If you're like millions of Americans, you receive a reminder every month of a financial obligation that may outlast all your other ones. This particular commitment can survive longer than your marriage, or it can still be hanging around after you've sent your kids to college and paid off your mortgage. Shoot, it may very well outlive you.
The obligation that's as sticky as pine tar is, of course, your credit card balance.
The credit card industry has made piling up debt as easy as throwing kindling on a bonfire. Here's the industry's trick: Make the debt seem manageable by requiring minuscule minimum monthly payments. Think of this strategy as putting a yellow smiley face on Frankenstein.
Consumers have traditionally been able to write monthly checks that represented just 2 percent or 2.5 percent of their outstanding balances. Americans who made just the bare-bones payments would not necessarily realize that their checks were not making even the tiniest dent on the principal owed. In fact, the checks sometimes wouldn't even cover the interest generated during the previous month.
Folks who have embraced this tortoise repayment method have often gotten into a heap of trouble.
Suppose, for instance, someone made payments of just 2 percent on a $10,000 balance. If the credit card charged 18 percent interest, it would take 691 months to retire the debt. And that assumes the borrower never used the card again. By the time 2063 arrived, the debtor would have paid $28,931 in interest.
Of course, it's costly to let your debt linger this long. The folks in Washington, D.C., came to that realization three years ago when the Federal Reserve and the Federal Deposit Insurance Corp., among others, issued guidelines that urged card issuers to hike the minimums by the end of 2005.
Under the new rules, issuers are now supposed to require minimums that will cover fees and finance charges, as well as 1 percent of the principal.
In essence, this means that minimum payments have doubled. Consequently, most consumers must now pay 4 percent or 5 percent of their balances. Instead of owing $200 a month on a $10,000 debt, the minimum has jumped to $400.
That may seem stiff, but it will dramatically reduce the time you spend indentured to a lender. In this scenario, the borrower would pay off the tab in 178 months instead of the 691 months, and the interest would total $5,916. That's a savings of $23,015. You can play with your own figures by using Bankrate.com's online credit-card calculators.
While this tough-love move may seem cruel to the 43 percent of consumers who carry monthly balances, the new minimums are still modest compared with historical ones.
When credit and charge cards emerged in the 1950s, the minimum payment was 10 percent of the outstanding balance, says Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego. Back then, people typically didn't struggle to pay off their cards.
Today's higher minimums could pose a threat to people who were having a hard time with the more lenient ones. And these folks are the ones most likely to get knee-capped by universal default clauses, which can only be described as dastardly.
These clauses, which the ICFE discovered in early 2003, require that you behave as an Eagle Scout 24/7. As such, you must not only make timely payments to your card issuer, but to anybody else who can squeal to a credit agency - even librarians. Suppose, for instance, that you didn't pay a library fine for
returning "The Scarlet Letter" a month late. If your credit card issuer learned of this minor transgression through Experian or one of the other credit bureaus, it could make you wish you were illiterate.
Whether you ignore a library fine or make a late payment on a different credit card, your card issuer can declare you in default and jack up the annual percentage rate you must now pay monthly.
Often this punitive rate is 29.99 percent.
Penalizing a consumer because of a mistake he might have committed with another creditor makes as much sense as a college rejecting a high schooler's admission application because it learned that she rarely makes her bed. But arguing that the credit-card industry plays unfair when it deals with consumers is a fruitless exercise.
The best way to dodge the universal default clause is to make sure it isn't lurking in your credit card provisions. Call your card issuers and ask. If the answer is yes, ask for the provision to be removed. "I absolutely wouldn't accept a card that has it," Richard insists. "If lenders are real eager for your business, they will take it out."