Business

Credit card minimum payment likely to rise soon

Bertha Mendez uses a credit card about once a month to buy groceries for her family. The Madera, Calif., sales clerk is the only one bringing home a paycheck and helps support her mother, disabled father and 14-year-old brother with her job at an auto parts store. She has a $1,000 balance on the card and a low minimum payment, but "sometimes we don't have enough in the bank" to pay it, says Mendez, 23. If her minimum payment increased, it would be even harder to pay it. Her minimum payment will probably rise soon. And so will yours, if it hasn't already. New federal regulations have credit-card companies boosting the minimum amount customers pay each month. Some companies already have increased minimum payments - and others will soon. In 2003, the U.S. Office of the Comptroller of the Currency required that minimum payments make a dent in the principal - the money spent buying a Dolce & Gabbana purse or a car stereo - as well as paying off all interest and fees, says Kevin Mukri, spokesman for the federal agency. Percentage of balance

Before then, many banks required the nation's 185 million cardholders to pay a percentage of their outstanding balances - usually about 2 percent, says Donald Rehorn, a community liaison for the parent company of Consumer Credit Counseling of the Central Valley. That 2 percent doesn't always pay part of the principal - or even all the interest - if a customer has fees and a high interest rate. How much minimum payments will rise depends on how much a person owes and the interest rate. The new amounts are designed to eliminate situations in which people are paying the minimum but still digging themselves deeper and deeper in the hole because their minimum payments are too low to cover all the fees and interest, Mukri says. Banking giant MBNA, for example, will start notifying customers of changes in the late summer and early fall. MBNA, the nation's largest independent issuer of credit cards, requires that customers pay 2.25 percent of their outstanding balances or $15, interest and fees - whichever is less. The new formula will require customers to pay interest, fees and 1 percent of the balance, says company spokesman Jim Donahue. The changes come as the federal government pays more attention to the $1.8 trillion Americans charged in 2004 on credit cards, including charge cards at stores. Bill would force disclosure

Sen. Chris Dodd, D-Conn., is pushing a bill that would force credit-card companies to disclose how long it would take to pay off a balance with minimum payments and how much a person would ultimately end up paying. The bill is being considered by the Senate Banking, Housing and Urban Affairs Committee. California passed a similar law in 2001, but the American Bankers Association and others challenged it in court and won, says Tom Dresslar, spokesman for state Attorney General Bill Lockyer. Congress and other federal agencies are realizing that we are a charge-happy nation: Households with at least one credit card owed an average $8,854 in 2004, according to Cardweb.com Inc., which provides credit information to consumers and credit professionals. "They are beginning to get very concerned as to the length of time people are in debt," says Catherine Williams, vice president of financial literacy at Money Management International, a nonprofit credit counseling service in Chicago. For example, take a $1,000 credit card balance with an 18 percent interest rate. Paying a 2 percent minimum - $20 a month - means you are paying just $2 of principal and $18 of interest, she says. It would take more than 19 years to pay off the debt if the cardholder made only the minimum payment, according to Cardweb. It also would cost $1,931 in interest, putting the final tally at $2,931, almost three times the original amount charged. Increase the minimum payment to 4 percent, and the payoff time drops to seven years, with $516 in interest for a total of $1,516. If you make minimum payments on a bigger balance and with a higher interest rate, your financial troubles could plague you until the day you die. "You could be in a situation when you don't live long enough to make those payments," Rehorn says. And without a federal cap on interest rates, debtors can get in big financial trouble, Rehorn says. Most pay more

So what do the changes in minimum payments mean to the average person? Nothing, if you pay off your balance each month. "The overwhelming majority of our customers, 95 percent, already pay more than the minimum each month," says Donahue of MBNA. But if you're making only minimum payments and have loads of debt, life will be harder. "For a family that's having difficulty in using credit as the averages indicate, they'll fall delinquent very quickly," Williams says. "It will use or consume money that maybe that consumer has been paying cash for things." That's just what Amanda Chrisco of Fresno is thinking. For her, a rising minimum payment would be "annoying … a burden," she says, wrinkling her nose at the thought. You could "spend that money on something else," she says. Chrisco uses her one credit card for food and clothes for her ever-growing 4-year-old son. The Loan Mart payday loan store employee carries a small balance, about $60, and pays a few dollars over the minimum payment each month.