|
Credit Card Minimum Payments On The Rise
By: Kyle Allen iSnare Expert Author
The minimum payment on next month’s credit card bill could be almost double what
you were required to pay this month due to the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005. How will higher credit card minimum payments
affect your family’s finances, and can your mortgage advisor help you avoid
financial hardship or even bankruptcy through cash out refinancing, a second
mortgage, or a home equity line of credit?
Credit Cards can be powerful financial tools when used properly. However, if
you’re like 35% of our fellow Americans, you are only paying the minimum payment
each month, at least according to the Federal Government Office of the
Comptroller of the Currency. Federal regulators are currently pressuring major
banks, including major issuers such as Citibank and MBNA as well as the Bank of
America, to increase their minimum payments so that consumers have a fighting
chance of paying off their high interest credit card debts.
Today, your credit card minimum payment is usually between 2% to 2.5% of the
total debt on your credit card. If you were to pay the minimum payment every
month today on $10,000.00 of credit card debt at 18% APR, it would take you more
than 50 years, 601 payments in total, to pay off your debt, and you would pay an
extra $29,000.00 in interest charges to the bank for the privilege of using
their money.
By the end of March 2006, major card issuers nationwide will be increasing their
minimum payments to effectively 4% of the total debt each month, which for the
estimated 50 million Americans who are paying the minimum payment each month may
mean that their credit card minimum payment will double. Regulators argue that
by paying 4% credit card minimum payments versus 2% credit card minimum
payments, you the consumer will be able to pay off your debts more quickly, if
you can come up with the extra money each month! Taking the above example of
$10,000.00 at 18% APR, you would be able to pay off your credit card debt with a
4% minimum payment in as little as 15 years, and you would pay less than
$6,000.00 in interest fees to the bank. That’s a savings of over $23,000.00
versus a 2% minimum payment.
Sounds great right? Higher credit card minimum payments can help you get out of
debt faster than lower minimum payments, but there is one catch. You need to pay
twice as much every month. So if your minimum payment is currently $400.00,
you’ll need to find another $400.00 per month just to keep up with the new
minimums. Even if your bank does not increase your rates this coming month, it’s
only a matter of time before they are drawn into compliance with the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005 and your credit card
minimum payments rise.
As you can see from the above examples, the government is onto something, paying
off credit cards more quickly saves consumers a ton of money, but it actually
increases their minimum payments, making it unaffordable for the Americans who
need this sort of protection the most. In fact, many of the people whom we’ve
spoken to in the writing of this article would likely face bankruptcy after
their savings were depleted with these higher payments.
But is there a better way? For homeowners there are some very attractive options
available. A Cash Out Refinance, a Fixed Rate Second Mortgage or Home Equity
Loan, or a Home Equity Line of credit from your mortgage broker is one of the
most effective ways to stop paying high interest on credit card debt and to
actually reduce your total monthly payments. For the average customer carrying
$10,000.00 dollars of credit card debt at an APR of 18% their new higher minimum
payment will be 400 dollars, and if they are like most customers they also have
a car loan of $20,000.00 at 9.5% and pay about $450.00 per month, the typical
savings realized by consolidating those debts with their mortgage or taking a
second mortgage to pay them off can be 60-70% on their current unsecured or
revolving debts, and even more savings come tax time through interest deductions
available for mortgages.
Speak to a mortgage broker and you’ll find that you can borrow $35,000.00 per
month by refinancing with cash out, getting a home equity loan or second
mortgage, or opening a home equity line of credit for as little as 200 dollars
per month, or even less. Refinancing with cash out not only pays off your credit
card debt and your car loan at the high interest rates associated with credit
cards and auto loans, but also saves you over $650.00 per month in this scenario
by lowering your total monthly payments. Yes, your mortgage payment will
increase, but your total monthly payments will actually decrease, putting
$650.00 in your pocket each month. Use some of that savings to make at least one
extra mortgage payment per year and you’ll pay off that mortgage even faster
than you could the credit card debt at minimum payment levels. And you should
speak to a tax professional as well, because while you cannot deduct credit card
or car loan interest from your taxable income, in most cases you can deduct the
interest paid on your mortgage from your taxes, which has the potential to save
you thousands more over the life of the loan. This method is not for everyone,
but if you are a homeowner facing financial constraints and the thought of your
credit card minimum payments going up by up to double makes you shiver, it may
make sense to speak with a mortgage broker and with your accountant about a debt
consolidation refinance or a debt consolidation loan.
About the Author:
Kyle R. Allen is a seasoned financial professional with a wealth of experience
in the mortgage industry, advising clients on debt consolidation, refinancing &
investor loans. Website: http://www.RefinanceOne.net |
