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Monday, July 29, 2002

By Alan Lavine and Gail Liberman

Nasty. That's all we can say about a recent federal judge's ruling that stopped implementation of a law that would have issued warnings to people who made only the minimum credit card payments.

The law would have required the nation's largest banks to include the warnings in monthly statements to customers who made just the minimum monthly payment for six months in a row.

The ruling, by U.S. District Judge Frank C. Damerell in Sacramento, Calif., is very unfortunate. Why?

We can't tell you how many people we've run into whose lives are ruined by credit card debt.

	Spouses Alan Lavine and Gail Liberman are authors of numerous books, including "More Rags to Riches" and "Love, Marriage & Money," both published by Dearborn. You may e-mail them at MWliblav@aol.com.

Credit card minimum payments are a scam. Banks purposely set the minimum required payment very low. We've commonly seen them at 2 percent of the balance, with a minimum of $10. By making such a low monthly payment, you feel great because you're able to pay your bills on time, yet buy virtually anything you want.

No wonder 30,000 people a month are filing for bankruptcy! They spend years making the minimum required monthly payments. Then they suddenly lose their jobs, have an expensive medical emergency or get a cut in pay. The noose tightens around their necks.

There's no way around it, folks. The smaller your credit card payment, the longer it takes to pay off debt, and the more interest your bank pockets. This translates into some big bucks that could have been much better used to build yourself financial security.

Meanwhile, if interest rates start rising, expect your credit card debt situation to worsen rapidly.

It's understandable that credit card companies don't want you to know how much those Mastercards and Visas truly cost.

You'd be stunned.

We ran some numbers ourselves at Cardweb.com just to give you an idea.

Based on just $2,500, which Cardweb.com says is about the average annual balance per credit card account, here's the time and money it costs to get out of debt. This assumes you make only a minimum required payment of 2 percent of the outstanding balance.

If your credit card interest rate is just 10 percent, it would take you nearly 17 years to pay off that debt of $2,500. Your interest charges would be $1,578.06.

With a 13.50 percent credit card rate, it would take you 211/2 years to pay off that balance. Your interest charges - $2,810.37 - would exceed your debt.

With a 16 percent interest rate, expect to be paying $4,329.44 in interest. You'd be paying off your debt for 27 years.

If your card rate is 18 percent, the cost of your $2,500 debt becomes $6,431.12. Expect to spend 341/2 years paying it off.

With a credit card rate of 21 percent, your $2,500 card balance is costing you $14,698.63 in interest charges. You'd be spending nearly 64 years paying off what you probably thought was a relatively small debt.

To make matters worse, we've seen credit card interest rates of 24.99 percent and more!

Meanwhile, Cardweb.com estimates that $2,500 merely is the average amount owed annually. The average debt per household, it says, is much larger - closer to about $6,000. So the picture truly is even bleaker.

There's been so much talk lately about all the accounting tricks on Wall Street and the poor performance of the stock market. However, making merely the minimum monthly payment on your credit card is much worse for your bottom line than any of those calamities.

This is why we so often advocate a very novel idea. Make all your purchases with cash. Or, at very least, make monthly credit card payments that are significantly larger than the minimum required monthly payment.