Editorial: Paying off personal debt sooner

Wednesday, Jan. 4, 2006 | 7:32 a.m.

Put down that credit card. New rules that go into effect this month mean millions of Americans will see an increase in their monthly minimum payments as federal regulators try to get consumers to pay off credit cards sooner -- or at least, in this lifetime.

A 2003 directive from the U.S. Treasury Department and other federal banking regulators being phased in this year calls for increasing minimum monthly payments from 2 percent of the total balance to payments that could be as high as 4 percent, depending on the card balance and interest rate.

Federal regulators have said the old 2 percent payments often didn't cover even the full monthly interest and monthly fees, let alone pay down the principal. The new rules call for minimum payments that cover all monthly interest and fees plus at least 1 percent of the principal.

For many, the increase could be only slightly higher -- maybe $25 or $50 more on a payment that is already around $200 a month, credit specialists say. But others, whose interest rates are very high or whose credit card companies opt to assess a 2 or 3 percent principal payment, could pay significantly more.

It will mean tough financial adjustments for many Americans. But the fact is, too many of us carry too much personal debt for too long. Consumer credit industry estimates show the average American household carries $7,500 to $9,000 in credit card debt. Some people pay off home mortgages faster than credit card bills.

Using a Bankrate.com calculator, a consumer making the old 2 percent minimum payments on a $10,000 balance at 13 percent interest would need 33 years to clear the bill and would pay $11,450 in interest. Under a new 4 percent payment, that $10,000 balance could disappear in fewer than 13 years after paying just over $3,600 in interest.

Credit experts say consumers worried about making higher payments should contact their credit card companies to find out just how much of an increase they are facing. While any kind of government regulation on personal habits should be viewed with a healthy amount of skepticism, it should be noted that the some of the staunchest opponents of these new rules are the credit card companies, which gain nothing by Americans acquiring financial freedom. It is time the government stepped in and put an end to these decadeslong payment plans that do nothing but strap the average American's pocketbook.