CREDIT REALITY CHECK

Many credit card holders may soon get a shock when they open their monthly bills and see they were required to increase their monthly payment. Some families will find it hard to come up with the money to cover the increased monthly minimum. However, paying more each month will make a bigger dent in their debt, perhaps enabling some families to escape completely from credit card debt.

An average of 58 percent of card holders carry a monthly balance, according to the American Bankers Association. The average debt of those who carry a balance is $9,000, according to the Consumer Federation of America. Paying the current minimum, which is usually 2 percent of the balance or $180 a month in this case, the holder would need 42 years to pay off a $9,000 balance, if the typical 18 percent interest is charged on the unpaid balance. Worse, that includes nearly $23,000 in interest. Doubling the minimum payment to $360 will shrink the repayment period to 12 years with less than $5,000 in interest.

Concerned that Americans were carrying too much debt, federal regulators issued new guidelines to credit card companies recommending that minimum payments be set so that customers can pay off their balances in a “reasonable” time period. The regulators – the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision – unfortunately did not define “reasonable.” It later clarified that a monthly minimum payment must cover interest, fees and 1 percent of the outstanding balance.

Using the $9,000 balance, the monthly interest payment would be about $135 and 1 percent of that balance would be $90 for a monthly minimum of $225 plus fees. Many large credit card companies are going beyond this and plan to raise their minimums from 2 percent to 4 percent by the end of this year.

As part of the recently passed bankruptcy bill, credit card bills will eventually have to carry a warning that making only minimum payments will increase interest payments and repayment time. To get their specific payoff information, customers could call a toll-free number. Payoff calculators are now available online. The one at http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp was used to calculate the examples above.

None of this will do as much to reduce consumer debt than reining in spending. While many people make only minimum payments, they also add to their debt by using credit cards to make unnecessary purchases.

The new federal guidance isn’t going to get anyone out of debt quick, but it is a move in the right direction.