Holiday shoppers: mind those credit card bills

Friday, November 18, 2005

Anticipating higher default rates on credit cards during 2006, MBNA, Citibank and Bank of America recently doubled minimum monthly payments on credit card balances from 2 to 4 percent -- which may put some Texans in a bind when they receive their bills for holiday expenses.

In addition, by Jan. 1, nearly all bank-issued credit cards will be required to have minimum monthly payments that cover interest, any fees and at least 1 percent of the month's balance, according to regulations established in 2003 by the U.S. Treasury Department's Office of the Comptroller of the Currency.

However, wise choices about spending and saving can make up for larger credit card payments, as well as changes in bankruptcy laws and increases in costs of living, says a University of North Texas finance professor.

Dr. John Baen points out that incomes have not kept up with rising prices on gasoline, natural gas and other items, and he predicts taxes will increase at all levels of government, resulting in an additional strain on consumers' pocketbooks.

"Interest rates are being pushed up by inflation and the shortage of capital," he says.

He notes that capital markets have increased loan standards and underwriting requirements as well as interest rates. Short-term bond interest rates have gone from 3 percent to 6.75 percent with guaranteed government I-bonds.

Baen says that even if credit card users pay the minimum balance each month, "the increase of interest rates from 16 to 24 percent will make it harder for them to get ahead."

He adds that more Americans have filed for bankruptcy in recent months, citing rising credit card rates, increased energy and retail costs, and job loss from Hurricane Katrina as causes.

A rewrite of the U.S. Bankruptcy Code went into effect Oct. 17, making it tougher for debtors to qualify for filing a Chapter 7, the most popular type of personal bankruptcy, Chapter 7 enables consumers to wipe out most of their unsecured debts.

Under the new bankruptcy laws, debtors may have to file a more restrictive Chapter 13, which involves a five-year repayment plan of their debts.

"People filing for bankruptcy will have to declare their assets and give them up," Baen says, adding the new laws went into effect "because there were so many defaults on loans and some people were misusing bankruptcy laws at the expense of other consumers and banks."

The economic conditions that Texans and other Americans will face in 2006 will pose some challenges, but Baen says they can find extra money for increased expenses by placing a higher priority on saving.

"People can save money in many ways," he says. "They can become more conservative in activities and focus more on goals and objectives in saving. They can eat out less and stretch their food dollars by using coupons. Commuters can conserve gas by carpooling or using public transportation."

He also encourages people to limit their impulse spending, keep their cars longer and trade down on their homes.

"Selling a high-priced home and moving into a lower-priced home is economically prudent," he says. "People should also consider refinancing home mortgages and paying off high credit card bills as soon as possible. We've had about a 12-year run of excellent economic conditions. But now, people will have to make some different choices."

UNT News Service Phone Number: (940) 565-2108