Expect bigger minimums

By Deborah Adamson
Advertiser Staff Writer

If you always pay the minimum on your credit cards, prepare for a shock.

Ala Moana Center shopper Michelle Toratani says it's a good idea to pay more than just the minimum due on credit cards. Gregory Yamamoto • The Honolulu Advertiser

The change will be tough for those who already struggle with meeting the monthly minimum. One of out of four Americans with credit cards — or about 44 million — pay just the minimum on their credit cards every month, according to Frederick, Md.-based CardWeb.com.

"It will hurt a lot of people," said Carol Arakawa, a preschool teacher in Kahului, Maui, who gave up her credit cards to get a handle on her spending. "It's very difficult for people to survive here. There are many local families moving to the Mainland because they can't make it."

The credit card issuers planning to increase the minimum include two of the nation's largest: JPMorgan Chase and MBNA Inc., which issues cards for Territorial Savings Bank, the University of Hawai'i at Manoa, Hawai'i Pacific University and others.

Bank of America bumped up its monthly minimum last year. The three command 39 percent of the credit card market, according to the Nilson Report in Carpinteria, Calif.

First Hawaiian Bank, Hawai'i's largest issuer and among the nation's top 50 issuers, raised its monthly payments in 2002.

More issuers are expected to follow suit.

"While a few have already made some moves, others are going to do so soon," said Fritz Elmendorf, spokesman for the Consumer Bankers Association in Arlington, Va.

While it may be a hardship for some, paying credit card bills off earlier saves you money in the end.

"It's the responsible thing to do when you look at what it saves the consumer," said Wendy Burkholder, executive director of Consumer Credit Counseling Service of Hawaii.

It's not uncommon in Hawai'i to see a consumer with $18,000 in credit card debt, Burkholder said. If the required payment is 2 percent of the balance, the minimum monthly payment would be $360. At an average 19.8 percent annual percentage rate, it would take nine years to pay off the debt at a total cost of more than $39,000.

If you increase the minimum to 3 percent, the monthly payment would rise to $540 and it would take about four years to pay off at a total cost of only $26,600. That's a 31 percent savings and cuts your indebtedness by five years.

"I think it's a good idea," said 31-year-old Michelle Toratani, who is taking a break from graduate studies in Australia to visit family in Honolulu. She has 10 credit, charge and store cards and carries a balance. "If you just pay the minimum, you're screwed."

Many U.S. banks charge about 2 percent of the credit card balance as the monthly payment, said Linda Sherry, editorial director of Consumer Action in San Francisco, which surveys credit cards annually.

"If you pay 2 percent at a 24 percent interest rate, you're paying only interest, no balance," she said. "If you're above 24 percent APR, you're adding to your balance" when you just pay the monthly minimum.

Going deeper into a hole is what federal regulators hope to correct.

"Consumers could make minimum payments but wouldn't cover all their interest. We want to make sure they pay part of the principal," said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency in Washington, D.C. "The minimum payment would have to indicate the interest is paid for (as well as) part of the principal."

While the dictum came out in 2003, financial institutions weren't given a time frame to comply.

Instead, they were instructed to implement the change "in a way that wouldn't hurt the consumer," Mukri said. "It's not the intent to push people into bankruptcy."

The Office of the Comptroller of the Currency issued the new guideline along with the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision. The four entities regulate the nation's banks and thrifts.

Banks said that most of their credit card customers pay more than the minimum monthly required.

"Very few of our customers pay only the minimum. For the latest month, it's just 5 to 6 percent of our accounts," said Gerry Keir, spokesman for First Hawaiian Bank in Honolulu.

For First Hawaiian Bank cardholders with balances of $15 to $500, the minimum payment is $15. For balances more than $500, the minimum is 3 percent of the balance, he said.

"We believe that's an appropriate level to give customers flexibility and to meet our national competition," Keir said. "We certainly don't encourage consumers to make only minimum payments."

He said the bank gives out a money management booklet that urges consumers to "pay off your credit card balance every month, whenever possible ... The quicker you pay off the balance, the less interest you pay."

Wilmington, Del.-based MBNA Corp., the nation's third-largest credit card issuer, said it will raise its minimum monthly payment in the third quarter for new customers and in the fourth quarter for existing cardholders. Currently, customers pay the smaller of the finance charge, plus any fees and $15 or 2.25 percent of the balance. Under the new formula, they will be required to pay the interest and any fees plus 1 percent of the balance.

MBNA said more than 90 percent of its cardholders pay more than the minimum.

In the fourth quarter, New York-based JPMorgan Chase, the nation's largest issuer, will be testing several formulas in calculating its minimum monthly credit card payment. After the test ends in January, the bank will choose which method it will use, according to a statement by Ray Fischer, chief financial officer of Chase Card Services.

Bank of America in Charlotte, N.C., the fifth-largest issuer in the nation, said it currently assesses $10 plus finance charges and any fees as the monthly minimum. Previously, it was the smaller of 2.2 percent with $10 or $10 plus finance charges and any fees.

"It's the right thing to do for our customers and our bank," said spokeswoman Betty Riess.

American Express, which handles Bank of Hawaii's credit cards, said it will not be raising its required monthly minimum payment.

The credit and charge card company, which is the fourth- largest card issuer in the nation, said the formula it uses already lets the consumer pay a portion of the balance.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.