Bank of America raises minimum payments on credit card accounts
PAUL NOWELL
Associated Press
CHARLOTTE, N.C. - The recent announcement by Bank of America Corp. that it will raise minimum required payments on credit card accounts was made with a minimum of fanfare.
In fact, few were aware the company had made the change until chief financial officer Marc Oken mentioned it last month, during a conference call with analysts to discuss the bank's fourth-quarter earnings.
Oken told listeners that the new policy, which boosts the amount of an outstanding credit card balance that must be paid off each month, "was a result of expected changes across the industry regarding minimum payment requirements."
With the change, the Charlotte-based banking giant became the second major credit card issuer to tighten payment requirements since the federal Comptroller of the Currency suggested in late 2003 that consumers would be better served by higher monthly payments.
The Comptroller of the Currency is an agency that supervises federally-chartered banks.
The first company to boost monthly minimums was Wilmington, Del.-based MBNA Corp., which services the credit cards issued by Bank of America's crosstown rival, Wachovia Corp., along with its own cards.
Bank of America raised its monthly minimum in the second quarter of 2004.
According to San Francisco-based Consumer Action, making monthly payments at a minimum rate like 2 percent is the most expensive way to pay off a credit card balance.
For example, a cardholder with a $2,000 balance and a 19 percent interest rate making 2 percent payments would need more than 22 years to pay off the principal debt and $4,800 in interest.
Doubling the required minimum payment to 4 percent shortens the time needed to retire the debt to seven years and saves the consumer about $3,680 in interest, the group said.
Before the recent change, Bank of America required a monthly minimum payment of 2 percent of the balance.
Now, the bank requires that cardholders pay all interest charges and fees every month, plus at least $10 off their principal debt, ensuring that the consumer is making at least some headway in paying down their core debt.
At the same time, Oken said, the bank increased its reserves for credit card losses, anticipating that some customers will not be able to keep up with the higher payments, leading to an increase in defaults.
Bank spokeswoman Betty Reiss said this week that the company is trying to do the right thing for its customers by slightly tightening the flow of easy credit.
"We believe the banks in this business have either done it already or will do it in 2005," she said. "It's a conservative measure, but we believe it's in the best interest of our card holders."
Consumer advocates have praised the tough love from Bank of America and MBNA, saying the small step could help keep financially strapped customers from getting into a deeper rut - where they might never be able to pay off their credit card debt.
At the same time, they warn that the new policy likely will lead to some short-term pain and perhaps even an increase in personal bankruptcies.
"Consumer groups have been urging these companies to stop lowering the size of payments for years," said Travis Plunkett, legislative director of the Washington, D.C.-based Consumer Federation of America.
"It lulls consumers into a dangerous state of complacency, where they are paying at levels that barely cover the interest charges," he said. "This was a deliberate strategy by credit card companies to appeal to their ideal consumer - someone on the debt treadmill who is paying his bill but won't pay it off for years."
Industrywide, the minimum payments used to be about 4 percent. In recent years, some issuers lowered minimums to just 2 percent of the balance, Plunkett said.
"The single best thing they can do is increase the size of the minimum payment," he said. "That's the positive thing about this. But there's a human impact here."
Plunkett urged banks and other credit card companies to take some time to impose the new policy. "We'd be concerned if they increased their minimum payments overnight," he said. "That would be a heavy hit."
Linda Sherry, editorial director for Consumer Action, also had mixed feelings about the new policy.
"This needs to be done, but we don't want people pushed into bankruptcy," she said. "Maybe a better idea would be to downsize their credit limit."
The higher monthly payments might be simply too rich for customers who maintain large balances, said Sherry.
"If you are looking at someone with a $10,000 balance, moving it up a percentage point could mean having to pay $100 more each month," she said. "Still, I agree that they need to increase the minimum payments so people have some hope to pay it off." |
