October 19, 2005
Wednesday AM

If you're one of the 7 million Americans who make minimum payments on their credit card bills each month, watch out.

The smallest amount that consumers can pay on bank-backed credit card debt could double under federal guidelines that take full effect on Jan. 1. Meanwhile, new bankruptcy rules that kicked in Monday will make it harder for debt-ridden consumers to wipe their financial slates clean.

"It's a double whammy," said Sacramento, Calif., bankruptcy attorney Roman Rector. "People are going to have higher monthly bills and a harder time dealing with them."

Under the new rules, cardholders must pay enough each month to reduce the loan's principal by at least 1 percent. Until now, some credit card companies allowed payments so small that the debt would grow each month even if a cardholder paid the minimum and made no purchases.

For example, the average 2 percent payment on a $10,000 credit card debt at 29 percent annual interest, or 2.42 percent per month, will grow by $42 - the difference between the $200 minimum paid and $242 monthly interest.

Federal regulators and the credit industry say the higher credit card repayment rules, which date to a 2003 bulletin to lenders, will curb growing personal bankruptcy filings.

Federal statistics show that about 1.6 million people filed for bankruptcy protection last year, up from about 900,000 in 1995.

"Basic sound banking practice says a loan should be paid back," said Kevin Mukri, spokesman for the Office of the Comptroller of the Currency in Washington, one of four federal agencies that shape credit card policy. "It's not in the consumer's or the lender's best interest to have loans out there that are never paid off."

Americans owe $800 billion in credit card debt, according to the Center for Responsible Lending in Washington. Last year, the average household debt was $9,205, according to Florida-based Bankrate.com.

The new federal guidelines don't dictate a specific minimum payment, Mukri said. Some card minimums could double from 2 percent to 4 percent. Others, especially those with lower interest rates, have terms that already meet or exceed the guidelines.

Mukri would not disclose which banks still need to comply or how many accounts will be affected, because the government considers the information proprietary.

Spokesmen for Bank of America Corp. and MBNA Corp. said they are notifying their cardholders that as of Dec. 1 the credit card payment minimum will be interest plus fees and 1 percent of the outstanding balance.

JP Morgan Chase & Co., the nation's largest credit card issuer with $136 billion in outstanding debt, is "testing" how it will comply with the federal guidelines.

"We will complete those tests no later than January of next year," said spokeswoman Jessica Iben. "Then we will choose the path forward that is best for us and for our customers."

The percentage of credit card accounts 30 days past due reached a record 4.81 percent in the second quarter of this year, according to the American Bankers Association.

No one knows what the impact of higher minimums will be on default and late payment rates, said association spokeswoman Tracey Mills.

"Considering the numerous variables involved it would be a challenge to make an accurate prediction," she said.

On Monday, new bankruptcy rules took effect that will make it harder to qualify for Chapter 7 bankruptcy protection, in which debtors can sell assets in return for wiping out their debt.

"There's no coincidence in the timing," said Rector, the bankruptcy lawyer. "First you have tighter bankruptcy laws, then a few weeks later new credit card minimums kick in? It's going to be rough for people."

Consultant Mark Lilien of Retail Technology Group in Stamford, Conn., says that the government has sided with powerful banking interests at the expense of the poor.

"I believe that there will be massive numbers of people shocked to see their credit card statements this December and January," Lilien predicted. "We're talking about the most economically vulnerable, because people who make the minimum payment usually make the least amount of money."

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