This is a guest post from Kevin Bowen, a content writer for RESQdebt.com and employee of Greenshieldfs.com
Will greater disclosure of the dangers of minimum payments affect how people react?
CARD Act of 2009
Earlier this month, the Federal Reserve issued new rules that set out the practical procedures to enforce the Credit Card Accountability and Responsibility Act of 2009, a sweeping round of new reform laws that will change the way that the credit card system operates.
The long-range effects of these rules will not be known for some time to come. How many of these changes will prove a benefit and how many of them will prove a disaster remains to be seen. However, there appears to be one thing that seems like an instant winner for the consumer – the new disclosure rules for minimum payments on a credit card account.
Minimum payments benefited credit card companies
The minimum payment has long been a tool that credit card companies have been able to use to rack up large sums of interest on some accounts. By giving some cardholders the opportunity to pay a very low minimum on a very large bill, the companies have been able to charge interest on significant amounts of money.
If done bill after bill over time, paying the minimums can throw consumers deeply in debt. For this reason the minimum payment has gained scrutiny from both academia and legislatures. A law was passed several years ago that required companies to raise the dollar figure on the minimum payment, in order to try to limit the amount of interest being charged to cardholders buried in debt. An English University also found that a minimum payment has a psychological “anchoring effect,” getting consumers to write checks for less money than if no minimum payment appeared on the bill.
Minimum payments – healthy new disclosures
Now, according to a Federal Reserve website, the look and substance of your credit card bill are about to change to help consumers understand this issue. These new Fed rules will require credit card companies to give consumers more information about how their payment choices affect their ability to pay and the length of their debt.
For those stuck making minimum payments, the new information could be eye-opening. For instance, the new bill will reveal the time needed to pay off your current balance if the consumer consistently makes only the minimum payment from month to month. This number could surprise some credit card users, unaware of the sometimes lengthy time frames – and the resulting high interest payments – that minimum payments invite. The new bill also will show the dollar figure that the cardholder would need to send in each month in order to pay off the balance in three years worth of time.
The bill will also have two warnings. The first is a late payment warning that explains that a late fee and an interest rate hike are possible effects of making a late payment. A minimum payment warning tells consumers that they will have interest added and a longer payoff time frame if they only make the minimum payment. While these things might seem obvious to a seasoned credit card user, less experienced users might not be familiar completely or at all, with how things work.
In the past, credit card companies have been able to prey on the ignorance of some of its more vulnerable cardholders. The new rules rightfully make it more difficult for a credit card issuer to take advantage of inexperienced or unwitting cardholders, who might make that payment without understanding that it could sink them further into debt. With the new payment information cardholders will be warned about the dangers of missing minimum payments; if they choose to make that payment, they will do so in an informed fashion. That seems only good for the consumer and fair for all parties involved.
What do you think?
Will this positive change in bill reporting make any difference in how unseasoned credit card users view and approach their debt payments?