New credit card rules may be a shock to some

David Washburn Copley News Service, October 2, 2005

October 2, 2005 Sunday


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HEADLINE: New credit card rules may be a shock to some

BYLINE: David Washburn Copley News Service

The final months of 2005 will be tough on some credit-card holders, as banks begin to comply with a new federal rule that requires them to increase the minimum payments customers must make on their monthly balances.

Officials say the rule is necessary because many consumers are seeing their balances increase even though they are paying the card's minimum payment - a phenomenon called negative amortization.

"We think this is good guidance because a credit card balance is a loan that is being paid off," said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency, the agency issuing the rule.

"Before (consumers) may have thought they were paying off their loan, but they weren't."

By the end of this year, all bank-issued credit cards are required to have monthly minimum payments that cover interest, any fees and at least 1 percent of the principal balance. It means some consumers will have to pay more than twice as much as they do now to keep current on their credit cards.

Few will quarrel with the notion that paying off a credit card balance is a good thing. But there is concern among consumer advocates over how the new rule will affect people at the low end of the economic ladder at a time when Congress is toughening bankruptcy laws and when millions face financial hardship from hurricanes Katrina and Rita.

"It sounds good in purpose, but the most distressed people will be hurt the most," said Robert D. Manning, an economics professor at the Rochester Institute of Technology in
New York and author of "Credit Card Nation."

"People who are now just making their minimum payments will get crushed," Manning said.

Since 1990, per-household credit card debt in the
U.S. has more than tripled, with the average approaching $10,000 in 2005, according to

To keep the business coming, banks in recent years have lowered minimum payback rates and allowed customers to finance their late fees and over-the-limit fees. The result is negative amortization.

A recent survey by the American Bankers Association showed that less than 5 percent of cardholders only pay the minimum payment each month. But Manning and other consumer advocates argue that the statistic is misleading because it only counts people who always pay the minimum, excluding those who are pay the minimum frequently but not always.

Neither the comptroller's office nor credit card industry representatives would offer specifics on how much minimum payments will go up, saying they will vary greatly depending on the card company and the customer.

Manning, however, said the increases will be significant in some cases. Consider, he says, a cardholder who has a balance of $5,000 and a minimum payment of $100, or 2 percent of the balance.

If the issuer raises the minimum to 4 percent, and stops allowing $39 late and over-the-limit fees to be rolled into the balance, that person's payment would go from $100 to $278.

"People may quickly find themselves in a downward spiral," Manning said.

Chris Peterson, a University of Florida law professor who specializes in consumer credit, agrees with Manning on the prospects of short-term pain, adding that some consumers will end up with long-term problems.

"I don't think the elites understand what a radical change this is," Peterson said. "There will be a real temptation for those seeing higher minimum payments to turn to fringe lenders."

Peterson is referring to so-called payday lenders, which, he says, charge an average of 474 percent interest. The payday lending industry has exploded over the last decade to the point where in some places payday loan centers outnumber McDonald's, he said.

Tracey Mills, a spokeswoman for the American Bankers Association, said such scenarios will be rare since the vast majority of cardholders already pay more than the minimum payment each month.

"It will be an adjustment for some cardholders for awhile," Mills said. "But in the long run it will help them."

Yet Mills and others in the industry acknowledge that banks are preparing for an increase in defaults.

Bank of America, which has already begun complying with the new rule, said in its most recent filing with the Securities and Exchange Commission that "increased minimum payment requirements will result in higher levels of consumer net charge-offs in 2005."

Mukri said the comptroller's office put a lot of thought into the prospect of increased delinquencies before deciding on the rule change, and decided that things would be even worse if nothing were done.

"If there was no guidance, and the balances continued to increase, that would cause more delinquencies," he said.

Both Peterson and Manning say it is not good for consumers or the country to have negatively amortizing debt. But, they argue that the timing may be wrong for such a rule, especially when one takes into account the financial hit many families are taking from hurricanes and Congress' recent overhaul of the bankruptcy law.

"The fact is those folks (affected by hurricanes) who are now living on credit cards face tremendous financial challenges," Peterson said. "In addition to losing their home and car, they will be faced with paying twice the minimum payment on their credit cards."

Many credit card issuers are, for the time being, waiving late fees and finance charges for customers affected by the hurricanes. They are also granting emergency credit-line increases and allowing some to obtain payment help.

"We will continue to work with customers on a case-by-case basis," said Betty Riess, a Bank of America spokeswoman.

But the bills will eventually come due, and some of those who can't pay will be confronted with a less-sympathetic bankruptcy court.

Beginning Oct. 17, consumers seeking Chapter 7 bankruptcy, which allows people to wipe away all their debt, will first have to go through credit counseling. A credit counselor will decide, largely based on income, whether someone can go through with the bankruptcy or has to begin a debt management plan.

Those put in the debt management plan will have to pay a lump sum to the credit counselor each month, plus a $25 to $40 fee for the counselor's services.

"They want people to get more responsible and squeeze their budget," Manning said. "But for a lot of people there just isn't anything to squeeze."

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This story ran on on October 2, 2005.