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.)

Then when I get one of those 0% for six months deals, I transfer the balance and pay it off at $200 or #300 a month.

I've got a better idea. Just don't use credit. Save up and pay cash. A lot of times, when you have to save up for something it gives you time to ponder whether you really need that item or if your money wouldn't be better off going into a mutual fund for your retirement. The instant gratification that comes with a credit card will always compel you to "buy it now."

I gave up using credit 4 or 5 years ago. My quality of life has gone up exponentially. There's something about being responsible with money that leads you to be even more responsible and even parsimonious.

People who say they can't make it without credit haven't tried hard enough. Two years ago, I saved up and paid cash for a car. And I don't have a six figure income.

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.

And you see nothing unethical about that? What you call a "transfer of wealth" I would call fraud!

"Just don't use credit. Save up and pay cash. A lot of times, when you have to save up for something it gives you time to ponder whether you really need that item or if your money wouldn't be better off going into a mutual fund for your retirement."

And what is your take on emergencies? Or better yet, what would constitute an emergency for you? Does your philosophy allow for any exceptions?

And what is your take on emergencies?

Be prepared. Save money. Build wealth. what would constitute an emergency for you?

Would a traffic accident that totalled my car suffice? I had cash in savings to buy a new car.

Does your philosophy allow for any exceptions?

My personal philosophy? Not much. I did take out a 15 year mortgage, but am about to pay it off after 8 years. When you have no debt it's easy to save. When it's easy to save it's easy to invest. When it's easy to invest, it's easy to become wealthy and then you don't need a credit card for "emergencies".

Thanks for a bit of clarification. Aside from your mortgage, have you ever had a loan? I agree with you that bthis whole discussion shouldn't be limited to credit cards. It's much broader, including all personal financing decisions.

How about a college education? How did you finance that? I've got several education loans to pay off, but would like to be able to finance my own children's education without using loans.

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