As if skyrocketing gas prices and housing bubble worries weren't enough, the one-two punch of stricter bankruptcy laws and rising minimum credit card payments may cause even more financial pain for consumers this fall.
Under rules instituted by the Office of the Comptroller of the Currency (OCC) in 2003 and phased in through the end of 2005, the minimum amount required for paying a credit card balance each month is increasing from 2 percent to 4 percent or more, depending on the bank that issued the card.
The average American carries roughly $10,000 in credit card debt, and though raising the monthly minimum may help them get out of debt faster, those already struggling to make their payments may see this as more burden than blessing.
If your debt is $15,000, for instance, and you pay $300 a month with an interest rate of 13 percent, it would take you nearly twenty years to pay off the debt, with nearly $9,000 in interest, according to the Cardweb.com credit card information site.
Doubling the payment to $600 would enable you to pay off the debt in 29 months, with interest of $2,3667.56.
However, many Americans simply do not have the financial means to pay off their debts any faster. Retirees on fixed incomes, young adults just getting out of college, and low-income families may have a tough time adjusting their debt load to meet the new payoff rate, especially with rising gas prices and the high cost of housing.
A Heavy Load
In addition, the recently passed bankruptcy "reform" law makes it more difficult for Americans to liquidate their debts through filing bankruptcy.
Rather than simply being able to file Chapter 7, under the new law, consumers must meet strict income and expense guidelines that determine how much they can pay towards their debt, and whether or not their debt load qualifies for bankruptcy. The law takes effect in October 2005.
The housing market boom has been driven partially by the popularity of "creative" loans, such as adjustable-rate mortgages (ARMs) and interest-only payments. Overextended consumers and highly-leveraged homebuyers may find themselves in a severe financial pinch if housing values flatten and monthly payments when principal payments kick in or interest rates rise.
Combine that with the doubling of monthly credit card payments, and many consumers face financial disaster.
The news isn't all bad, however. A recent survey by the American Bankers Association showed that 42 percent of card owners paid their balances off in full each month, up from 39 percent in 2004.
Consumers paying off their balances in full was a direct contributor to the massive profit shortfall experienced by financial services giant MBNA, leading to their buyout by Bank of America earlier this year.
Individual bankruptcy petitions actually decreased in July 2005, as the race to file before the new laws took effect began to slow down. Nearly a million individuals have filed for bankruptcy so far this year.
Some wonder if the timing of the new bankruptcy laws and the deadline to phase in new minimum payment rates is a coincidence.
As one pundit put it, "Your credit card payment just doubled. Isn't that newsworthy? Don't you think this should be shouted from the house top?Profit loss is at stake if [those deeply in debt] can more easily declare bankruptcy and have this debt written off before the new law takes effect."
Others applaud the higher minimum payments, even if they cause short-term pain for some consumers. Most economists agree that American consumers are saving way too little and carrying way too much debt.