Tuesday, September 13, 2005

Do you want the good news or bad news first?

MSN Money - Your credit card payment just doubled

Good news: Credit card companies are doubling their minimum payments.

Bad news: Credit card companies are doubling their minimum payments.

So far, MBNA, Citibank and Bank of America have announced they are doubling minimum monthly payments on credit card balances from 2% to 4%.

Others are expected to follow suit quickly.

To some cardholders, that could be seen as a good thing.

If you can handle the increased payment it's good.

Let's face it, if you pay only a 2% minimum each month, your debt would probably last longer than most marriages.

Doubling your minimum might put you back on the financial straight and narrow.

Ostensibly designed to help consumers get out of debt faster, the increased minimums will force cardholders to pay off fees, interest and at least a portion of the principal each month.

But if you simply can't make that doubled minimum month after month, it could put you and many other debtors in over your head.

Why it's happening Over the past few years, low minimum payback rates of between 2 and 2.5% have encouraged Americans to spend, spend, spend -- and to rack up an average credit card debt of close to $10,000 per household.

For the estimated 40% of cardholders who carry a balance from month to month, the low minimums free up cash.

But paying off a big charge little by ever-so-little also means that a $1,000 debt can turn into a 22-year commitment -- and that you'll accumulate thousands more in interest in the meantime.

"People are now in a revolving debt cycle that they'll never escape," says Adam Brauer, a debtor advocate and in-house counsel for Debt Settlement USA in Scottsdale, Ariz.

"So the government nudged credit card companies into saying, 'This isn't working.'"

Specifically, regulators with the Office of the Comptroller of the Currency began pressuring credit card companies to raise minimum payments.

Another incentive for change: The newly enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which requires credit card companies to post a kind of Surgeon General's warning on monthly statements that notifies consumers about how long they'll be in debt if they make minimum payments.

Help for big spenders Although increased minimum payments aren't a panacea for consumer debt, most financial experts think they'll help.

"If you pay more per month, you'll get out of debt quicker and you'll pay less interest," explains Mike Peterson, vice president and co-founder of American Credit Foundation, in Midvale, Utah.

Take the $2,000 Hawaiian cruise you charged to a card with an 18% interest rate.

If you faithfully make minimum payments and never add another dime to the balance, it'll still take you about 30 years to pay off the trip -- and you'll end up forking over almost $5,000 in interest.

"People charge up to the point that they feel they have room within their budget to afford those payments," Peterson explains.

Bad news for big debtors Of course, if your finances are already squeezed to the breaking point, the rate hike is a bitter pill to swallow -- good for you in the long run, but hard to take right now.

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 defaulting cardholders.

"I always tell people there are two sins: not paying, and not paying as agreed," says Cate Williams, vice president of financial literacy for Money Management International, in Chicago.

If you've been carrying a big credit card balance and suddenly need an extra $300 a month to make your minimum payments, now's a good time to re-examine your finances. With some smart spending shifts and careful planning, virtually anyone can dig an extra 10 to 15% out of their budget.

Here are some ways to get started:
  • Pay less to Uncle Sam. In 2004, 80% of taxpayers got a refund -- on average, $2,400 a pop. By adjusting your withholdings, you can keep that money in your own pocket and put an extra $200 a month toward your debt.
  • Curb your spending. Even small changes, like brown-bagging lunch or renting one DVD a week instead of three, can free up to 10 to 15% of your income, says Peterson. To find expenses you can shave, track your spending for seven days. You may be surprised at how relatively small expenses -- like 75 cents for a Diet Coke from the vending machine -- add up over time.
  • See a credit counselor. The new bankruptcy law mandates at least two financial counseling sessions during the bankruptcy process, but if you see a counselor now you may be able to avoid reaching that point altogether. For help finding one, visit the website of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
  • Control your cards. Paying down a big debt is hard enough without adding more fuel to the fire. To avoid the temptation to spend, "Take every credit card except one out of your wallet," recommends Williams. "Lock them away. People have frozen them in bowls of ice or given them to a trusted friend. I'm concerned about people walking around without some means of emergency cash. But we all agree what an emergency is, and a shoe sale at Nordstrom is not it."
-- Melody Warnick is a freelance writer in Iowa

Summarized by Copernic Summarizer


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