Credit payment traps

Capital Eye by Randi Bjornstad

People hopelessly mired in consumer debt got a whammy from the U.S.

Congress recently with the passage of bankruptcy reform legislation that makes it harder to walk away from past financial problems, whether they stem from bad decisions or bad luck.

Research at the time showed that more than two-thirds of those who file for personal bankruptcy do so after experiencing catastrophic health problems that gobble up their savings and force many to use credit to try to regain their financial stability.

Unfortunately, trying to balance the family budget by hopping from one credit card to the next to keep ahead of the bill collector is a recipe for disaster.

It’s hard to blame beleaguered consumers for yielding to the temptation, though, when many get at least two or three credit card come-ons in the mail every week, offering them the chance to transfer high-interest balances from one company to another at what seems to be an impossibly low rate of interest

As usual, what seems to be too good to be true generally is, and the failure to read – much less understand – the fine print on these fabulous deals can lead to the double whammy of actually higher than ever interest rates and perpetually increasing credit balances for those who can keep up with only the minimum required payment.

For example, until now most credit card companies have required payment of only about two percent of the entire balance as a minimum payment. On a bill of $5,000, that’s a mere $100. At a rate of 8.99 percent – very low compared with what many credit card companies end up charging if someone misses the deadline on just one payment – it will take 63 months to pay off that balance at the minimum level of payment, and that’s only if the cardholder doesn’t continue adding to the balance.

In fact, many credit card companies now write into their too-seldom-read credit agreements a clause that automatically increases the interest rate if the cardholder makes only the minimum payment for a specified period of time.

Not only that, according to the Internet-based Bankrate.com, several of the really big credit card companies, including MBNA, Citibank and Bank of America, have announced they soon will increase the minimum monthly payment from two percent to four percent of the balance, a move sure to be copied by many other companies.

For cardholders who can afford to double their monthly payback, that’s a fine thing that could get them out of debt sooner – maybe. For those already having trouble making the minimum payment, it will be an even worse disaster than usual.

This issue of falling further and further behind on escalating consumer debt has drawn the interest of at least a couple members of the U.S. Congress.

Sen. Daniel Akaka of Hawaii and Rep. David Price of N.C. have introduced companion bills that at least would require credit card companies to disclose the likely outcome of making minimum payments on credit card debt.

Called the “Credit Card Minimum Payment Warning Act,” Akaka has sponsored S. 393, while Price’s bill carries the number H.R. 3852.

The bills amend the federal Truth in Lending Act by requiring the lender – i.e. the credit card holder – to provide the consumer in a conspicuous place on the first page of each billing a “minimum payment warning” that reads: “Making only the minimum payment will increase the amount of interest that you pay and the time it will take to repay your outstanding balance.”

The warning also would include the number of years and months it would take the consumer to pay the balance at the minimum payment rate, the total cost of principal and interest over the period of the balance and the monthly payment that would be required to retire the balance in a three-year period.

The bills also would require inclusion of a telephone number the consumer could use to seek credit counseling assistance.

“Middle class families are carrying record levels of debt,” and many consumers don’t realize they are “digging themselves further into debt with each passing month,” Price said. “Our legislation will provide a wakeup call for consumers. It will make it very clear what costs consumers will incur if they make only the minimum payments on their credit cards.”

It’s a move that’s long overdue. Obviously, the lending industry will not police itself in an effort to educate consumers adequately. It’s entirely appropriate for Congress to step into the breach.