Most Americans Making Minimum Payments

Americans are sliding deeper into credit card debt, according to the Cambridge Consumer Credit Index.

Almost half of Americans are making minimum payments or no payments on their credit card balances, according to Cambridge. Of those surveyed who had revolving balances on their credit cards, 6 percent made no payments, 40 percent plan to make slightly more than the minimum payment, 37 percent expect to pay less than half the balance but more than the minimum, while 17 percent will pay more than half their balance. Some 44 percent of respondents said they're incurring debt because they don't have funds to pay for the purchases in full, while 56 percent are incurring additional debt because they're confident of their ability to pay off their balances in full.

Among all credit card holders, 31 percent carried balances into the next month, 43 percent paid off their balances in full, and 26 percent didn't use their credit cards at all.

The findings add fuel to the debate surrounding credit card practices of banks. In January, regulators issued guidelines in which they criticized as "inappropriate" the practice of setting low minimum payments that maximize outstanding balances and finance charges (see BS&T, March 2003, page 8). Earlier, the banking industry had beaten back an attempt by California lawmakers to require a "minimum payment warning" on account statements.

The credit survey results indicate a large split among the haves and have-nots among American consumers. The haves are paying off their credit cards in full, while the have-nots are barely able to make their minimum payments-while some 6 percent aren't even able to make any payments.

"They are using their cards knowing they don't have the money to pay the bills when they arrive," said Jordan Goodman, spokesperson for the Index.

The results are similar to findings from a year ago, when among consumers who revolve credit card balances, 47 percent made minimum payments, 37 percent paid under half the balances and 3 percent made no payments at all.

The "reality gap"-the difference between the amount of debt consumers say they will pay off the next month compared to what they actually pay off-fell from 20 percentage points to 12. In the survey, 81 percent said they planned to pay off debt, but a month later only 69 percent actually did.

With the economy in turmoil, the fact that Americans are knowingly incurring debt they can't pay off is disturbing, according to Chris Viale, general manager of Cambridge Credit Counseling. "Hard earned money should not be spent to pay high interest rates on credit card balances, but rather on a nest egg to fall back on."

Thirty-one percent of respondents said they had taken on more debt in the month prior to the survey, while 69 percent said they had paid off debt. That, said Goodman, points to the fact "that consumers are being cautiously optimistic about the future while remaining conservative with their current levels of consumer debt."

In a separate survey of people who have called in for credit counseling services, one-third cited high bank rates and fees as the main reason for their being in debt. Others cited reduced income, overspending, medical expenses and divorce.

The survey was conducted by ICR, Media, Pa., over a five-day period. Over 1,000 households were polled based on random-digit dialing, with all demographic and regional groups fairly represented. The Index has a margin of error of plus or minus three percentage points.