It’s been a little more than a year since Congress passed the Credit CARD Act and shed light onto the credit card industry and the $12.1 billion in hidden fees .
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The legislation, passed in May 2009 and subsequently put into effect in February 2010, was billed by some as a way to clean up the credit card industry, to instill transparency into issuer actions and to protect consumers from egregious fees.
Others feared that while the reform had good intentions, it would cause rising interest rates and a drought of available credit. Well, it’s time for a judgment: time to see who was right and who was wrong and to declare the CARD Act a success to date or a failure.
The best starting point for such an evaluation is to consider the key changes instituted by the law, which have manifested in four distinct ways.
First: Credit card companies can no longer apply increased interest rates to pre-existing balances unless account holders are at least 60 days delinquent. The impetus for this change was the common disparity between advertised and effective interest rates. Consumers can now trust that the terms they sign up for are the terms for which they will be held accountable unless their use--or perhaps more accurately, misuse--truly warrants penalty measures.
Second: The CARD Act essentially made punishments for credit card misuse fit the crimes that caused them. Late fees are now a function of prior payment history and the amount of the minimum payment missed. In addition, not only must consumers now explicitly opt in for the ability to exceed their credit limits, fees for doing so cannot surpass the overage amount. Consumers now know they won’t get the death penalty for an offense that truly deserves a slap on the wrist.
Third: The law forced subprime credit card issuers to clearly illustrate the true cost of their products by capping non-penalty fees at 25% of an account’s credit limit during the first year it’s open. Subprime issuers were once able to offer 9.9% APRs while charging an assortment of fees amounting to as much as 80% of a card’s credit line. Now fees are regulated and the once-hidden costs of subprime credit cards are now evident in the interest rates that have skyrocketed to around 79.9%.
And finally, the CARD Act instituted various regulations fostering increased clarity in the statements that credit card companies send to their customers. For example, companies must provide advance warning as well as reasoning for any change in the terms of an account, and they must clearly note how long it will take customers to pay down their debt.
These changes have brought transparency to the once-murky credit card industry. Now, what consumers see is what they get, from the time they consider a credit card offer throughout the duration of their use. But did this new-found transparency, consistency and predictability come with a price?
The most common criticisms of the CARD Act are that it led to higher interest rates and limited available consumer credit. Truth behind either or both of these statements would negate the aforementioned benefits of the one-year-old law.
We recently conducted a CARD Act study and found that while interest rates did rise and available credit dried up, they did so because of economic pressures, not as a result of legislative coercion. CardHub analyzed economic trends throughout history and compared what has occurred during the Great Recession with the aid of proprietary statistical models.
In truth, not only are rising interest rates and declining levels of available credit consistent with what has occurred during past recessions, but they have actually not been as pronounced as could be expected given historically-high unemployment and credit card charge-off rates. These findings were also corroborated by another independent study conducted by The Center for Responsible Lending, also released last week.
To recap: The CARD Act increased transparency throughout the credit card industry and was, in fact, not responsible for the unfortunate economic trends that many have attributed to it. Therefore, at one-year-old, the law can be called a success.
However, the CARD Act is by no means perfect. Two starkly apparent flaws are the restrictions on credit for people under the age of 21 and the fact that small business credit cards were not given the same protections against arbitrary interest rate changes as personal credit cards. If these problems are fixed, the CARD Act will be a comprehensively positive piece of legislation.
Odysseas Papadimitriou is the CEO of CardHub.com, a website that operates the nation’s largest gift card exchange and helps consumers find the best credit card deals.