Jan. 3, 2006 — -- After coping with a few unforeseen difficulties -- like weather damage to his family's new home and his son's emergency room visit -- Stephen Hampe found himself racking up credit card debt and struggling to make the minimum payments. Now a change in the rules governing credit cards may make things even more difficult for the psychology doctoral student.
"There is nothing more demoralizing than knowing that I have done what my culture deems valuable -- sought out the highest academic degree, [sought] to work to better society," he said.
"But I am now in a situation where my 'reward' is to be in such a financial hole that I will never be able to climb out of it."
When Hampe, his wife and their two young children moved from New York City to rural Sterling, Ill., the family was in good financial shape and figured the lower cost of living there would make life more affordable.
But after Hampe was forced by circumstances to run up his credit card bills, his modest internship salary, even combined with his wife's salary, did not allow the family to cover what they owed.
Hampe started working with one creditor to settle card penalties and move toward paying down his debt, but with new federal rules raising the minimum monthly payments on credit cards, he's not sure what his family will do.
Millions of consumers who carry monthly balances are getting hit this month with higher minimum payment requirements as card issuers start implementing the January 2003 guidelines issued by the Federal Reserve, the Office of the Comptroller of the Currency and other federal regulators.
The companies require that minimum payments go toward monthly interest charges as well as toward the principal. Instead of paying a 2 percent minimum, consumers will be required to pay at least 4 percent each month.
Some consumers, however, may not see an increase because the payments they are making already include a reasonable amount of principal, said Barbara Grunkemeyer, deputy comptroller for credit risk with the Office of the Comptroller.
The new rules are meant to get people to pay down their debt faster, but in the short term many who get by paying just the minimum are concerned about how they'll pay more. "It's creating a lot of stress and a lot of worry," said Nick Jacobs, a spokesman for the National Foundation for Credit Counseling, adding, "but at the same time, the essential motive or the intent is to get out of debt faster, and that's a good one."
If someone has a $1,000 balance and pays $15 a month, it would take 17 years and cost about $3,000 in principal and interest, he said. Paying $20 a month would take seven years and cost $1,750 in interest.
Credit card debt affects millions of Americans. The average household carries about $9,000 in debt, excluding mortgages, according to NFCC. Federal figures from December show the overall level of debt in the country is $2.1 trillion. And according to the site CardWeb.com, consumers, including those who pay off all cards in full and those who carry balances, on average pay credit card companies about 16 percent of all outstanding balances each month.
The NFCC has several recommendations for those who are afraid they cannot afford higher payments. "If you've been paying on time and so forth and have been a good customer -- even if you've been a bad customer -- call your creditor immediately," Jacobs said. "They should be willing to work with you somehow."
Second, the group suggests meeting with a credit counselor. "The very worst thing you can do is keep it to yourself," Jacobs said. "There's no shame in getting into trouble like this. We've all done it. Go find a qualified credit counselor to examine your spending habits and work out an approach that's best for you."
Catherine Williams, vice president of financial literacy for Consumer Credit Counseling Services/Money Management International, said the new rules will have the biggest impact on those who can least manage it.
"I'm concerned, because people who make the minimum credit card payments are people who ill can afford to take this kind of a hit in their budget," Williams said. "People don't usually make minimum credit card payments because, 'Oh, gee, I want to stay in debt and pay a lot of interest.'"
Williams said it is important for consumers to keep track of how much interest they pay each month. "So many people have different financial tools and do such a good job of bill payment but they're not tracking what interest is costing them," she said.
Still, there are simple ways to find cash for those who need to pay just a little bit more. "Another $25, $30 a month can usually be trimmed out of about everybody's budget if we're just thoughtful and realistic," Williams said. "It doesn't mean you've got to eat rock soup and watch 35-year-old movies."
"It's being creative and being realistic about how we spend our money," Williams said. "I wish I could give you the silver bullet that would solve everybody's financial problems."
Williams noted that the changes come at a time when most Americans are dealing with higher utility costs, which includes Hampe, who said he just received a $600 heating bill.
And for those who no longer work, the crunch will also be felt. Gloria Potter, who has been semi-retired since 1998, gets by with help from her family. She said she already tries to pay $100 toward her credit cards each month, "but if your debt is in the thousands, it takes a long time."
"I'm 80-something now," she said, adding, "I would like to get rid of the debt so that I don't leave it for my kids."
Still, she's not sure what she can do to pay more. "Because I have no foreseeable way to increase my income, these payments I make are only to pay the debt down," Potter said. "There is no doubt retired seniors of my age and situation must be disturbed over any increases in minimums due each month. Limited income means just that -- one has to limit something, which for some might be proper nutrition or housing, clothing, etc., to make the means meet the demands."
For young families like Hampe's, another solution may be on the horizon: "I guess lottery tickets are in our future," he said.