BANKRUPTCY UPDATES

Credit Card Minimums To Rise - More Misery For Consumers or Strong Medicine?

By the end of 2005, new federal regulations requiring credit companies to increase the minimum payment for people with outstanding credit will go into effect.

The new minimum payment has been raised from 2 percent of the outstanding balance to 4 percent.

Coming on the heels of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005-which will make qualifying for bankruptcy protection harder for many financially, troubled consumers-consumers may feel like they're the victims of a massive conspiracy by government and business intended to make their lives even more miserable than they already are.

However, looked at in a more realistic light, although the coincidence is certainly unfortunate, for most individuals, the new increased minimum payments may the only way they can begin to dig themselves out from under the debt load they've built for themselves.

Under just about every credit card agreement, if you pay only the minimum amount due each month, you will stay hopelessly in debt with little chance of getting clear.

For example, assume you have an outstanding credit balance of $5,000 with a 17 percent interest rate.

By increasing the minimum payment from 1.67 percent to 3 percent, the total interest you'll pay over the life of the loan is reduced from more than $25,000 to just over $4,000. Furthermore, the amount of time it will take you to pay off this debt is reduced from 81 years to 18 years.

If you are fortunate enough to be able to pay off your credit card debt in full each month, the new increased minimum will have no effect on you. But if you are one of the estimated 35 million Americans who make only the minimum payment each month, your minimum monthly payments may soon be doubling.

Obviously, in the short run, this will cause a great deal of pain for financially troubled consumers, as they will forced either to find new sources of income to fund their new minimum payments or to cut back on their other expenses.

But in the long run, the new rule may, one hopes, lead to better spending and credit habits, and will help consumers to pay off their debts in a more timely fashion.

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