By Mark Lilien, Consultant, Retail Technology Group (www.retailtechnologygroup.com)
Thirty-five million Americans make the minimum payment on their credit card debt each month. Certainly, Christmas is the key time for increasing that debt.
In January 2003, the Office of the Controller of the Currency issued Bulletin 2003-1, which told all national banks to review their minimum credit card payment requirements. Years ago, the minimum was five percent a month. Over time, it declined to one percent for many loans. Bulletin 2003-1 allowed banks to take a reasonable time to raise their payment minimums. Well, that time is now up - so, before Christmas, major credit card issuers like Citi, MBNA, and Bank of America will raise their minimums.
In some cases, the new minimum will be up to four times the old minimum (four percent instead of one percent). In many cases, it will double (four percent instead of two percent). Even if retailers extend zero percent financing, the minimum payment increase (if the card plan is issued by a national bank) will be mandated by the OCC.
Perhaps the banks will wait until after the new bankruptcy law starts in October. So the "stretched" shoppers will not realize they need to declare bankruptcy until the new law is in effect. The new law reduces the proportion of people allowed to completely discharge their debt, so the squeeze will be maximized.
Adding to the squeeze: short-term interest rates are higher this year than a year ago (the prime is 6.5 percent, 44 percent higher than a year ago), and many credit cards have variable rates.
A Katrina side note: the victims will also be subject to the new bankruptcy law, even though it's unlikely they can use the remaining few days before it starts to file bankruptcy paperwork. Or will FEMA fly in several thousand bankruptcy lawyers in the next couple of weeks?
Combine the credit minimum tightening, bankruptcy tightening, short-term interest rate rise, and the expected peak prices for heating oil and gasoline. The effect on Christmas shopping will be huge, because the Christmas season is very short, and many of those 35 million people will be in shock.
Moderator's Comment: How will raising the minimum payment on credit card debt impact consumers? What can retailers do about the financial issues raised by the article? - Mark Lilien - Moderator