Increased Minimum Credit Card Payments Burden the Debt Distressed

Many banks and credit card issuers are increasing their minimum monthly payment requirements, a move that will help consumers dig out of debt faster but may place others in jeopardy. The typical monthly minimum will double from about 2 percent to 4 percent with many consumers seeing the change on their statements by the end of this year.

“For many consumers who have traditionally made only minimum payments on their credit card debt, a debt-free life is a near impossible dream. While this move by banks and creditors is good long-term public policy, there is concern that the most heavily indebted consumers will find this additional burden too much to bear at the start,” according to Robert Barrett, president and chief executive of InCharge® Institute, a national non-profit organization specializing in personal finance education and credit counseling.

“We applaud this move – it will highlight the importance of paying off previous debts before dedicating finances to something new. It’s a step toward getting Americans to refocus their attention on getting out of debt, and staying out,” explains Barrett.

InCharge offers advice for the debt distressed who will feel the impact of increasing minimum payments the most:

SURVIVAL GUIDE: What to do if you can no longer afford your minimum payment.

1. BUDGET: Budgeting is essential ? but sometimes hard to get started. Gather three months of bills and add up how much you spend every month. Divide into categories such as housing, food, debt, and entertainment. Reward yourself after it’s completed.
2. PRIORITIZE: Take a hard look at what you can cut. Entertainment expenses are easier to slash than utility costs. Keep a daily journal of what you spend your cash on ? you may be surprised at how quickly unnecessary expenses add up.

3. STICK TO IT: Sticking to a budget is like dieting ? it’s hard in the beginning, but once you form good habits and start seeing results, it becomes easier. But at the same time, it has to be livable for you so you?ll stay committed to the program.

4. RESIST THE URGE TO JUMP: Not all credit cards will be raising their minimum payments, and the concern is that the debt distressed will be tempted to switch to a different card with a much higher interest rate, simply to take advantage of the lower monthly minimum payments. This will only ensure that your current debt distress will be around for a very long time.

5. KNOW WHEN TO ASK FOR HELP: If your total debt payments (not including mortgage or rent) exceed 20 percent of your income, your debts are a serious problem requiring help. Some options include:
   • The “Do It Yourself” Approach ? If you feel you have the ability, temperament and time required to contact your creditors individually in an attempt to negotiate lower rates and better terms, this approach can be very effective. These people generally pay off cards with the highest interest rates first, sometimes take a second job, and cut up their credit cards. Those with the self-discipline and confidence to follow through to completion will succeed.

   • Credit Counseling ? Typically free or low cost money management advice, where a trained professional helps you create a plan of action based on your personal situation, provides you with personal finance education, encouragement and motivation, and presents all of your options in an unbiased way.

   • Debt Management Plan ? If you have a high “debt to income ratio,” a credit counselor will work with your creditors on your behalf in an attempt to negotiate more favorable terms, and create a monthly payment plan to fit within your budget. Along the way, a good credit counselor will provide education and motivation to ensure that you achieve your goals, and learn how to avoid future debt.

   • Debt Consolidation ? This is an option rarely recommended by good financial counselors. You could take out a loan, using your house as collateral, to pay off your debts, which could put your home in jeopardy if you get behind on your payments. This is not a good plan if you have a habit of buying on credit and carrying large balances ? it won’t fix your underlying spending problems, as other options might.
   • Bankruptcy ? Filing for bankruptcy should be considered a last resort. This is a court action to stop creditors from collecting from you, but comes with a high cost ? it could damage your credit for up to 10 years, causing you future difficulty in obtaining credit to buy cars, homes, or other loans, and in some cases could affect your employment.

“There are clearly times when paying only the minimum is the only option, particularly for those with cyclical income,” explains Barrett. “As a credit counselor, we see too many people who don’t understand the consequences of doing so. I think this move by credit card providers will demonstrate how costly paying only the minimum can be.”

THE REAL IMPACT: On at $2,000 debt with an 18 percent interest rate, paying the greater of the 2 percent minimum required payment or $10 would take 30 years and 10 months to repay, and would cost $4931.15 in interest. By raising the minimum payment to 4 percent, that same debt would take nine years and six months to repay, and cost $1115.73 in interest. The consumer would save $3,815.42, and 21 years and four months extra of being debt free.

“Consumers who find themselves too deep in debt need to know that there is help available ? help that might even improve your financial picture,” says Barrett. “Try to focus on the long-term. It will be difficult at first, but the promise of a debt-free life just became a lot closer to being in your grasp.”