How one mom avoided financial reality as credit card debt piled up

Jenny Bauman never ran the numbers to try to calculate just how much her credit card debt would end up costing her at frighteningly high interest rates of nearly 30% a year.

And she had absolutely no idea how long she'd be buried in debt if she kept making only minimum monthly payments, which, thankfully, is no longer a cause for concern on her financial horizon.

"I like living in a bubble," Bauman said warmly.

On the plus side of the ledger, Bauman, 45, locked in a 3.75% mortgage on her home in Warren, where she raises her 7-year-old son, before inflation skyrocketed. She has a well-paying job that involves leveraging technology to enhance training in the workplace.

Yet her money woes kept building, thanks to an extraordinary level of student loans, assorted spending sprees, a catastrophic cycle of payday loans, and $13,000 on eight credit cards at an average rate of 29%, credit card debt that could only climb higher as she made minimum payments, sometimes late.

She'd always told herself: "I'll be fine, I'll be fine. I don't need to worry about this."

"I never did the math, which I think would cause a panic attack if I did."

How long would it take to pay off a credit card

Doing the math would trigger high anxiety for anyone.

The numbers show that it would take someone 306 months — or a bit more than 25 years — to pay off $13,000 in credit card debt if the consumer only made minimum payments each month on credit card debt when the annual percentage rate is 30%, according to Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.

How much would the interest drag you down? Brace yourself. Here's where a 30% rate on credit cards gets ugly.

The consumer in this example would accumulate $30,776 in interest — well more than two times the cost of what you bought.

Rossman noted that different credit card issuers will calculate their required minimum payments in various ways. He used a minimum payment formula of 1% of the balance plus interest each month, with a floor of $35 a month.

During the first year, based on his example, the minimum payments would be in the $400 to $450 a month range.

Monthly payments would gradually drop as the debt was paid off. Yet, it would take roughly 12 years to get those minimum payments down to $100 a month and lower. The example uses a $35 minimum payment as a floor for the lowest the minimum would go in the final years.

Many people who are burdened by high interest rates and old bills, according to financial counselors, never do the math. They don't want the black and white to spell out how deeply they're in the red.

A Fed rate cut is coming but won't be enough

The Federal Reserve's fight against skyrocketing inflation drove up short-term interest rates, which pushed up the prime rate and ultimately sent credit card rates to ungodly levels.

The Fed's first rate cut in a series of rate cuts is expected to hit at the Fed's next meeting on Sept. 17 and Sept. 18. But borrowers shouldn't expect much breathing room immediately. Credit card rates would come down only gradually with each rate cut. A quarter point rate cut by the Fed would translate to a quarter-point cut for credit card rates.

Worse yet, some consumers who ran into trouble with their credit cards might not see any reduction in rates on their cards because they're dealing with penalty rates that won't go down when the Fed cuts rates.

Your credit card statement lists details of the rates of your card, including what rate is charged on purchases, cash advances, and balance transfers, as well as when any promotional rate ends.

All of your credit card statements now include what's known as a minimum payment warning section that spells out what you'll pay in interest and how long it will take you to pay off that balance — if you only make a minimum required payment each month. The box was mandated and went into effect in early 2010 as part of the Credit CARD Act of 2009.

The average credit card rate was 16.34% in March 2022, according to Bankrate.com data. It moved to 19.93% by early 2023. And it's now 20.78%.

Looking at another data base: If you go back to February 2016, the average credit card rate charged by commercial banks was as low as 12.31%, according to data from the Federal Reserve Bank of St. Louis. The rate had hit 15.09% by February 2020 but fell only slightly to the 14.5% range or slightly higher during the COVID-19 pandemic. The average hit 21.51% as of May.

Penalty rates pack plenty of trouble

Where many people get into real trouble: They let credit card interest build several months at high rates, perhaps by only paying the minimum balance each month. They carry too big of a balance on the cards — leading to a drop in their credit scores. They don't pay bills on time, again leading to a drop in credit scores.

Got a bit more than $1,500 on a credit card with a 20.24% interest rate? Pay only the minimum of $25 or so and you're looking at taking three years to pay off that balance and the interest that builds with it. Ultimately, you'd dish out an estimated $998 in interest.

That example assumes your interest rate stays at that level and you don't charge any more on the card. If you're socked with a late payment rate, say you're at least 60 days late with a payment, your annual percentage rate could jump to 29.99% on some cards.

And watch out, if you're dealing with high penalty rates.

The penalty APR stays in place for at least six months on existing balances. After six months of being a good customer, the credit card issuer must lower your rate back on existing balances. Regulation Z, known as the Truth In Lending Law, specifies that the six months of minimum payments must be consecutive, and must begin immediately with the first payment due following the effective date of the increase.

You'd be notified at least 45 days in advance if you're hit with a penalty rate. But it's key to understand that most penalty APR are fixed rates, so they will not go down when the Fed cuts interest rates.

Even if you're paying on time, you could be at risk for higher rates, too, if your credit card issuer sees signs that you might be taking on too much debt and your credit score has dropped.

Credit card issuers will periodically review annual percentage rates to ensure card members are at the appropriate rate based on their FICO score. So, you might qualify for a lower interest rate when you applied for the card because of a higher credit score then. But if your credit score drops, a credit card issuer could raise your APR.

Buying a bike with a bonus

Bauman says her tipping point wasn't high rates, a notice from one of her credit card issuers, or the high price of groceries and other goods.

No, her reality check, if you will, ended up being her bonus. She threw the extra month at a $2,000 bike in April 2023. It wasn't exactly the best move when she had built up other bills that needed to get paid.

"It's like 'Oh, I got this bonus, I'm going to spend it,' " she said. "But I have all these bills to pay. But I'm going to spend it on this bike to impress some guy. So, yeah. That was really the flipping point."

She began to steadily realize how half of her paycheck already automatically was going to cover payday loans and other obligations. And she had a $1,500 mortgage payment each month that needed to get paid plus utilities.

She had maxxed out several credit cards that had low limits often after impulse spending, such as treating friends to $70 prime rib birthday dinners, splurging on holiday gifts or spending $500 on a new wardrobe.

When she ran into tight financial jams, she said, she'd pay credit card bills late because "credit cards were pushed to the bottom of the list."

"I needed to have my electricity. I needed to have my gas. I needed to have a roof over my head. Those all took priority," she said.

She aimed to stay ahead of shutoff notices.

"The most difficult thing for me was admitting I needed help," Bauman said. "I like to be self-reliant. I like to think I can solve everything myself."

"When I get overwhelmed, I personally shut down," she said.

Yet, her therapist suggested that everything was not OK, raising the possibility that she might no longer be able to pay her mortgage one day if she ignored her credit card debt and kept spending on items that didn't bring her any joy or value. The therapist recommended that she contact the nonprofit GreenPath Financial Wellness, and she did.

Working with a debt management program, she was able to see her credit card rates drop substantially into single digits after she made a commitment to pay off the debt.

How she got help with paying down debt

GreenPath's debt management clients are often dealing with credit cards that have a shockingly high average rate of 28%, but the program typically is able to negotiate rates with credit card issuers to bring down the rates to an average APR of 7.3%. On average, GreenPath clients are charged a one-time enrollment fee of $35 and a $28 monthly fee.

Overall, GreenPath has seen a pattern of consumers who have turned to credit cards to pay more bills, maybe trying to keep up with a hike in rent or higher grocery prices, said Kristen Holt, president and CEO of Farmington Hills-based GreenPath Financial Wellness.

Many times, she said, people turned to credit cards in the past few years to cover the higher cost of basic needs, like groceries. She talked with one client at an event who said she went from spending about $150 on groceries every two weeks a few years ago to spending upwards of $300 for just one week of groceries.

"Groceries are a need," Holt said.

Credit card balances are growing more rapidly, too, since interest rates on credit cards are higher than they were before the Fed began hiking rates. And minimum payments went up, too, as a result of higher balances and higher rates.

"If they were already struggling to make the minimum payment," Holt said, "their budget now is out of whack so that's causing delinquencies to go up as well."

GreenPath, she said, has seen about a 17% increase in the credit card balances of people who contact the financial counselors for help. And, she said, GreenPath is seeing a higher portion of people who call being over 30 days past due on their bills. Those who are past due face those higher penalty rates.

"It's a huge problem," Holt said.

"We're seeing more and more people calling and needing a debt management plan."

Those who contact GreenPath go through a free counseling session to review the financial trouble spots, including other debt and expenses. The consumer gets help creating a budget to see what they can afford to pay on their credit cards. They are able to review data on how much someone in their area is spending on groceries so that they know if there's room to cut spending on some necessities, too. And GreenPath can suggest food resources that can help, too.

"Most people cannot afford to pay off their debt at these high rates," Holt said.

GreenPath then proposes new monthly payments to the creditor. The goal is to pay off their full debt in full by making payments under a lower rate and pay off the debt in five years or so.

Under the plan, the credit card issuers reduce the rate so people can pay down the debt in full, Holt said.

Consider this example: Someone with $15,658 in credit card debt could take roughly 10 years to pay off that debt by making payments of $522 a month on their own when the rate is 28%. But getting the average rate down to 7.3% means the person can pay off the debt in about four years if they make payments of $361 a month.

They'd save more than $25,000 in interest and pay about $1,400 in debt management fees at GreenPath.

For many people, Holt said, the hardest time is the first six months of adjusting to the new payment plan. To go on a debt management plan, the creditor is going to close the credit card so you're not able to use the card for more spending.

She stresses that consumers don't want to be dealing with unscrupulous companies that suggest that they stop paying their bills.

The Federal Trade Commission warns that dishonest debt relief companies promise shortcuts that don't exist, and may try to illegally charge you upfront for services.

Bauman is optimistic that she's on a far better path, a path that could be free from the burden of her credit card debt, personal loans and payday loans in a few more months. The debt management program she began at GreenPath in May 2023 was expected to be able to be completed about 16 months.

Rates on some of her credit card accounts dropped to 0%; others dropped to a range between 7.5% and 9.9%. But GreenPath was unable to get some rates lowered, due to the creditor, so the interest rate remained the same.

"Before starting with Green Path, my monthly payments were approximately $2,117, which included payday loans and personal loans," Bauman said.

"If I subtract the payday and personal loans, I was paying my minimum balances on the credit cards, totaling $430 per month."

But GreenPath was able to make arrangements to get payments down to about $900 per month to pay off her credit cards, as well as her personal and payday loans.

She remains on an income-driven student loan repayment program to continue making payments on her student loan debt.

Bauman plans her meals more often. She's been going to movies and reading more, instead of shopping. "Books are cheaper than buying clothes," she said.

Her mantras: Budget yourself. Don't take more than you want to spend. Keep an eye on your bank account. Don't put your head in the sand. Be proactive. Don't load up spending on high-rate credit cards.

"Having the credit is not worth what you're going to pay in interest," she said.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.

This article originally appeared on Detroit Free Press: How one mom avoided financial reality as credit card debt piled up