This post is part 5 in a series of articles in which CreditGumbo.com's credit experts examine the 2009 Credit CARD Law and provide insight on its likely ramifications.

Credit cards have become so integrated into our daily lives because they offer tremendous convenience, ease of use, and flexibility. One aspect of that flexibility – the option to make partial payments over time, often represents a significant and unknown cost to the consumer, which if understood might cause the cardholder to make different choices. The Credit CARD Law of 2009 mandates enhanced consumer disclosures, in part, to address this issue.

Let’s look at an example to bring this into sharper focus. If you used your credit card to purchase a new 42" 1080p LCD HD television for $1,100 and each month only paid the card company the required minimum payment – what would be the real cost to you of buying that TV?

Not sure? Well, most of us wouldn’t know the answer. But you might be shocked to know that it would take you more than 12 years* to pay off your credit card obligation and that the actual cost of the TV, including the interest paid to the credit card company, would be $2209* – that’s double what you thought you were paying!!! Armed with this information you might make different choices.

Although the exact wording is yet to be determined, the Credit CARD Act will require that credit card billing statements include a warning that making minimum payments will increase the amount of interest that you pay and extend the time it takes to repay your balance. Of greatest value to cardholders will be the required disclosure on monthly billing statements of:
a.) the number of months that it would take to pay the entire amount of that balance, if the consumer pays only the required minimum monthly payments and if no further advances are made; and
b.) the total cost to the consumer, including interest and principal payments, of paying that balance in full, if the consumer pays only the required minimum monthly payments and if no further advances are made.

When the Law goes into effect in early 2010, with the newly required billing statement the consumer will know the consequences of solely making the minimum payment. Equipped with this information, it’s reasonable to assume that many consumers will consider alternative payment options. To assist in this process, the Credit CARD Act also will require that billing statements display the monthly payment amount that would be required for the consumer to eliminate the outstanding balance in 36 months, and the total cost to the consumer, including interest and principal payments, of paying that balance in full if the consumer pays the balance over 36 months.

To help appreciate the impact of the law, once again we’ll turn to our $1,100 TV example. But this time we’ll use the new information provided on the billing statement as required by the Credit CARD Law, and evaluate paying off the balance in 36 months.

By paying $39.22 per month to the credit card company, the entire balance will be repaid in three years, instead of twelve, at a total cost of $1,411, instead of $2,209.

That’s a total savings of $798!!! For a modestly higher monthly payment the consumer can save a significant amount of money.

The enhanced disclosures required by the credit CARD Act of 2009 will require that banks and credit card companies change their monthly billing statements to help consumers understand the high cost of making minimum monthly payments, and provide information that highlights the benefits of alternative payment amounts. This can mean real money in your pocket.


* Results will vary based upon the credit card APR, minimum payment formula, and cardholder monthly payments. This example assumes an APR of 17.0%, a minimum payment equal to 2.5% of the outstanding balance, and monthly payments equal to the required minimum payment.

 

Labels: Credit Card, Credit Card Law