Credit Basics

If the minimum payment on January credit card bills seem a little higher than normal, it’s probably not just from Christmas purchases.

Federal banking regulators in the Office of the Comptroller of the Currency/National Administrator of Banks, last year issued new guidelines to banks and credit card companies, requiring them to increase minimum payments to cover interest, fees or extra charges, and 1 percent of the principal amount.

As a result, MBNA, Citibank and Bank of America announced last year they were doubling minimum monthly payments on credit card balances from 2 percent to 4 percent.

The guidelines stated that by the end of 2005, all credit card companies would require the change for their January 2006 bills. That means cardholders are now seeing the requirement for higher minimum payments, said Howard Dvorkin, founder of Consolidated Credit Counseling Services Inc., a national non-profit agency which has locations across the Upstate.

The new regulations bring both good news and bad news for consumers.

Long-term the change is good because the higher minimum payments will force shoppers to pay off their credit card bill faster, Mr. Dvorkin said.

For example, a person with $5,000 in credit card debt at 18 percent interest will spend nearly 47 years and $13,931.13 in interest paying it off with only 2 percent minimum monthly payments.

With a 4 percent minimum monthly payment, that person will be out of debt in about 13 years and pay only $2,915.66 in interest, according to a credit calculator at Bankrate.com. For someone with a balance of $5,000, the minimum payment would equal about $100, if 2 percent was required; for 4 percent it would be $200. "But it’s still going to hurt like hell," Mr. Dvorkin said.

Bank regulators’ goal is save consumers from themselves, according to industry officials.

Credit cards paid for an estimated $1.75 trillion in purchases during 2005 compared to an estimated $872 billion on debit cards, according to The Nilson Report, a newsletter that’s been following spending trends since 1970.

But money is going to be tight for the 7 percent of Americans who only make the minimum monthly payment on their credit card.

Lynn Donald, 41, of Townville hasn’t gotten her bill yet, but said she fears it will leave her screaming.

"Some people don’t have extra and just get by," Ms. Donald said. "It seems minor right now, but it could be critical in the long run."

About 65 percent of credit card users carry a balance. With minimum payments doubling in most cases, unpredictably high fuel and heating prices and stricter bankruptcy laws, consumers living month to month are in trouble, Mr. Dvorkin said.

That also could mean trouble for credit card companies. According to Bankrate.com, Bank of America, one of the first to raise minimum payment requirements, worked an extra $130 million into its 2005 budget to cover projected losses from cardholders who default.

But Mr. Dvorkin said creditors haven’t fully prepared for the consequences they will face when the number of consumers defaulting on their credit card bills increases initially.

After six months, credit card companies can write off debt as not collectable, and in June he thinks there is a good chance the value of their stocks will drop.

"It’s very difficult for people to dig out," Mr. Dvorkin said.

Some advice he had for residents faced with higher payments is to go through finances to determine the debt load, and make a budget. Most people don’t realize exactly how much debt they have and are shocked to find out where they are spending money, he said.

Gary Whitten, 61, of Anderson said his father always told him that if he didn’t have cash to pay for something he shouldn’t buy it. That’s the same advice Mr. Dvorkin and other experts are giving residents today.

"It’s good for the people to get them paid off," Mr. Whitten said. "I know it’s hard on people, but people ought not to live off credit cards."