New Law Aims to Make Credit Card Statements More User-friendly
By Eva Norlyk Smith, Ph.D.
November 13, 2009
One of the most common credit card mistakes that cardholders make is to get seduced by the beguiling option of paying only the minimum monthly payment on their credit card. It’s easy, it’s simple, and it endlessly postpones the pain of facing up to what we actually spent last month—and the month before, and the months before that.
So what if the card balance is well over $2,000? All you have to do to stay even is to pay a measly $50 or so a month; something that even those on a tight budget can generally manage. However, unbeknownst to most cardholders, our addiction to paying the minimum is a costly one; people who consistently pay only the minimum monthly due on their credit cards end up paying the initial charges two to three times over, depending on the card interest rate.
Worse, most people do this without realizing it. Unless you actually sit down to calculate the true cost of paying the minimum, it’s impossible to know just how much it would cost to pay off the card balance in full by paying only the minimum each month.
The new CARD Act of 2009 is about to change all of that. Effective February of 2010, the new provisions will require card companies to clearly print at the top of each monthly statement exactly how long it will take to pay off the balance making only minimum payments and how much it will cost.
Most cardholders have some awareness of how their monthly interest charges add up over time, but few grasp the big picture in full detail. For example, an $8,000 debt on a card with 22.99% APR, when paid off at a rate of $400 a month, will milk an additional $2,186 from your pockets over the course of the two years and two months it will take to pay off.
Lower your monthly payment to $200/month, and you can expect interest payments alone to total $7,331.44 by the time you mail in your last payment, nearly six and a half years later.
Take a look at what paying the minimum will cost you. The minimum payment is calculated as a percentage of the balance on the card, most typically around 2.5%, so the payment amount decreases as the card balance goes down. Payments on a balance of $8,000, for example, will typically start out at about $200 a month, but because of the decreasing monthly payments, if you pay only the minimum, you will be paying off that $8,000 balance for the next 49 years. That’s a lot of time for interest to accumulate, and indeed, in the example of a 22.99% APR the grand total interest paid would be a colossal $25,340. Add that amount to you original debt, and voila: you’ve paid back the initial charge four times over.
By making figures such as these available to cardholders up front, the CARD Act of 2009 hopes that consumers will have the knowledge necessary to make smarter credit choices.
In addition, the Act also mandates that issuers disclose APR rates, fees, and their effective dates in an easy-to-understand table format; that they clearly disclose the sum totals of interest and fees; and clearly state the repercussions of late payments, including exact APR penalty rates and late fees.