Just a few years ago, credit card companies could be sure that Americans who made only the minimum monthly payment on their high-interest credit cards would languish in debt for years and years.
Now that most credit card companies have complied with a federal request to increase the minimum amount due, this small percentage of consumers will only languish in debt for years.
A credit card user with a balance of $6,000 and an annual percentage rate of 20 percent, paying a minimum balance of $110, will take 11.9 years to pay off the debt.
With those conditions, that credit debt cost the consumer about $15,800, with the credit card company pocketing $9,800.
The same person paying a 1 percent increase in their minimum balance, which comes to $111.10, would take 11.5 years to pay off the debt. Paying off that card five months earlier saves that person $555 in payments.
Credit counselors and consumer advocates say just paying an increased minimum monthly payment isn't going to get Americans out of debt. That takes a strict budget and commitment to paying more than the required amount.
And that, according to the American Bankers Association, is what 75 percent of credit card users are doing. The majority of consumers pay their balances in full or pay more than the minimum each month, according to a recent association survey.
Only 4 percent of credit users make the minimum monthly payment. This was the group the feds targeted.
Federal regulators suggested back in 2003 that credit card companies change their minimum-payment formula to cover at least 1 percent of the outstanding balance, plus the interest on the card and any fees, by the end of 2005.
Travis Plunkett, legislative director at the Consumer Federation of America, said this is a welcome shift from the 1970s-1990s, when many credit issuers decreased customers' minimum amount owed to make more of a profit off interest-heavy lending.
Decreasing the minimum payment led consumers to spend more money, said Plunkett, which meant more profit from the interest charged on a larger outstanding balance.
"In the 1990s the number of bankruptcies increased sharply," he said. "Our analysis of this rise in consumer bankruptcies was that credit card companies were keeping people on the debt treadmill that kept speeding up."
Breaking the budget now; benefit later
Now that consumers are forced to pay more toward their balance, the debt will shrink at a faster rate, said Natalie McKinnon, a credit counselor with Consumer Credit Counseling Service of Northern Nevada.
"The downside to that is that most people have the increased gas costs, the increased utility costs to also pay for," she said. "Those living on the edge are most likely only able to make only the minimum payment on credit cards, and to have that doubled now is really going to eat into their monthly budget."
She said low-income Americans will pay their increased gas and energy bills, especially during the winter, and then rack up late fees on the credit cards, which they'll have to pay in the next billing cycle.
"What I'm also finding is that not only are they doubling the minimum payment, but companies have also kicked up their interest rates."
This happens because many issuers abide by the university default clause. If you have five credit cards, and are late with one, or with a phone, rent or utility payment, the interest rate rises on all of them.
They'll put themselves even deeper into debt because of a minimum payment formula that was meant to help them, she said.
-- Contact reporter Becky Bosshart at bbosshart@nevadaappeal.com or 881-1212.
Break it down
How it shakes out
The Office of the Comptroller of the Currency, which regulates national banks, recommended credit card companies increase their minimum payment to include at least 1 percent of the outstanding balance.
How much your minimum payment increases depends on the balance you're carrying, the interest rate and whether or not you have late or over-limit fees.
Here is how some credit card issuers have responded to the feds request:
Citi Cards
Throughout 2005, the company changed its minimum payment calculation so that 1 percent of the outstanding balance is paid each month. Previously they only computed 1/48th of the outstanding balance into the minimum payment.
Wells Fargo
In the past, the company determined the minimum payments by taking 2 percent-2.5 percent of the new balance shown on the customer's statement, which included the principal, interest rate computation and any fees. Now, Wells Fargo calculates payments by taking the sum of the fees and finance charges billed during the cycle for which the minimum payment is calculated plus 1 percent of the new balance shown on the billing statement.
Bank of America, which also owns MBNA
Bank of America determined its minimum payment by adding $10 of the principal balance, plus any fees and the finance charge. Effective Dec. 1, the company changed the minimum payment to include 1 percent of the new balance.
Do the math
To calculate how long it will take you to pay off your credit card debt visit www.bankrate.com, click on "Calculators" and scroll down to "Credit card calculators."