New Credit Card Statements Trigger Faster Debt Pay-Offs
By Eva Norlyk Smith, Ph.D.
May 18, 2010
Most people carrying $8,000 in credit card debt think of it as a $8,000 debt. While this seems perfectly logic, the truth of the matter is that when interest and speed of debt repayment factor into the equation, that $8,000 grows into a far weightier sum—$11,308, for example, for a card with an APR of 22.99 percent, if the balance is paid off over three years.
Cardholders who choose to pay off that $8,000 credit card debt at the minimum monthly payment would be paying the balance off over as much as 49 years, during which that $8,000 debt would have been grown to $33,340 (numbers will vary, depending on how the card issuer calculates the minimum payment due).
Up until the new rules for credit card statement disclosures stepped into effect in February this year, few consumers were aware of this fact. However, under the new Credit CARD Act, monthly credit card statements now must clearly disclose how long it will take the cardholder to pay off the outstanding balance on their cards as well as what it would cost in total, if they were to make only the minimum payment each month. In addition, the new statements also must list the amount cardholders would need to pay each month to pay off the credit card balance within three years.
According to a recent survey by the National Foundation for Credit Counseling (NFCC), the new credit card disclosures have been eye openers for many cardholders. Even though the new statements have been out for less than three months, a full 25 percent of the 2,000 cardholders surveyed said that the new statement disclosures have motivated them to pay more than the monthly minimum. Another 12 percent were so struck by the hard reality of the math that they took advantage of another piece of information credit card statements are now required to provide: the toll-free number of a certified debt counseling service.
“After seeing their financial situation in black and white, consumers who find themselves in financial difficulty can reach out to the legitimate credit counseling agency listed on their statement,” Gail Cunningham, spokesperson for the NFCC, explains. “Only credit counseling agencies that have been approved by the Executive Office of the United States Trustee, an arm of the Department of Justice, are allowed to be listed. Therefore, the consumer is assured of receiving solid financial direction.”
Not all consumers who see the numbers are motivated to take action or seek help, however. 55 percent of cardholders surveyed in the NFCC study reported already paying as much as they could on the balance each month, so the statement disclosures made no difference. Another 7 percent reported that the numbers had no effect on their payment habits, because they already paid off their balance in full each billing cycle.
In addition to the new payment disclosures on credit card statements, card issuers are also required to apply payments differently than they have in the past. Card issuers can no longer apply payments towards the lowest-interest portion of the balance only. Instead, any amount paid above the minimum monthly payment must be put towards the highest-interest part of the balance, in order to enable cardholders to pay off debt faster. Experts have found that in some cases, this new rule gives consumer dollars twice their previous power to pay down debt. Of course, in order to make this new rule work, cardholders must pay more than just the minimum monthly payment due—which, according to the NFCC survey, may not be an option for more than half of cardholders.
To calculate how much it would cost you to pay off your credit card debt at different monthly amounts, use this handy little credit card payment calculator.