Minimum Payments Now = Maximum Concern for the Future
Credit Counseling Company Cautions Consumers on the Hidden Costs of Just Paying Minimum Payments on Credit Cards...and More
(April 23, 2004)...In the hustle and bustle of everyday survival, many people are looking for ways to simplify their lives and are increasingly taking advantage of services that offer “convenience” by using credit cards. A multitude of opportunities are provided at the consumer’s fingertips — purchases can be made with just a swipe of the plastic at the grocery store and your favorite fast food restaurant. You can also pay your taxes, renew your license plates, and send flowers to your mom all via the Internet, again courtesy of our favorite plastic accessory. But is the cost of “convenience” too high?
According to Take Charge America, one of the oldest consumer credit counseling companies in the U.S., when the bill arrives, aside from the accumulating debt, many consumers are unaware that just making the minimum monthly payments on credit cards can do them more harm than good.
Outstanding credit card debt continues to be a growing trend among consumers. CardWeb.com, a Maryland-based credit card industry-tracking organization, said that 18 percent of all U.S personal consumption expenditures are made on credit cards and that number is quickly growing. Since 1998, consumer debt has jumped nearly 40 percent, as U.S. households with at least one card are carrying an average of $9,205 in credit card debt.
Mike Sullivan, director of education for Take Charge America, cautions consumers when using credit cards. “It’s very easy to get caught up in a certain lifestyle when using credit cards. Before you know it, you have maxed out your cards and have accumulated thousands of dollars in debt.”
A recent report from the Federal Reserve (as of November 2003) said that Americans owe a total of more than $2 trillion. The American Bankruptcy Institute recently announced that personal bankruptcies hit a record high in 2003, with credit card delinquencies hitting the same record in the fourth quarter of 2003, according to the American Bankers Association. Now might seem like a good time for consumers to be easing up on debt. Sullivan recommends that consumers should try to use credit cards only when necessary and plan to pay them back quickly. He said people want to use credit cards like cash or debit cards, but they are quite different — and that difference is the high finance charge.
“To complicate things even more, card users often choose to pay minimum payments every month,” said Sullivan. “The problem with making minimum payments is that you don’t reduce your debt, and you may even increase debt if minimum payments don’t cover the full interest charge. On top of that, many consumers get hit with higher interest rates when special low interest offers expire or if they are late in making a payment. When consumers make late payments or go over the credit limit, they accumulate even more charges. Dependency on credit cards becomes a vicious cycle.”
Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit, was quoted in The Washington Post saying, "In the old days, the best customer was someone who could pay off their loan. Today the best client of the banking industry is someone who will never pay off their loan" — since such a client will generate a lot of fee revenues. The average household consumer debt in 2002 produced some $1,700 per year in finance charges and fees, according to Manning.
According to the Federal Deposit Insurance Corporation (FDIC), if a consumer buys — for example — a television and stereo system for a total of $2,500 with an interest rate of 18 percent and submits the minimum payment monthly, it can take as long as 34 years to pay off. The total interest alone can be as high as $6,281 and the total cost will be $8,781, more than tripling the initial cost of the items.
Sullivan suggests three easy ways to get bills paid quicker and more efficiently:
- Increase minimum payments across the board – It is known that adding as little as $25 more to each monthly payment will be extremely beneficial in the long run, by reducing the time it takes to pay off the balance.
- If you have multiple cards, pay off cards with the highest interest rates first – It is recommended that higher interest rate credit cards should be the first credit cards to eliminate. These cards usually bring the biggest burden to individuals. Sullivan also suggested another idea — eliminate the balances from cards with smaller balances. This would allow for more money to be put toward the higher interest cards.
- Seek the assistance of consumer credit counseling services – Counselors are readily available to help customers gain control over their finances, pay off existing debts, save for the future and become financially independent.
“Credit card debt affects consumers in the present, as well as the future,” said Sullivan. “We understand that everyone’s situation is different. In some cases, the minimum payment is all some consumers can do with their current situation. However, we recommend paying off as much as one can, if possible, for a more sound future.”
About Take Charge America
Founded in 1987, Take Charge America, Inc. (TCA), formerly Credit Counselors of America, Inc. (CCOA), is a non-profit 501(c)(3) charitable organization headquartered in Phoenix, Arizona. TCA is committed to helping consumers gain control of their finances and offers a variety of services including education, budget and financial counseling, and when necessary, debt management.
TCA serves as an effective resource for the business community. TCA also helps financially distressed consumers reorganize their finances and return hundreds of millions of dollars annually to financial institutions, professional service providers, and businesses of all sizes and descriptions that may otherwise have been dishonored in bankruptcy. TCA’s diversified programs are utilized by tens of thousands of families and single men and women throughout the United States each year.