"Get Ready to Pay More on Credit-Card Balance"

September 26, 2005
BY TERRY SAVAGE SUN-TIMES COLUMNIST

Consumers are about to be hit with a triple whammy -- a series of blows that could push those on the edge into bankruptcy. And with the new bankruptcy laws scheduled to take effect Oct. 17, even bankruptcy won't be an easy solution.

Get ready. The combination of rising energy prices, rising interest rates, and rising credit-card required minimum payments are going to take a big bite out of your budget in the coming few months. And since consumer spending has been a potent force in keeping the economy growing, this blow to consumers could have a larger impact on the economy.

Here's a closer look at the three factors sneaking up on consumers:

Rising Energy Prices: That's no secret. Double hurricane hits will make for doubly higher prices in both gasoline and home heating costs this winter.

Rising Interest Rates: Even hurricanes Don't stop the Fed from increasing interest rates to fight inflation. And if inflation comes, it will bring rising interest rates anyway. Everyone with an adjustable rate mortgage or credit-card debt will feel the impact of higher monthly payments.

Higher Credit Card Minimum Payments: Here's the sleeper in the triple whammy -- a new banking regulation that could actually double the amount of your required minimum monthly credit-card payment.

Debt more dangerous

Within the next three months, consumers with the highest amount of credit-card debt will see the impact on their monthly statements. There's nearly $1 trillion worth of revolving credit-card debt outstanding -- the balances that revolve from month to month. And about half of those accounts are held by consumers who make only the minimum monthly payment.

When you make minimum monthly payments, it keeps your credit in good standing. But it can also bury you in a burden of debt and interest payments that could take more than 30 years to pay off, given the way some banks have been calculating the minimum required payment.

Two years ago, Federal banking regulators grew concerned about this burden of consumer debt, and they instructed banks to demand higher minimum monthly payments that would include at least a 1 percent monthly paydown of the amount owed.

Thus, with higher monthly payments, the total interest burden on consumers would be lower, and they could pay off their balances sooner.

The deadline was set for year-end 2005. And the banks, worried about pushing indebted consumers over the edge with higher minimum monthly payments, have delayed imposing those higher minimums. Until now.

Higher minimum payments

Here's what could happen to your minimum monthly payment under the new regulations.

Suppose you owe $2,000 on your credit card and your interest rate (finance rate) on the unpaid balance is 18 percent.

Many banks currently require you to pay only 2 percent of the outstanding balance as your minimum monthly payment. Under that scenario, your minimum monthly payment is currently $40.

But at that rate, it will take you nearly 31 years to pay off the balance -- and along the way, you'll pay an additional $4,931 in interest. That's because about three-quarters of your monthly payment goes to interest.

Under the new regulations, banks would be required to include a paydown of an additional 1 percent of the outstanding balance. So your minimum monthly payment would jump to $60 -- an increase of 50 percent. (As the card is paid down, the monthly payment drops slightly each month.)

And assuming you make no new charges, you'll pay off that balance in just under 14 years. And your total interest paid will be far smaller -- $1,798.

That's still a lot of money to pay in interest over the years for today's consumption. And that should inspire you to pay down your credit-card balances as soon as possible. Over the long run, the idea of requiring increased credit card payments is a good thing for consumers and the economy. But over the short run, it could be disastrous for a family's budget.

The combination of higher minimum monthly payments on credit-card debt with higher energy bills, and potentially higher mortgage payments as interest rates rise is a recipe for the Triple Whammy. And that's The Savage Truth.

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Terry Savage is a registered investment adviser and the author of the newly published The Savage Number: How Much Money Do You Need To Retire? (256 pages, Wiley, $24.95).

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