Capital One Changes Minimum Balance Calculations

UPDATE: Capital One Explains Minimum Balance Calculation Changes

A few readers have reported receiving letters from Capital One announcing that they credit card company is going to change how it calculates the minimum payment due amount. It used to be 3% of the balance, now it’s going to be 1% of the balance, plus new interest, plus new late fees, or $15, whichever is greater. The change will be effective December, 2008. Most likely, Cap One saw more people not sending in their monthly payments so they changed it so that more people could afford to at least make their minimums. Maybe it’s also a way to encourage people to be more loose with the plastic for Christmas. However, having a lower minimum monthly payment also encourages debtors to take longer paying off their debt, increasing their total cost in the long run. What’s interesting though is the letter says the change is required by “federal banking regulators.” Not sure what rule change they’re referring to there. Scan of the letter inside.

(Thanks to Nathan and Jason!) (Photo: thivierr)

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  1. hellinmyeyes says:

    I thought there was a federal law passed two or three years ago mandating that it had to be at least 2% of the credit card balance or something?

    • thebluepill says:

      @hellinmyeyes:

      Ditto, that is what I was thinking..

      Im on the fence about this one.. Lowing that Percentage will be a big boost for those that are having a hard time paying right now and will lower defaults significantly..

      Perhaps the bulk of those folks learned their lesson on over-use of credit, therefore it will be some real releif??

    • SadSam says:

      @hellinmyeyes:

      Cap One forumla sounds correct:

      By the end of 2005, new banking guidelines went into effect in an effort to save consumers from themselves. Banking regulators issued the guidelines that pressured credit card companies to boost minimum payments so debts would be paid off in a reasonable time. For many banks, that has translated into new rules requiring monthly minimums to cover interest, any fees or extra charges and at least 1 percent of the principal amount.

    • bikeoid says:

      @hellinmyeyes: Exactly – from [www.consumeraffairs.com] ,

      “Under rules instituted by the Office of the Comptroller of the Currency (OCC) in 2003 and phased in through the end of 2005, the minimum amount required for paying a credit card balance each month is increasing from 2 percent to 4 percent or more, depending on the bank that issued the card.”

      I wonder how they got around this. Is this another sinkhole for our bailout money?

    • Barbarisater says:

      @hellinmyeyes: That’s what I was thinking also. Maybe something that you had to be able to pay it off in a certain amount of time. Because if you followed the old min payment it would take you something like 10 years to pay it off.

  2. Segador says:

    This just encourages people to make even less intelligent financial decicions. The obvious end goal here is to keep people in revolving credit for as long as possible.

    • kamel5547 says:

      @Segador: Actually at this point I think Capital One is trying to delay charging off a ton of accounts. They’ve suffered a rash of delinquencies. While I agree that lower minimums are not good for consumers in general, I think the intent here is to get people to pay something rather than nothing. Not that it makes much of a difference IMHO.

      • Segador says:

        @kamel5547: That’s a great point. This is an ideal way to circumvent at least some of those charge offs.

      • crouton976 says:

        @kamel5547: My grandfather was in the finance business for most of his adult life. At one point in time, he was the president of the Georgia Industrial Loan Association. All of this with only a 6th grade education (his father died when he was young and being the only male left in his family forced him to go to work). He viewed the world with common sense education, particularly when it came to financial affairs.

        At one point in time, Lockheed laid off most of it’s workers, forcing them into bankruptcy, and many of whom had outstanding loans with my grandfather’s loan business. He made calls to all of them and said that after their bankruptcy was discharged, if they wanted to build their credit again, he would allow them to resume the loan payments, paying whatever they could afford at the same interest rate the loan originally had. Once everything had been paid off, he would pass a top notch report to the credit bureaus, thereby allowing them to receive credit from bigger lenders.

        When I asked him about this once, he told me that his philosophy was getting something was better than getting nothing.

        • crouton976 says:

          @crouton976: BTW, he told me that about 85-90% of all the people he offered this to accepted.

        • tcolberg says:

          @crouton976: Your grandfather has a lot more compassion and financial insight that many people out there do. Normally, I’m all for increasing minimum payment thresholds in order to encourage smarter credit card use, but these are tough times. It’s much better to reduce minimum payments rather than to let people lapse on their accounts, which would benefit neither party.

    • Coles_Law says:

      @Segador: I disagree. At a flat 3% minimum, if you pay late, your minimum payment will likely not cover interest+late fees. This at least ensures some headway will be made.

  3. RAREBREED says:

    These days, I guess nothing should really come as a surprise. Whatever they can do to make money, they’ll do.

    great picture…

  4. Anonymous says:

    It used to be 3% of the balance, now it’s going to be 1% of the balance or $15, whichever is greater.

    Hang on. Was the old scheme 3% of the balance straightup, or was it 3% of the balance, plus new interest and late payment fees? If it was just a straight 3%, this may not be a decrease in the payment amount, since the new calculated payment includes all new finance charges and late payment fees.

    This sounds as much like a way of making people feel the late payment fees more, since a late fee will automatically increase their minimum payment for the next month.

  5. Anonymous says:

    If I’m reading this right, it used to be a flat 3% of the balance which probably didn’t even pay the monthly interest. Now it is the monthly interest amount plus 1% of the balance. So 1% of the principal is being paid off each month.

  6. Employees Must Wash Hands says:

    The Consumerist introduction of the policy is not quite right, compared to the scan of the letter. The new policy is 1% of the balance [b]plus new accrued interest.[/b]

    Was the old policy just 3% of the balance, or 3% of the balance plus accrued interest?

    This doesn’t seem like it’s going to necessarily help credit card customers in terms of lower payments. However, it will at least make sure that if you should make the minimum payment, you’re going to reduce the balance even if by a pittance.

  7. Burgandy says:

    I would love for them to have to print out a date that shows when your bill would be paid in full and if you only paid the minimum. That might kick a few ppl in the butt and get them to pay this stuff off. Also show how much interest you are paying on that original purchase.

  8. Acolyte says:

    I actually worked for a credit card company once and yes that is based on legislation. You see the old formula could have you carrying a balance for years if you only paid the minimum.
    With this new formula you actually get to pay more in the long term. the minimum payments may be higher but you get done with the balance much faster.

  9. KithKanan says:

    For people with reasonable interest rates, this payment will be lower. For people with high default rates like 29%, this payment will go up a bit. It’s probable that the federal guidelines mentioned above were being broken in some cases by their old minimum payment formula for people with high APRs on their accounts, and it was easier for C1 to change the formula to be the same for everyone since they had to make the change.

  10. jamesmusik says:

    The odd thing about this note is that it says it “cannot be declined”, which seems completely false. Any material change to a contract has to be ratified by all parties to it. Surely you should be able cancel your card and continue paying off the balance under the old formula, correct?

    • jenl1625 says:

      @jamesmusik: You would think. But most credit card companies have fine print that says they can change the calculations on outstanding balances, and all they have to do is give you notice. It’s not considered a “change”, because there was some fine print somewhere when you got the card that said they could do it.

      Before this “bailout” frenzy took over, there was some pending legislation (I don’t know whether it would have passed) that would have set up some rights for credit card holders. From what I understood, it would have said that changes to interest rates (not sure about these kinds of calculations) would only apply to new purchases after notice of the change. Unfortunately, the legislature decided that it was much more important to throw billions of $s to banks, so that they could buy each other.

  11. Pop Socket says:

    Somehow I see this being combined with a lot more arbitrary fees and default rate implementations.

  12. Bahnburner says:

    Just one more demonstration of why credit card companies practices are evil…not just bad…evil.

  13. shepd says:

    This will make no difference (except to lower minimum monthly payments — it’s not like you can’t pay EXTRA as these are demand accounts, IIRC from Accounting 101) unless your APR is above 26%, at which point APR + 1% will mean higher payments.

    While some bad credit cards have an APR over 26%, and I bet some of them are Capitol One cards, it probably *is* a government regulation that you must pay a minimum of 1% of the principal (which, at 3% of the balance you aren’t doing above 26%).

    For those curious, anything above 42% APR would allow minimum payments below the interest-only threshold at 3% of the balance, meaning the account not only never gets paid off on the minimums, but it also increases due to unpaid interest. Basically, it’s usury and since 42% APR is actually legal, I would say this new method (which is what most places use already) only makes sense.

    The 3% of the balance thing is a really weird way of doing things, for the fact it makes accounting (for both sides) a major PITA, since the interest vs. principle portions will be different depending on your interest rate. The 1% of principle + interest means the interest component can be anything, and you will always know exactly what the maximum length of the loan is (100 months, or 8 1/3 years). At 3 percent, the duration depends solely on the interest (@ 10% APR, 45 months; @ 20% APR, 99 months; @ 30% APR, 127 months).

    Or, my math is totally wrong and you can ignore what I said. :-)

  14. ckaught78 says:

    I thought the regulators cmae in a few years back and changed things for banks making minimum payments larger to reduce the risk of negative ammortization and help people pay off their credit cards in 20 years versus 25…

  15. stinerman says:

    Bah-ha! That image came from my scanner. I win!

  16. KeithSmelt says:

    the problem with lowering the percentage of principal in the minimum payment is with a higher balance accompanied with a higher apr, you end up with what’s called ‘negative amortization’, a situation where the balance goes up, not down resulting in a no-payoff condition as well as pointing you towards over-credit limit fees which in turn trigger higher rates…

  17. banmojo says:

    chick in the pic is hot