A Much-Needed Jolt for Minimum Payers

By Michelle Singletary
Thursday, October 6, 2005

Credit card delinquencies reached a record 4.81 percent of accounts in the second quarter of this year, according to the American Bankers Association's Consumer Credit Delinquency Bulletin.

"The last two quarters have not been pretty," James Chessen, the association's chief economist, said in a release about the results. "Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations."

With gas prices still rising, Chessen said, the third quarter is not likely to be any better.

This news -- that an increasing number of people can't handle their credit card debt -- is more evidence that cardholders should be forced for their own good to pay more of their balances every month. And they will, as a result of an edict from the federal agencies that govern the banks and thrifts that issue credit cards.

I wrote about this issue recently, arguing that it was about time federal regulators ordered credit card issuers to increase the minimum monthly payments consumers have to make.

The regulators want the institutions to require that cardholders cover at least 1 percent of their outstanding balance each month. This is in addition to any finance charges or fees owed.

In my weekly online newsletter, I asked subscribers what they thought of the new policy. Is it good for consumers? Would it make people curtail their spending if they had to pay more of their credit card principal each month? Here are some responses.

"Once again 'Big Brother' is making decisions that people should make for themselves," said John Douglass of Memphis.

Sandra Poole of Gaithersburg, like many cardholders who responded, is not pleased. "If I choose to keep the revolving debt, then let me," she wrote. "Previously, I paid the minimum for some months, so that I could pay off another card sooner. This is one case where you and the regulators should have kept quiet. Tell the federal government to pay off its debt quicker."

Another reader on a modest fixed income said he was concerned about the burden the new minimum policy will have on him and other consumers.

"I have credit card debt that waxes and wanes, essentially determined by unexpected expenses that pop up from time to time (e.g., automobile repair)," he said. "I have found that the opportunity to pay a minimum amount to be of great value. I would never think of paying the minimum all of the time, or even much of the time, but there are occasions when a minimum allows me to squeeze through a tight period."

Other readers believe the new requirement will force people to be more responsible with credit.

"As someone who years ago was mired in debt and felt as if I were drowning, the repayment should be higher," wrote Melanie Files of Martinsburg, W.Va. "Maybe that would discourage folks from plunking down the plastic. At some point everyone needs to say a resounding 'No' to the buy, buy, buy syndrome in which we are collectively drowning."

Jay Lassiter of Cherry Hill, N.J., wrote: "I am surprised that folks in general seem a bit peeved that their minimum payment may soon be rising. I think it is a wonderful thing, frankly the first real pro-consumer move this industry has made in my adult lifetime."

Of all the comments I received, I thought the one from Cherry Livesay of Woodburn, Ore., was proof that on this issue, the federal agencies were right to pressure the institutions.

"I use my credit cards only to purchase necessary items that can be purchased sooner on credit rather than having to wait to work them into the budget," she wrote. "If the payments were higher I would have to forgo some of the purchases that I now go ahead and make . . . rather than waiting until they can be worked into the budget. Or find ways to do without them altogether so that I would always have money on hand for emergencies."

That's how easy credit and low minimum payments work. They entice you to buy what you want or need without any notion of when you can pay the money back. How many of us are a paycheck or two away from a financial disaster? And if that disaster hit, would we have a better chance to overcome it if we didn't have huge credit card bills to pay on top of our necessary expenses?

Many responders argued fervently that they were grown-ups and had every right to dig themselves into a deep debt ditch. True.

But as a policy, the government shouldn't give you the shovel. As it is, the new minimum required is still incredibly low.

I understand the new regulation will be a hardship for many people. However, the fact is, many people have long needed a hard push out of their credit card minimum-payment comfort zone.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.


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