Credit CARD Act Offers Consumers More Credit Information
People who only make the minimum required payment each month on their credit card accounts might be in for a form of "sticker shock" soon, due in part to the Credit Card Accountability, Responsibility and Disclosure (CARD) Act.
The new credit card law requires credit card issuers to tell you — in plain English and in a prominent location on each billing statement — not just how much you owe each month but, more importantly, how much you could wind up paying in the long run if you always make only the minimum required payment.
Per "Section 201, PAYOFF TIMING DISCLOSURES," a statute in the new credit card law that goes into effect on February 22, 2010, this information must "be placed in a conspicuous and prominent location on the billing statement," and it must include:
- A written statement that says, "Minimum Payment Warning: Making only the minimum payment will increase the amount of interest you pay and the time it takes to repay your balance" (or words to that effect once the statement has been tested on consumers);
- Specific details on how long (rounded to the nearest month) it would take you to pay off your existing balance if you only made the required minimum monthly payment and charged nothing else to your credit card;
- The total amount you'd end up paying — including interest on the balance — if you only paid the minimum required and made no other purchases with your card; and
- The amount you'd have to pay each month (including interest charges) if you wanted to wipe out your existing balance within 36 months.
There's also a clause in this section of the Credit CARD Act that requires your credit card statement to include a toll-free number that can help you find credit counseling and debt management services.
The new consumer credit law is intended to make you more aware of the true costs of your credit card behavior. Here's an example of what those disclosures might tell you:
- For this example, we'll use the the median credit card debt, which for individual cardholders in the United States in 2009 was $2,960 (i.e., half of cardholders owed more than $2,960, half owed less).
- Generally speaking, the major credit card issuers (American Express, Citi, Capital One, Chase, Discover, Wells Fargo, and others) require minimum payments of one to two percent each month, along with finance charges (i.e., interest) and fees.
- One percent of $2,960 is $29.60; two percent equals $59.20.
- If you're at the median debt level of $2,960, it will take you 100 months (more than eight years!) to wipe out your principal debt if you pay just one percent each month, or 50 months (over four years) if you pay two percent.
- And remember, that doesn't include any fees, finance charges, or new purchases you might make with your credit card.
That's what we mean by "sticker shock."
The silver lining of the Great Recession is that it's forced consumers to pay much closer attention to their finances. In fact, consumers have been paying down their debts in response to the recession. To get a true sense of where you stand in the credit world, of course, it's a good idea to check your credit scores and monitor your credit reports closely in the coming months and years.