Now, let’s talk about minimum payments. Back in the 1970s when banks wanted you to pay your credit card balances down to get their money back because they really didn’t make that much from the capped interest rates, it was the norm to expect no less than 5%, and even sometimes more, as a minimum monthly payment on your credit card balance.
This average of a 5% minimum payment each month was the norm for many years, that was until the credit card companies turned to a man named Andrew Kahr, who today very rarely grants interviews, and will only do interviews if reporters promise not to reveal what part of the country he lives in and who his clients are and were.
The big banks that were turning into credit card companies brought Andrew Kahr in to see how they could squeeze even more money out of the consumers they were now charging 20% interest.
Andrew looked at the psychology behind America’s emerging lack of financial responsibility in the 1980s and came up with a theory. Andrew felt that the 5% minimum payment was requiring the debtor to properly manage and worry about the amount of debt they took on, but that if the credit card companies lowered that minimum to a mere 2%, the debtor would have a much smaller minimum payment to worry about and would feel free to become relaxed about their debt management.
Not only was Andrew’s theory correct, it resulted in a fringe benefit for the credit card companies. See, at a 5% minimum, it would take you much less than half the time to pay off the debt that it would at a 2% minimum, and on top of it, the people making the 2% minimum still would think they were being financially responsible because they were not missing payments.
Today, the 2% minimum is industry wide and consumers take on a larger amount of debt because their monthly minimum payments are lower and all the while, it is taking them more than twice as long to pay off their debt, giving the credit card companies more chances at late payment fees and over-limit fees.
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