Fewer borrowers are paying the bare minimum on their credit card balances since a disclosure requirement took effect. The rule forces lenders to inform each cardholder how long it would take to get out of debt if he or she paid the minimum each month.

Companies such as Citigroup, Bank of America, JPMorgan Chase and Capital One raised interest rates before the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or Credit CARD Act, took effect on Feb. 22, anticipating a loss of revenue as its consumer protections kicked in.

“It appears from where we sit (that the Credit CARD Act) achieved its intended effect,” says Gail Cunningham, the vice president of public relations at the nonprofit National Foundation for Credit Counseling.

In April, the foundation conducted an online poll of 2,000 cardholders and found that 25% were paying a bigger chunk of their monthly balances than they had done three months earlier. A total of 55% said they didn’t pay more than the minimum because they couldn’t afford to — unchanged since the Credit CARD Act took effect — while 12% said they had paid off their balances in full. The CARD Act also requires issuers to list a toll-free number to a nonprofit credit counseling agency on cardholders’ statements, providing consumers struggling with their finances access to assistance.

Twelve percent of poll respondents said they’d dialed the number on their statements to receive credit counseling. The most common reason given for a call a credit counseling agency was a reduction of income.

Credit climate in April
Credit score Total debt* Paying on time

< 500

$40,652

59.5%

500-599

$42,883

74.2%

600-699

$92,029

95.7%

700-799

$126,636

99.4%

800 and

$55,442

99.9%

*Credit card, mortgage, home equity, auto and student loans

Source: Credit Karma

Thanks to rules changes stemming from the CARD Act, paying above the minimum balance is now more cost-effective than ever.

The Center for Responsible Lending recently analyzed the legislation and discovered that for each dollar above the minimum a customer pays, he or she could save more than $2 in interest.

Before the Credit CARD Act, a borrower paying $100 more than the minimum balance could save $164 in interest charges, the center said, but recent changes mean that the potential savings have risen to $224.

Another consumer protection in the law means that any amount a customer pays above the required minimum must be applied to the balance in his or her credit card account carrying the highest interest rate. That’s the opposite of what issuers had been doing — applying payments to the lowest-rate balances first, thereby maximizing interest charges. “Those three little words, ‘above the minimum,’ change everything,” says Odysseas Papadimitriou, the chief executive and founder of Card Hub, a website that helps customers find the best credit card rates.

“For the ones who are paying just the minimum, they (still) get no benefit, allowing the industry to essentially screw that segment of the population that needs help the most,” Papadimitriou said.

Card Hub is launching a lobbying effort to encourage the Federal Reserve to do something about that loophole, allowing even minimum payments to be applied to balances carrying the highest interest rate. “My hope is that the Federal Reserve acts and says, ‘You know what, this makes no sense,’” he says.

In the meantime, for those who can afford only the minimum payment, Papadimitriou recommends carrying the balance on multiple credit cards, rather than carrying all the debt on one card.

This article was reported by Carmen Nobel for TheStreet.com.

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