Wednesday, January 04, 2006

Consumer Credit Tightens On Many Levels

The Orlando Sentinel looks at consumer credit trends. "Many of the banks that issue credit cards are raising their minimum required monthly payments this month, in some cases doubling them, as a result of pressure from federal regulators worried about U.S. consumers' deepening debt and its potential effect on the financial system. Though some banks began phasing in higher minimum payments as long as two years ago, as much as 50 percent of the industry just made the change."

"'To some people, that may not seem like much, but when you don't have a lot, an extra $100 a month is going to put a big strain' on your budget, said Michelle Smith, 39, a mother of three in St. Cloud who is wrestling with about $3,500 in debt on three cards. 'I try to pay a little more than the minimum, but I don't ever pay double. I use the money for things like car repairs, gas, groceries and other household needs.'"

"It's not clear how many Americans with credit-card debt pay only the minimum monthly payment. Estimates range from as low as 4 percent, according to the American Bankers Association, to as high as 45 percent, according to a survey by the Cambridge Consumer Credit Index. About 167 million Americans have at least one credit card, according to the Nilson Report, an industry newsletter. By that measure, 6 million to 75 million cardholders are paying the required minimum or close to it."

"For Wayne Watt of Apopka, a low minimum payment was a godsend for almost a year as he struggled with $30,000 in credit-card debt, accumulated from medical, automobile and other expenses. Watt eventually paid off the credit cards with a refinanced home mortgage, but 'it definitely helped me get through some hard times,' he said. 'And now they're changing it to make the minimum payments higher? That's going to hurt a lot of people.'"

"Still, banks need to be flexible and provide proper notification so their most cash-strapped customers have time to adapt, said Travis Plunkett, legislative director for the Consumer Federation of America. 'Tens of millions of Americans are going to be affected by these higher payments,' he said. 'And unless the banks do it the right way, they are going to see a lot of defaults and many forced into bankruptcy.'"

"The widespread adoption of higher minimum payment comes on the heels of a new bankruptcy law that tightened the screws on many debtors last fall. The comptroller of the currency's chief concern is that, if such debt continues to spiral upward, credit-card customers would eventually start defaulting on their debt in larger numbers, undermining financial institutions nationwide."


At 5:47 PM, Blogger txchic57 said...

Ben, as a former bankruptcy professional who has no credit cards and does not own a home at this time, I look forward to a ringside seat as this train wreck plays out.


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