Deborah Falsman ran up $25,000 in credit-card debt when interest rates were low, credit was easy and bankruptcy offered a simple escape...

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Deborah Falsman ran up $25,000 in credit-card debt when interest rates were low, credit was easy and bankruptcy offered a simple escape hatch.


Now, the school health clerk is looking at monthly payments that could rise by hundreds of dollars a month, thanks to new regulations aimed at helping Americans tame their soaring credit-card bills.


“You think you can pay $500 or $600 a month and get it over with,” Falsman said of her credit-card debt, which financed a remodeling project for her home in Denton, Texas. “But it never seems to work out that way.”


Consumer advocates are largely applauding the changes, which will take effect by Jan. 1, because they will save millions of credit-card holders money by trimming what they pay in interest over time.


The problem for at least some people, however, is that the higher credit-card payments coincide with bankruptcy-law changes taking effect tomorrow. The new rules make it harder for people to qualify for Chapter 7 liquidation bankruptcies, in which they surrender most assets in return for wiping out their debt.


For those living close to the financial edge, the combination of higher credit-card minimums, tighter bankruptcy rules and rising gasoline costs may be overwhelming, said Bradford G. Stroh, chief executive of Freedom Financial Network, a debt-counseling firm based in California.


“No one could imagine that all of these things would line up at exactly the same time,” Stroh said. “But, they are all hitting the American consumer in the fourth quarter of 2005. On the heels of that, the overleveraged consumer’s one parachute was Chapter 7 bankruptcy and that parachute is closing.”


Americans already know they are paying more for fuel and heating oil, with energy costs up 20.2 percent in the past year, according to the government. But many are just now finding out about higher minimum payments on their credit cards.


Most major credit-card issuers have allowed customers to repay just 2 percent of their balances each month. For people with high-interest-rate cards, or who don’t pay their bills on time, the minimum often isn’t enough to pay down their debt.


For example, Citibank charges its higher-risk card holders about 29 percent a year, or 2.42 percent a month, in interest. Until recently, it allowed these cardholders to make minimum payments that amounted to just 2.08 percent of their balance each month, said spokeswoman Janis Tarter.


For a $10,000 balance, that would be $208. But a higher-risk cardholder would pay $242 a month in interest alone — allowing his debt to grow by $34, even after paying the minimum.


In 2003, the four primary bank regulators — the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. — agreed that these artificially low payments allowed consumer debt to snowball out of control. The regulators issued “joint guidance” demanding that monthly payments be set high enough that revolving balances would be repaid in 10 years.


This guidance was later clarified to state that customers must pay at least 1 percent of the principal balance, plus all interest and fees that accrued that month. The rule takes effect Jan. 1, although some companies are implementing it sooner.


Under the new rule, a cardholder paying 29 percent interest on a $10,000 balance would be required to pay at least $342 a month — or 64 percent more than under the old standard.


Minimum payments will vary from customer to customer, depending on the interest rate of the card, the size of the balance and other factors.


That makes it tough for people such as Falsman, who has roughly a dozen cards at varying interest rates, to figure out how much more she will have to pay. Falsman, who with her husband takes home about $7,500 a month, said she got hooked on several cards with low-cost introductory “teaser” rates.


Falsman said the couple must now pay about $500 a month to meet their minimum requirements. She said she already has received notices from several card companies saying her minimum payments would rise by 25 percent to 50 percent — leading her to anticipate her payments will go up by several hundred dollars.


Financial-planning experts say that in a worst-case scenario, a consumer with $25,000 in debt who is paying 29 percent interest could be required to pay about $855 a month under the new formula — $605 in monthly interest and $250 in principal.


Lisa Moore of Sacramento, Calif., who has $28,000 in debt on six different cards, said so far only one of her lenders had sent a letter warning about a rise in the minimum payment. That card, which has a $6,500 balance, will require a $280 minimum payment starting next month, up from $180, she said.


“I’m glad I have a good job,” said Moore, 48, a library worker. “Otherwise I wouldn’t be able to make the payments.”


Not everyone will see a big increase, however, because the old minimum-payment formula is sufficient to pay down debt for people who use cards with lower interest rates.


For example, a credit-card holder who pays 10 percent and has $10,000 in debt would accrue just over $83 a month in interest charges. Add on 1 percent of the principle, or $100, and the cardholder’s minimum payment would be $183.


That’s a little less than the $200 — 2 percent of the balance — that credit-card companies demanded under the old rules.


Consumer advocates consider the higher minimums to be healthier for individuals in the long-run. The average household credit-card balance is $9,205, according to credit research firm Cardweb.com, up from $8,940 in 2002. Nationally, outstanding credit-card debt has ballooned from $443.49 billion in 1995 to $797.97 billion currently.


“In principal, raising minimum payments makes sense because it allows consumers to pay off their debts faster and save thousands of dollars in interest,” said Joseph Ridout, who manages the consumer hot line at Consumer Action in San Francisco.