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As long back as 2004, credit issuing companies were making quick and decisive moves towards lowering cardholders' minimum payments, claiming that the act would leave a customer with some additional disposable budget. And it did work. Cardholders opened their monthly statements and were just happy to find their minimum due was reduced to 2%, which certainly meant they were going to save.
But there was a pitfall as well. Every single instance of saving went no further than a certain month and in fact only took you a much longer period of time to repay the balance. As of2004, the idea of reducing the minimum payments was twofold - to make you feel you're saving but actually having you pay times more in total interest charges.
Cardholders who are far from the habit of examining the fine print and calculating the charges they are paying to the bank are little, if any, aware of how the minimum credit payment is calculated and what it is meant for.
The minimum payment is the percentage of your current outstanding balance that you are obliged to pay to your bank every month. In 2004 the minimum due was reduced to 2% which meant that with a debt of $3.000 at 18% APR your monthly payment will be $60. Part of it will go to cover the principle $3.000 itself and the other part will pay for the interest. Add to it all other charges on your card and it will take you more than 20 years to pay off that $3.000 and an awful amount of interest over that.
Well, it is easy to calculate that the more your minimum payment is, the faster you will get rid of the debt and the less you will pay in credit card interest rate.
Unfortunately, not all consumers understand the hidden math and so readily seize the opportunity to save every other cent on debt repaying.
However, the Senate Bill of 22 January 2008 which goes as Credit Card Minimum Payment Notification Act of 2008 is believed to bring more clarity into the matter for cardholders and certain caps on revenues as a result for issuers.
The Act is expected to change consumers' faith in the well-intentioned policy of keeping the minimum monthly due so low.
Complying with the Act, credit card companies are required to place a note in every monthly credit card statement warning that paying only the minimum due will increase the time of debt repaying and interest on the debt.
A monthly statement will also include sort of calculator that will show how long exactly and how much you will pay, making only the minimum on your balance.
Evidently, the legislation will bring notable relief into debt-inclined households and notable disturbance and obstinacy towards its acceptance among credit companies. However, the evolution of credit card minimum payment idea should knock at the door of every household with a plastic, especially that household for whom a credit card has become a source of everyday funding.
The evolution should bring us to intelligent credit card use and smart everyday financial decisions. It is expected to teach us that it is through abandoning the idea of minimum monthly payments that we will really save on debt repaying and will get more of spare cash for everyday personal disposal.