Chase’s recent decision to raise credit card minimums from 2% to 5% for nearly a million of its account holders was (understandably) met with public outcry. The general consensus seems to be that these loan-sharking credit card companies are gouging consumers with a myriad of bait-and-switch techniques (before their fins are tied by the stricter credit card regulations coming down the pike in February 2010). Chase’s higher minimum payments appear to be just one more slimy tactic in the sea of dirty credit card company behavior.
But is raising credit card minimums from 2% to 5% of our balance really so ghastly? Isn’t requiring us to pay our debts back faster ultimately doing us a favor? When viewed from this perspective, Chase is giving us just the kick in the pants we need to break our cycle of debt.
Who is affected
The higher minimum payment is set to begin in August and will affect less than 1% of Chase customers. Most of these customers were originally lured by the low-interest rate of the credit card, and the fact that they could balance-transfer debt onto it, also at a low-interest rate. Many piled thousands of dollars of debt onto the card at 5.99% or 6.99% rates.
Now, these same customers are complaining that raising the minimum payments from 2% to 5% of the balance will mean allocating hundreds more dollars towards their Chase bill each month.
More towards principal, less wasted on interest
It’s important to remember, though, that Chase isn’t raising the interest rates on these accounts, just the minimums. So the extra money you pay each month will go directly toward principal, ultimately paying down your debt faster and saving you money.
For instance, Wendy says that she will now owe $475 more a month to Chase. This means that her balance is $15,833. If Wendy had continued paying the old minimum rate of 2%, it would have taken her 50 months to pay off her balance, and she would have spent $2433 on interest alone. If she can pay the new 5% minimum rate, she’ll have her balance paid off in 20 months, and will have only spent $890 on interest.
So Chase’s new mandate will ultimately save Wendy $1,543 and help put her debt behind her almost three years faster than she otherwise would have. To find out how much you could save by increasing your monthly credit card payments, use a cost-of-debt calculator.
I’m not saying Chase is right to change the terms and conditions originally attached to these accounts. And I certainly understand the frustration from Chase customers who simply can’t afford to make pay the higher minimum. (Chase advises customers who can’t make the higher payments to give them a call.)
But if you can pay the raised minimum, you should. It will ultimately save you money and put your debts behind you quicker.