Do You Pay Attention to the Disclosures on Your Credit Card Statements?

One of the provisions of The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) was that credit card statements had to include the impact of paying the minimum over a certain time frame compared to making a larger payment.  The purpose was to provide better understanding of credit card debt, so that consumers could make more informed decisions.  If they realized how much interest they were paying, they would pay more than the monthly minimum.

An on-going study is being conducted by the Harvard Business School and preliminary results were released recently.  The study was based on 30,000 credit card customers at a midsized Minnesota credit union, Affinity Plus Federal Credit Union.  The purpose of the study was to evaluate the effect of the information disclosed on credit card  statements regarding paying the minimum monthly payment verses paying more.

Study example

An example in the study stated:  “If you make no additional charges using this card and each month you make only the minimum payment, it would take 14 years and cost an estimated $6,534 total. By comparison,  you could pay off the balance in three years and save more than $1,200 if you made a larger monthly payment, of $147.”

Results

The good news was that in this study more cardholders paid more than the minimum payment and some paid the suggested amount to pay it off in 36 months.  Unfortunately, those that made the payment based upon 36 months had larger balances than those that did  not.  This was because they continued to charge on the card each month, which continued to raise the balance.  They didn’t understand that paying it off in 36 months was based on the balance staying the same during the time frame, which meant that they didn’t continue to charge on it.  The example did state that, but that wasn’t understood.

Credit card payments aren’t like installment loans, that are for a fixed amount and you pay it  off in a specified time frame.  Credit card balances will continue to increase, if the card is still used for purchases and it isn’t paid off in full. Have the disclosure notices on your credit card statement encouraged you to pay more than the minimum monthly payment?

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Debt, Government, Money & Identity

This post was written by John Ulzheimer