January 31, 2010 9:50 pm

US law spells out credit card costs

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Millions of debt-laden households across the US are in for a dose of harsh reality when they open their February credit card statements. For the first time card issuers are required by law to spell out how long it will take to pay off a balance by making only the minimum payment.

The average American household has $10,000 in credit card debt. Assuming no new borrowings and an 18 per cent annual percentage rate, it would take 48 years to become debt-free by just paying the monthly minimum.

US credit card debt has fallen 8.7 per cent since early 2008 to $874bn, as consumers reduced consumption during the financial crisis. Behavioural economists said the new disclosures, part of broader credit card reforms enacted by Congress last year to curb predatory lending, could make Americans more financially responsible.

“Many people underestimate how expensive it is for them to borrow, and some are just humming along month to month not thinking at all about paying the balance off in full,” said Jonathan Zinman, a Dartmouth College economics professor.

Cherie McFarland, an Esparto, California resident who rang up $20,000 in credit card debt when she lost her job last year at a home storage retailer, said that a better understanding of borrowing costs would have caused her to spend more carefully. “It would shock you into knowing how big a hole you were in,” she said.

Additional information listed on credit card statements starting in February will include the amount of interest and fees paid in the year to date, as well as the size of monthly payments needed to become debt-free in 36 months. Rules also require issuers to give borrowers 45 days’ notice before changing the interest rate on pre-existing accounts. and prevent them from automatically charging overdraft fees.

The White House estimates that nearly 44 per cent of American families carry a balance on their credit card and pay around $15bn in penalty fees each year.

Not everyone agrees that the new rules will be sufficient. Some experts point to a 1988 law that required prominent disclosure of APRs on credit card applications. While that law initially caused issuers to lower APRs and introduce teaser rates that lowered borrowing costs, banks quickly found a way to charge for other services such as balance transfers. Similarly, issuers have jacked up interest rates and added annual fees to compensate for lost revenue from the newest round of rules.

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