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Credit Card Debt has its Price

Easy credit is great. Except when it's too easy.

Millions of people are now in danger of losing their homes as a result of the meltdown in the sub-prime mortgage market. But millions more face the prospect of financial ruin because of an even more ubiquitous problem: the danger of making only minimum payments on monthly credit card bills.

Michelle Schimeck, 35, discovered this for herself after running up a combined balance of more than $20,000 on five credit cards. She ended up using a couple of cards to pay down the others and then made minimum payments on the remaining debt.

The result: even more debt, and soaring interest rates.

"You're not even denting your debt at all," said Schimeck, a Detroit resident. "All you're doing is keeping your credit card company happy so you can keep your account."

Sen. Dianne Feinstein (D-Calif.) introduced legislation last week to protect consumers nationwide from getting into a similar fix.

The bill, S. 2542, would require credit card issuers to clearly warn consumers about the pitfalls of making only minimum payments on their outstanding balances.

It also would require lenders to inform people about how long they'll be on the hook, and how much they'll have to shell out in interest, if they pay less than they owe each month.

"It's unethical and immoral to not let people know what the terms and conditions are," Feinstein told me. "The banks basically don't want people to know. They make money off uninformed consumers who get in over their heads."

To illustrate her point, she cited the example of a household with $9,500 in credit card debt and an interest rate of 13.74%.

If that family made only the minimum required payment each month and made no other purchases, Feinstein said it would take about 35 years to pay off the $9,500 balance and an additional $12,000 in interest.

In fact, her numbers might be on the conservative side. A survey of 55,000 consumers last year by CardTrak.com, a website that focuses on credit cards, found that the median amount of card debt carried by households is $6,600 and the average debt load is almost $9,900.

The survey found that of the 88 million households with plastic, 61% carry a balance from month to month.

A separate poll by Gallup and the credit rating agency Experian found that about 11% of cardholders usually make only the minimum payment each month.

Feinstein's bill wouldn't stop anyone from making minimum payments.

It would, however, require card issuers to be much more forthright about the dangers of doing so.

Among other things, the bill would mandate that card companies:

• Add a warning to people's statements making clear that minimum payments will lengthen the amount of time it takes to pay off debt and increase interest payments.
  
• Provide an explanation of how long and how much it would take individual customers to pay off their balances after making six months of minimum payments.
  
• Offer a toll-free number that customers can call to also find out this information.
  
• Include the toll-free number of a credit counseling service in case more help is needed.

"All we're asking is that people just be given the facts," Feinstein said.

In recent years, many card issuers have responded to complaints about their minimum payment policies by boosting the amount of money required from 2% of the outstanding balance to 4%.

The idea here is that consumers would be protected by having to pay off their debts faster than before (about 2% faster, that is).

But even a 4% minimum can get people into trouble, just as more than 2 million people are estimated to be in danger of losing their homes because of too-costly mortgages -- another example of lenders making it all too easy for people to get into financial situations they aren't prepared to deal with.

The banking industry is skeptical of Feinstein's legislation, preferring instead alternative notification requirements being cooked up by the Federal Reserve.

Ken Clayton, managing director of card policy for the American Bankers Assn., said most consumers knew what they were doing when they made minimum payments on their plastic.

"Consumers are generally smart on this issue," he said. "They know that if you pay less, it will cost you more over time."

Clayton said most card issuers support proposed changes to the Fed's Regulation Z, which, like Feinstein's bill, would require a warning and a toll-free number people could call to find out about the consequences of minimum payments.

However, Regulation Z's proposed changes would allow card issuers to include only generic information on statements about what could happen if minimum payments were made, rather than specific information about individual cardholders' accounts.

Linda Sherry, a spokeswoman for Consumer Action, said this was a crucial distinction.

"They know that only a small percentage of people would ever call the toll-free number," she said.

"They're doing everything they can to avoid having to give personalized information to every cardholder on their statements."

Feinstein's bill seems like a reasonable compromise. It would require personalized information on statements only if a cardholder made half a year of minimum payments.

"It targets the people most at risk," Sherry said.

Clayton at the bankers' association said it might be too technically ambitious and too costly to expect card issuers to tell all customers how much and how long they'll be paying if they don't pay off their plastic in full.

"It's a massive undertaking to deal with every customer in America on this," he said. "It's very costly to do so."

I conveyed this to Feinstein, who had a ready response to the banking industry's objection.

"They make a heck of a lot of money," she said.