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The Honolulu Advertiser
Posted on: Thursday, December 22, 2005

Higher minimum payments on credit cards a sign of 'tough love'

By Greg Wiles
Advertiser Staff Writer

Q. I heard that credit card companies may raise the minimum payment requirements. Is this true?

A. Depending on your credit card issuer, they may already have raised the rate or will raise it by your January billing.

For example, in July Central Pacific Bank raised the minimum payment for holders of its Visa cards to 3 percent of outstanding balances from 2 percent previously. First Hawaiian Bank, the biggest Hawai'i-based credit card issuer, has had a 3 percent minimum payment requirement for several years.

All card issuers are supposed to require higher monthly payments by the end of the year. Prior to the change, many banks required only 2 percent of outstanding balance be paid each month. Now some are doubling that to 4 percent. Others may require customers to pay all monthly interest and fees plus 1 percent of the outstanding balance, Web site IndexCreditCards.com reported.

Credit card issuers are raising requirements after being pressured to do so by the U.S. Office of the Comptroller of the Currency, the federal agency that regulates nationally chartered banks. The Comptroller's office and other regulators were worried about potentially pernicious effects of low minimums in that people who only pay the lowest required amount shoulder the debt for longer and end up with a bigger interest expense bill.

"A minimum payment increase from 2 to 4 percent for someone who's hanging by a fingernail at 2 percent is a big deal," said Wendy Burkholder, executive director of the Consumer Credit Counseling Service of Hawaii.

Burkholder helps arrange debt-management plans for people with financial problems.

The difference in interest expenses under different repayment scenarios can be startling. Consider a simple example of someone who has a $1,500 balance on a credit card with an 18 percent interest rate.

The card holder making 2 percent minimum payments would take 26 years and pay $3,341 in interest, according to a minimum payment calculator on Web site Bankrate.com.

With a 4 percent minimum payment, the card holder would need about 8 1/2 years and pay $816 in interest.

No numbers exist for the number of people in Hawai'i who are in the category of only making minimum or less than minimum payments. But First Hawaiian Bank said only 5 percent of its Visa and Mastercard holders fall into this category. The remainder pay off balances or send in more than the minimum.

The bank set its minimum payment requirement at 3 percent several years ago, said bank Executive Vice President Ed Pei.

"Certainly we want the customer to be reasonably able to service the debt they own so they're not in debt forever," Pei said. He said the bank is also willing to work with customers having temporary financial problems.

Burkholder said new minimum payment requirements may come as a rude awakening to some people whose budgets are being stretched by rising apartment rents, gasoline prices and other costs. Yet she said the new requirements will be better in the long-run.

"It's almost forcing education on them in a 'tough-love' kind of way," she said.

Advertiser news services contributed to this report.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.