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In the
UK, there has recently been increasing concern
about the minimum payments required on outstanding
credit card balances. Until the mid-1990s the
required minimum monthly payment was generally 5%
of the outstanding balance, but competition in the
last 15 years to attract customers has led to this
figure being eroded on the premise that the
minimum monthly payment to service a debt will be
lower. Typically, credit card companies now only
require a monthly minimum payment of between 2%
and 3% of the outstanding balance, or a fixed cash
fee, whichever is the greater. For example, on a
debt of $1,000, the card holder can expect to pay
back only $20 - $30 per month.
Unfortunately, some people are not aware of how
long it can take to repay a debt when only paying
the minimum each month. An example of this: by
paying 2.5% of the debt each month, while accruing
interest at 14% (in line with modern credit card
interest rates), it can take over 14 years to pay
back an original debt of $1,000.
It has
recently been suggested that credit card companies
include a warning on their statements discouraging
customers from paying only the minimum, however
few companies have so far acted upon this.
Companies which do include a warning tend not to
inform customers how long full repayment will
take, i.e. they discourage users from making just
minimum payments but do not explain why. Less
financially savvy customers may ignore these empty
warnings as a result.
Starting in 2006, most US credit card companies
regulated by the
Office of the Comptroller of
the Currency have
been required to increase customers' minimum
payments to cover at least the interest and late
fees from the prior statement plus 1% of the
outstanding balance. The reason is to avoid a
negative amortization situation which may result
when the previous 3% minimum was enforced.
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