(Update1) Good News for Credit Card Customers?by Tim Manni
Chase has recently introduced two controversial changes to the terms of their credit cards. While the first — a $10/month service fee — has brought on class-action lawsuits, the other is something financial expert Peter G. Miller feels is a great benefit to cardholders.
Chase’s decision to raise their cardholders’ minimum-monthly payments from two percent to five percent on their outstanding balance will serve to greatly reduce interest costs:
One of the great “breakthroughs” of the credit card industry was the decision to lower minimum monthly payments from 5 percent to 2 percent. The result was that people would spend more because there was less due each month and balances would remain outstanding for a longer period of time — meaning more interest revenue for credit card companies.
For instance, imagine that you owe $10,000, have an annual interest rate of 18 percent and make a payment equal to 2 percent of the outstanding balance each month. It will cost $28,525 in interest to pay off the bill, assuming no additional borrowing.
Raise the minimum monthly payment to 5 percent and the interest cost will fall to $4,286.
In other words, Chase is actually doing something good for consumers by raising the required monthly payment.
But not all cardholders agree with Miller. A reader countered Miller’s argument by saying Chase had only increased the monthly minimums for cardholders with an already low interest rate. “Having to pay more on this debt will probably force borrowers to pay less on other debts that have a higher rate of interest. CHASE is not doing us any favors.”
“The reality is that it’s better for credit card borrowers to make payments equal to 5 percent of their outstanding balance rather than 2 percent,” said Miller. Regardless of personal experiences, “the math is the math.”
Readers: Do you agree with Miller or his reader?
UPDATE1: As reported yesterday by The Consumerist, Chase will stop charging the $10 monthly fee referenced in the article above.
From The Consumerist:
According to Cuomo’s office, Chase will be refunding $4.4 million in fees to their customers, but according the Chase, they’ll be refunding $3.3 million. Chase also says they’re relenting not because of the fear that Andrew Cuomo strikes into the heart of Corporate America, but because of customer feedback.