Credit Card Issuers Doubling Minimum Payments

For years now, the minimum payments on credit cards have been shrinking. Low minimum payments, combined with default interest rates of 20 – 30%, and penalty fees of $29 -- $39, mean millions of consumers are on a debt treadmill with no hope of getting off.

And that treadmill is about to speed up dramatically.

Many of the major credit card issuers are about to double minimum monthly payments. This change is the result of guidance from the Office of the Comptroller of the Currency, which in January 2003 directed national banks to raise minimum payments so that consumers who pay the minimum would pay off their credit cards in more reasonable periods of time (as opposed to almost never under some current practices). While no specific minimum payment requirement has been set by the OCC, it appears that many issuers will be moving from requiring about 2% of the balance to be paid each month, to requiring consumers to pay closer to 4% of the balance due.

Overall, it’s good news, since consumers will get out of debt faster. But for the 44 million people that CardWeb.com estimates just pay the minimum, the new higher payments will come as quite a shock.

As a loan officer, then, this can be the ideal time to promote the best way to use home equity for debt consolidation. Here are a few points to keep in mind:

Consolidating credit cards with a mortgage can result in lower interest costs, payments, and the added benefit of a tax deduction for those who itemize. Savings should be weighed against the cost of the new loan, including the time period required to pay it off.

A larger mortgage loan, paid on time, will not negatively impact the credit score the way that high balance credit cards do. By consolidating, the client’s credit score can improve.

Personally, I don’t like the “consolidate and take a vacation” message many lenders use. Would you rather be viewed as an advisor with your client’s best interest in mind? Then use a message that shows them how to create greater financial security. Here are a couple of ideas:

Show consumers how they can consolidate their debt with a new loan, then pre-pay their mortgage to become completely debt-free in the fastest time possible. Offer a free report, seminar, or both, showing consumers how to completely eliminate their debt, for example. (For an inexpensive do-it-yourself program consumers can use to create a rapid debt elimination plan, I work with and recommend EverydayWealth.)

Team up with a financial planner to offer a seminar showing consumers how to consolidate debt, then save or invest the money they free up each month. You’ll really do your clients a favor by helping them become more successful, which can result in referrals. And you can also get more mileage from your marketing efforts with your strategic partner’s help.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.