Credit card statements are a bit different this month. Those lists of expenditures emblazoned with Visa (V), American Express (AXP) and Mastercard (MA) now show how long it would take to pay off the bill if only the minimum monthly payment were made. Although this is just one of the many changes the credit card industry is enacting, it is, perhaps, one of the most public. I suspect that, for many, it will be one of the most eye opening, as well.
For consumers who pay their credit card bill in full every month, this simple addition to their statement will be little more than a curio cluttering up, and changing the layout of, their monthly paperwork. These folks likely use credit cards for the convenience of not carrying cash, to earn freebies (such as cash back or air miles), or to help build and maintain a credit history. In fact, many of these types would probably use cash if there were no incentives to using the credit card.
Although the “pay it all off” type of credit card consumer appears to be a significant portion of the total, there is a large group that maintains balances month to month. For them, the new disclosure is a great tool and helps to clarify what was often murky, perhaps intentionally so.
Now, with painful precision, customers can see how long they will be indebted to the bank issuing their card if they don’t pay more than the minimum. It is a sobering time frame, if not a disheartening one. These emotions, however, should be harnessed to spur change in behavior—that, at least, would seem to be the hope of this addition. It is a good attempt that I hope will help.
The crux of the problem, however, has never been how credit card statements are presented. The crux of the problem is that many people live beyond their means. Although the media would have you believe this is a uniquely American trait, it is not. It is a trait that humans have exhibited for thousands of years. The problem today is that it is easier than ever to overextend yourself.
This isn’t a commentary on the selling tactics of banks like Citigroup (C) or Bank of America (BOA), or any other bank that seemingly lost its way during the market boom. Clearly, the vast majority of individuals were at least equally to blame for anything they agreed to, including mortgages, second mortgages, and, of course, credit card spending.
Now that there has been a resurgence of frugality, perhaps there will be a long-term alteration of spending habits. This new disclosure should at least help in this regard.
It would be nice if everyone would follow those old rules of thumb, such as save 10% of your income for the future. Keep at least three to six months of living expenses in a liquid and easily accessible account. Invest your portfolio using your age as your bond percentage (if you are 30, by this rule, 30% of your portfolio should be in bonds). These aren’t perfect rules, but they would serve most people just fine.
I would add, “pay your credit bill in full each month” to these old rules of thumb. And, now, there’s more incentive than ever to do just that.