What the CARD Act Reveals About Credit Card Debt
Because of the CARD Act, credit card statements now show how long it takes to pay off a balance by making only the minimum payment. They also show how much interest you will pay over time. Many consumers think this information is a mistake. After all, how can it take 22 years to repay a $15,000 balance?
However, the numbers are correct. For most people, this information is both shocking and helpful. It clearly shows the real cost of minimum payments.
Why Minimum Payments Cost More
To explain the impact, let’s look at two real examples. Each example assumes no new charges are added. The interest rate stays at 14.5% throughout the repayment period. These examples show how quickly interest adds up.
Example One: $680 Credit Card Balance
With a $680 balance, the minimum payment is $15 per month. At that rate, it takes six years to pay off the card. Over time, you pay a total of $991. That includes $311 in interest alone. This means interest adds nearly 50% to the original balance.
If you increase the payment to $23 per month, the balance is paid off in three years. In that case, the total paid drops to $842. Interest falls to $162. By paying more, you save $149 and finish three years earlier.
Summary:
$15/month → 6 years → $991 paid → $311 interest
$23/month → 3 years → $842 paid → $162 interest
Example Two: $1,424 Credit Card Balance
Now consider a $1,424 balance. Paying the minimum of $28 per month takes 12 years. The total paid reaches $2,662. Interest alone equals $1,238, or 86% of the original bill.
By raising the payment to $49 per month, you pay off the balance in three years. You pay $1,764 total, with $341 in interest. This change saves $897 and cuts nine years off repayment time.
Summary:
$28/month → 12 years → $2,662 paid → $1,238 interest
$49/month → 3 years → $1,764 paid → $341 interest
Late Payments Make Things Worse
Missing a due date adds even more cost. Most cards charge a late fee of about $35. On top of that, your interest rate may increase.
Check your cardholder agreement for the “default rate.” This is the higher rate the issuer can apply after a missed payment.
Why Paying Interest Feels Like Wasted Money
Paying interest gives you nothing in return. It does not buy food, travel, or security. Instead, it drains money that could be used elsewhere.
Most people can think of better uses for $1,238—or even $341—than handing it over in interest.
About the Author
John Ulzheimer is President of Consumer Education at SmartCredit.com. He is also a contributor to the National Foundation for Credit Counseling and a former executive at FICO, Equifax, and Credit.com. He specializes in credit reporting, scoring, and identity theft education.
