Increasing Minimums to Reduce Debt

National banks are all regulated by the Office of the Comptroller of the Currency, also known as the OCC. Back in January of 2006, the OCC ordered the national banks to double their minimum payments on credit cards. Prior to then the average credit card minimum payment was only 2 percent of the outstanding balance, making debt reduction next to impossible on high interest credit cards when only paying the minimum. Since far too many consumers weren’t paying substantially more than the minimum payment, the OCC decided to take upon themselves that they do. By asking creditors to double the minimum payments, the OCC was hoping more Americans would actually reduce their debt and payoff the full outstanding balance. To get a better idea of this concept, consider the following:

Scenario 1: 2% minimum payment on $20,000 of credit card debt at 18% interest

Time Till Debt Free: 830 months (more than 69 years)
Total Interest Charges: $58,931

Scenario 2: 4% minimum on $20,000 of credit card debt at 18% interest

Time Till Debt Free: 205 months (approximately 17 years)
Total Interest Charges: $11,915

As evidenced by this example, the financial power of compounding interest is striking. Even though the minimum payment only doubled in this example, the interest costs were reduced to 1/5th of what they would have been otherwise. Unfortunately, the increased minimum payments left far too many consumers in need of debt relief, but on the bright side, it did force many Americans to reduce debt levels and start strategically budgeting on a monthly basis. Until consumers start becoming more knowledgeable about credit and debt issues, government intervention may be necessary to protect our nation’s financial well-being.