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The Credit CARD Act of 2009 will be the law of the land on February 22. It gives consumers greater protection from the abusive practices of credit card companies, as well as better education on responsible credit use. I know that the word responsible implies a values-laden judgment on credit usage. My goal, however, is not to chastise or shame, but to nudge you toward better financial planning practices. I define better as that which saves you money.
One of the truly inspired provisions of the new law is the fuller disclosure of how much you are actually paying when you make only the minimum payment due. Every monthly bill will state how long it will take you to pay off the balance and what the total amount—principal and interest—is that you will pay to reduce the balance to zero.
Every bill will also tell you how much you need to pay per month to pay off the entire balance in three years. Again, you’ll see the total principal and interest payments to achieve that goal. Any net savings compared to the minimum payment due method will be highlighted. Having the real numbers stated so clearly every month should motivate consumers to pay off balances at a quicker pace, saving real money in the long run.
As of this writing, the national average of interest rates on credit card balances was 14.15%. Late payments or increased credit risk can increase that rate to 25% to 29%. My values-laden judgment is that these rates are obscene and should be avoided at all costs. Pay down your balances as quickly as possible!
By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog