It was 2009 when the Credit Card Accountability Responsibility and Disclosure Act (the Credit CARD Act) substantially changed the playing field for credit card issuers and users. It improved how interest could be charged, how terms could be changed, how fees could be assessed, who may be issued a credit card, and much more.
Still, in my professional opinion, one of the most significant changes began to show up right on your credit card bill. Card issuers must explain how long it will take you to pay off your balance, and how much you will pay in total, if you pay only the minimum amount owed every month. They must also disclose how much the monthly payment would have to be (as well as the total cost) for you to pay off the current balance in 36 months.
Here’s how this looked on one consumer’s bill. On a balance of about $4,550, monthly payments of only the $97 minimum would mean the balance would take 25 years to pay off, at a total cost of about $9,350—more than twice the actual balance on the card.
And to pay off the bill in three years? It must take $500 per month, right?
Nope. Only $154. And the total cost over those three years would be only about $5,550—a savings of $3,800.
|Minimum Payment||Three-year Payment||Difference|
|25 years||3 years||22 years saved|
|$9,350 total||$5,550 total||$3,800 saved|
It’s remarkable how just $2 extra per day dramatically reduces both the time and the amount needed to pay off a debt. It happens because with each passing month, a larger payment reduces not only the remaining balance, but also the amount of the next finance charge. Your payment takes you a step forward, toward your goal of paying your bill in full—and the finance charge takes you a step back. But the size of the step back is based on the remaining balance. The larger your step forward, the smaller your step back.
Of course, the credit card companies had known this for a long time before 2009. They could have told us that a moderately larger payment would eliminate our debts years—or decades—sooner.
But the didn’t, did they? They’ve waited until they were forced to tell us. Maybe that’s because they’re in business to make money from us. And if that means making us lifelong debtors, that’s fine with them—at least, that’s how it seems to me.
All the more reason to be glad our statements clearly show us how we can hasten the day we don’t need to send payment for any finance charge to a credit card company.