Lower Minimum Payments Keep Credit Card Users on the Hook Longer

If you make the typical minimum payment on your $8,000 credit card bill, it will take you 34 years to pay it off.

Numbers like those -- almost impossible to appreciate unless you see the calculations on paper -- become even more alarming when one considers the growing number of people carrying credit card balances.

And now major credit card issuers are slowly lowering their minimum monthly payments, a move that could quietly lull consumers even deeper into debt, some consumer advocates say.

"I'm sorry to state the obvious, but credit card companies would love to keep you in debt for the rest of your life," said Linda Sherry, executive director of Consumer Action, a national, nonprofit consumer education group based in San Francisco.

A few years ago, most bank and store credit cards required a monthly payment of at least 4 percent of the balance.

The standard has drifted down toward 2 percent the last couple of years and keeps sliding. Some companies this year even dipped to 1 percent or lower.

The bottom line: It will take even longer to wipe out the bill for consumers paying just the minimum, and they'll end up paying more.

"The minimum payments have dwindled so much lately," Sherry said. "It's a real sea change."

More than half of U.S. consumers don't pay their credit card bills in full each month, according to the Federal Reserve. A Fed study released in 2000 said 55 percent of families are carrying credit card balances, compared with 52 percent in 1989.

With 1 billion credit cards in use, the average household has $8,367 in credit card debt, according to the research firm CardWeb.com, up from $2,985 in 1990.

Among the 185 million U.S. consumers with at least one credit card, the average person has 2.7 bank cards, such as MasterCards or Visas, and 3.8 store cards, according to CardWeb.

Paying the minimum is a common phenomenon in today's growing paycheck-to-paycheck circles, experts say. With minimum payments now sometimes dipping below a card's monthly finance charge, consumers paying the minimum could be sinking deeper in debt even when they don't make any new charges.

"It's like companies are trying to get you addicted to paying the minimum," said Russ Haven, a spokesman for the U.S. Public Interest Research Group in New York. "You think, `Oh, I'm off the hook.' It (lower minimum payments) may seem like temporary relief, but it's a way to cultivate a nation of debtors."

Among those reducing minimum payments below 1 percent for at least some customers is MBNA Corp., which has slipped to the second-largest card issuer behind Citigroup Inc. Spokespersons for MBNA didn't return phone calls seeking comment.

In its most recent national report, Consumer Action for the first time found that none of the 42 credit card issuers surveyed required minimum payments greater than 3 percent.

Most consumers probably wouldn't notice a declining minimum payment because most don't read their card companies' disclosure notices anyway, said Gregory Elliehausen, who follows consumer debt issues as senior research scholar at the Credit Research Center, a Washington research association affiliated with Georgetown University.

But he's a little surprised by the trend. "With 1 percent payments, it can't get much lower than that," Elliehausen said.

Credit issuers that are lowering minimums may be trying to boost revenues that they're losing because of lower interest rates, some consumer advocates say. The Federal Reserve last year cut interest rates by 4.75 percentage points, forcing issuers whose rates are calculated from the prime rate plus a certain number to slash rates as well.

But most credit issuers have minimum rates and cut consumer rates by only 2 to 3 points. Meanwhile, the nation's top six issuers, with a combined 263 million accounts, posted profit increases of 20 percent to 40 percent in the final quarter of last year, according to CardWeb.

The banking industry strongly denies that creditors want to squeeze more money out of consumers.

"Just because you are offered a lower minimum due doesn't mean you should take it," said Julie Malveaux, a spokeswoman for the American Bankers Association in Washington. "It's great when you're in a crunch. But we tell people that when it comes to paying your bills, it's always better to try to pay more because you want to get your balance down."

Still, the banking industry viciously fought a proposal to spell out the costs of carrying a balance. Legislation proposed three years ago by Rep. John LaFalce, D-N.Y., would have required companies to tell customers on each statement how long it would take to pay off their bill, and the total interest charges, if only minimum payments were made.

The proposal was later folded into bankruptcy reform and modified to require creditors to provide only a generic example of how minimum payments work. The proposal was killed last year.

(Teresa Dixon Murray is a reporter for The Plain Dealer of Cleveland. She can be contacted at tmurray@plaind.com.)

But if you are in a financial bind or unemployed, you may have no choice because you cannot afford to pay more

How did people survive before credit cards in such situations? THEY WORKED THEIR ASS OFF AS A FAMILY, OR WENT TO GET HELP FROM CHARITIES!!!! Credit Cards are a recent phenomena, that can be used to get people in trouble. Avoid them if you can't pay them off month to month. If you are are Christian, even the Bible tells us to avoid debt that we can't afford. The "easy" money mentality associated with Credit Cards is what got this nation, as a whole, into trouble.

Anyone who runs a credit card balance is a moron. Period.

Not so fast. A credit card with a high limit is a good safeguard against a cash emergency. As happened to me a couple of years ago, when a sudden death had the family scrambling to get to the funeral. Six round-trip airline flights is a chunk of change, and we had to book them in 2 days.

But you won't get a high limit if the computers think you're a poor customer, an that's what their idiot programs will think if you always pay off.

A better strategy, in my opinion (as informed by one of the guys who wrote the idiot program in question), is to charge something big about once every couple of years, and take 2 to 3 months to pay it off. Yes, it costs you a little interest (about 2%), but to the computer you now smell like a rose.

"The latest trend is that senior citizens are running up big debt on cards. What's happened to that generation? "

Actually, I could see how this would make sense from a financial standpoint. Suppose you don't have any assets to leave to heirs. Why not just run up credit cards and buy stuff for your children and grandchildren? If you are going to die without assets, why not die with credit card debt. It's a transfer of wealth from credit card companies to yourself or your kids.

I always pay off during the grace period, and have something like three platinums and 2 golds that have caps of several thousand each. (Not to mention a couple or so home-improvement store credit cards.) Put together they would fly your family to Timbuktu and back if needed. And I still get several offers a month for platinums and golds and "ordinary" cards. I am not exactly filthy rich, either, and have about 20 years of mortgage to go. If I stink creditwise, nobody ever told the computers.

I run balances ONLY when I get a 'same as cash' deal. For instance, we bought a beautiful bed for about 3K or so. The terms were minimum payments for 12 months, and then if there was a balance at the end, you'd get hit with the full amount.

Each month I'd send in about $100, then put 1/12th of the amount (minus the $100) in my money market in an off-budget account (meaning the amount was removed from my net worth calculations). It is still 3 or 4 months from being due, but I have the balance already to be paid out fully. I've done this for several accounts, but I bet I show up as one of the 'in debt' people.

In addition, all my work expenses are on my personal cards. Therefore, my AmEx bills can run around 6 or 7 K/ month. But I pay it off since I get reimbursed. Heck - I probably skew the results. I think there are a lot of people like me, at least more than what one would think....

It's a transfer of wealth from credit card companies to yourself or your kids.

And what happens if the amount outstanding is greater than what the estate (counting life insurance etc.) is worth? The companies eat the remaining debt; they can't go after the heirs for more.

A credit card with a high limit is a good safeguard against a cash emergency.

I agree with that.

. . .an that's what their idiot programs will think if you always pay off.

But not with that. I always, ALWAYS pay off my credit cards and they have never lowered my available credit.

Bottom line is that if more people ran there affairs like those who have posted on this thread . . there wouldn't be any credit cards. That might be a good thing.

There are three things that are okay to go into debt for: houses, cars (when absolutely neceessary) and family emergencies. Most people who have credit card debt ran it up frivolously, but they will vehemently deny it.

Years ago, my husband and I decided to pay off our credit cards. We took advantage of all the low interest offers that came in the mail as well as good deals on balance transfers. We transferred as much of the balances to each card as we could.
Then, we gritted our teeth, tightened our belts and began hitting the payments as hard as we could. To keep track of everything, my husband made a flow chart! No kidding! We just kept paying heavy and transferring balances from card to card.
It took us about a year but we are totally debt free and now use one or two cards and pay them in full each month. We have even had a few credit card companies cancel us because we carry no balances. And, our credit report is just fine and we have never had any problems.

The companies eat the remaining debt; they can't go after the heirs for more.

I'm not going to feel sorry for credit card companies that don't check out who they're lending money to anymore than I feel sorry for people who use credit cards to spend money they don't have.

I'm not so sure it is stealing. I don't think there is anything in the fine print that says you have to tell the credit card company when you think you are going to die, and they know how old you are when they give you the card. I'm not saying I would do that, and I'm not someone who argues two wrongs make a right, but doing that is really no worse than what the credit card companies do to cardholders.

Yes, that's exactly what I am saying. I was throwing out a hypothetical of when it might make economic sense for seniors to run up credit card debt. I'm not arguing the morality of it one way or the other, just that it could be a way to legally transfer wealth from the credit card companies (or their shareholders ultimately).

"How did people survive before credit cards in such situations? THEY WORKED THEIR ASS OFF AS A FAMILY, OR WENT TO GET HELP FROM CHARITIES!!!! Credit Cards are a recent phenomena, that can be used to get people in trouble. Avoid them if you can't pay them off month to month. If you are are Christian, even the Bible tells us to avoid debt that we can't afford. The "easy" money mentality associated with Credit Cards is what got this nation, as a whole, into trouble."

I'm aware of history prior to credit cards and I understand your perspective. Still, I stand by my viewpoint. I can tell you that I wouldn't be able to post this reply had it not been for the ability to cautiously utilize a credit card in the way that I have attempted to describe. If you read my other posts on this discussion, you will find that the scenario I am describing is for very limited, and rare cases. Only truly responsible persons who are nonetheless in the situation I described can make it work. I'm speaking from personal experience.

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