Debt may pile quicker in '06: New credit laws could put some in deeper hole
DOVER - With minimum payments for many credit cards set to double in January, those who scrape by month to month may get socked when their holiday shopping bills come in.
Federal mandates requiring the rise in minimum payment rates are meant to encourage people to pay off their debt more quickly. But though crafted with an eye toward solvency, the requirements could exact a toll in the short run - especially among those who don't see the change coming.
Nancy Coverdale of Dover always pays above the minimum on her bill. But that's her decision, she said, and she's not happy to hear she won't have a choice about whether to pay more in the future.
She'd never heard of the change before Thursday. "It really shouldn't be," she said.
"What about the people who can barely make the minimum payment?"
Only about 35 percent of American credit card customers pay off their balances in full each month, said Howard S. Dvorkin, founder of the Florida-based nonprofit Consolidated Credit Counseling Service.
The rest carry balances, and with most minimum payments slated to rise from 2 to 4 percent in 2006, and interest rates hovering in the teens and twenties, Mr. Dvorkin said it could be a tough year for many consumers.
"The increase in the minimum payments, the interest rate hikes, bankruptcy reform, the cast of heating oil and just in a global concept, the overall household debt could devastate many, many people in 2006.
"These consumers are living paycheck to paycheck right now. When they're asked to pay another $200 to $300 a month, that's going to put them in dire straits."
Not all minimum payment rates are rising. Carol Langiu, marketing manager for the Dover Federal Credit Union, said the National Credit Union Administration was not affected by the change in federal regulations. As such, the 4,000-5,000 Dover Federal Credit Union cardholders won't see a change on their next bill.
Major banks however are affected. Mary Rammel, a senior counselor at the nonprofit Consumer Credit Counseling Service of Maryland and Delaware, said the organization's offices have been surprisingly busy this month because, she speculates, many have received notification of the rise in minimum payments.
Ms. Rammel said many credit card companies sent notification to their customers this fall. For instance, at Bank of America, where increases took effect Dec. 1, spokeswoman Julie Davis said customers were notified on their October statements.
Both interest rates and late fees have been "inching up" in recent years, Ms. Rammel said.
"We're seeing some now as high as 30 percent interest," Ms. Rammel said.
The high-end for late fees has also crept from $29 to around $39 in recent years, and failing to make one payment on time could cost you not only the fee, but higher interest rates on each one of your cards, Ms.
Rammel said.
The "universal default clause" allows a company to hike interest rates after a missed or late payment on a credit card - even if the missed payment was for another card distributed by another company altogether.
"Sometimes it's a chain reaction," Ms. Rammel said.
"It can be a really, really devastating thing to the person because all of the sudden, their interest rates are higher, they're making their minimum payments, but their balance isn't coming down because their interest rates are up."
Another potential complication for consumers this year could be the merger of Delaware-based MBNA and Bank of America. As reported by the Associated Press, Bank of America will become the nation's largest credit-card issuer when it closes its $35 billion acquisition of MBNA on Jan. 1.
Rashmi Rangan, executive director of the Delaware Community Reinvestment Action Council, said consumers should expect to pay more to access credit, given the decrease in competition.
Ms. Davis of Bank of America said she wouldn't comment on speculation, but said they do feel there will still be a competitive card environment.
Mr. Dvorkin thinks that the MBNA/Bank of America merger likely won't hit consumers too hard, saying interest rates can't get much higher than they are already.
He cited bankruptcy reform as another challenge to consumers who find themselves deeply in debt, their monthly payments mainly going toward interest rather than principal. New laws that he said are meant to deter individuals from filing bankruptcy stipulate an income threshold that people must fall below to qualify for Chapter 7 bankruptcy, which allows for complete liquidation of debt.
More people will now fall under Chapter 13, he said, which requires individuals to set up and stick to repayment plans, as well as pursue financial education.
Ms. Rangan said she advocates full disclosure by credit card companies about the life of a loan, which she said can be much longer than many consumers anticipate.
"Assuming that the interest rate on a credit card is 18 percent, and the person owes $1,200 as a balance, and doesn't use the credit card at all.
"Suppose this person pays 3 percent, which is $36 every month, it would take them 47 months to pay it off, and they would have paid $476 in interest," Ms. Rangan said.
"And if they pay 5 percent every month, that is $60 a month, then they would take 24 months to pay it off and pay $237 in interest.
"That is assuming that you're paying on time and there are no late fees."
Increasing the minimum payments is of course designed to lessen the life of a loan, providing cardholders with the freedom to shed their debt burden and move forward.
Richard Brown of Magnolia said he just finished paying off his credit card debt after four years.
"It feels good. We were paying enough money (in credit card bills) to pay for a brand-new car," he said.
"My wife told me it's got to stop."
Debt-free, he said he and his wife keep one credit card on hand these days, but only for emergencies.
Staff writer Elizabeth Redden can be reached at 741-8247 or eredden@newszap.com
