quarter of 2005, the first negative savings rate since quarterly updates were made available in 1947.