January 8th, 2013 by Kenneth Long
Having a small minimum monthly payment is one of the great appeals of using a credit card to spread out purchases. However, Chase has found that cardholders that only make a $10 monthly payment have a higher default risk. In order to reduce their default rates, Chase implemented a $25 floor on their minimum monthly payment calculations. Since that change on March 15, 2011, many of their cardholders have found it difficult to juggle the higher monthly payments, especially since some of their other credit cards have also increased the minimum payment calculations.
By requiring a higher minimum payment, Chase is speeding up the repayment process for its cardholders. Less outstanding debt means less risk of loss for the bank. Even if the cardholder eventually defaults, the hope is that there is a lower balance on the card at that time.
Of course many consumer advocates would point out the opposite effect that the higher minimum payments would have on cardholders. It certainly is true that consumers with already stretched budgets cannot handle the shock of multiple credit cards requiring higher monthly payments. By putting a household into a negative budget situation, the result could be delinquent payments and eventually multiple defaults.
There is a cost saving component to the higher required payment. It costs any company money to handle payments. Online payments through bill pay services are easy to handle and very cheap for the bank to process. Paper checks however are very cost intensive to process, since they often require various levels of manual interaction. Even with newer technology, a certain percentage of customer payments must still be handled manually due to a number of factors (ink smears, dark pictures obscuring numbers, tears, etc.). The increased monthly minimum means that a lower percentage of the payment would be used up by processing costs.
If you are struggling to handle the higher minimum payment requirements, then you might need to talk with a credit counselor. On one hand, it might be possible to restructure part of your budget to make the higher payment easier. On the other hand, you might be at a point where you need intervention to avoid an eventual default. Credit counseling can help either way, and it can also include the potential benefits of lower minimum payments and reduced interest charges that are typical in a debt management program.
When higher payment requirements put your budget in a pinch, it is a sign that you have taken on too much debt. Something has to change. Either your expenses must drop, income must increase or you must get relief through one of the structured plans offered by a certified financial counselor. If your previous habits have not cured the problem, then you need to find a new direction.
This entry was posted on Tuesday, January 8th, 2013 at 10:46 am and is filed under Credit Cards, Credit Cards: Chase, Debt Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.