By Charlene Crowell
With 71 percent of consumers having at least one credit card, new research findings from two different sources show that the Credit CARD Act, enacted in 2009, is working. The only difference between the reports is just how much consumers are benefitting.
According to the Consumer Financial Protection Bureau (CFPB), the total cost of credit declined by two percentage points between 2008 and 2012, with borrowers saving $4 billion in fees that would have been charged if not for the new law.
“The CARD Act was passed with the specific goal of making the credit card market fairer and more transparent for consumers,” said Richard Cordray, CFPB Director. “Consumers need access to credit; we simply want to ensure that they have responsible access to credit.”
CFPB found that in two specific areas, America’s consumers have already saved $2.5 billion in over-limit fees that have mostly disappeared. Before the law took effect, these fees were assessed each time a transaction exceeded approved credit limits. The law now limits fees to only once in a single billing cycle but also requires customers to opt-in to the fees. Additionally, late fees have also dropped by $1.5 billion and on average dropped in cost by $6 since the law took effect.
A related working paper released days earlier by the National Bureau of Economic Research estimates that the law has performed even better, saving consumers an estimated $20.8 billion per year. This estimate, based on an analysis of more than 150 million credit card accounts, showed a drop in costs of more than 10 percent for consumers with the lowest FICO scores and an annualized reduction in borrowing costs of 2.8 percent on average daily balances. This report was developed jointly by the Office of the Comptroller of the Currency and academicians from the University of Chicago Booth School of Business, New York University, and the National University of Singapore.
Either way, the effects of this key regulatory reform are welcome financial relief news for consumers.
Signed into law in May 2009, the Credit CARD Act sought to establish fair and transparent practices in the credit card market. It included specific protections for consumers under the age of 21. They now must demonstrate an independent ability to repay the debt or secure an adult co-signer. Since enactment of the CARD Act, credit card holders under 21 have dropped by half.
Other CARD Act requirements include:
Customer statements must clearly show how long it will take to pay off the bill if the consumer opts to pay only the minimum amount due, including interest charges;
Card issuers cannot change terms or interest rates on customers who are current on their accounts; and
Customers must be delinquent for 60 days before a rate increase can be imposed.
Even so, the CFPB finds problem areas remain despite these provisions and customer savings. Further and greater regulatory examination may be warranted.
Take the case of mailings that offer low and no interest to finance purchases for a specific period of time are known in the industry as deferred interest products. While the offers may appear tempting, it is not widely understood by consumers that if the balance is not paid in full by the designated date, interest will be charged and assessed retroactively to the transaction date.
Similarly, CFPB will closely monitor fees assessed before an account is opened. Some cards include what is known as harvester fees have high upfront costs, e.g. application fees, and low limits. As a result, the initial fees absorb much of the card’s credit limit. Currently not covered by the CARD Act, CFPB’s review of these charges will determine whether it should take action under its authority.
Other areas of concern for the Bureau include credit card rewards programs, add-on products, online disclosures, and grace periods – the time between the end of a billing cycle and when a balance is due.
When consumers understand the terms and responsibilities incurred through credit, they are better able to comparison shop for the best product. More importantly, no consumer wants to feel snookered by a deal gone bad.
For more information on CFPB’s new report, visit www.consumerfinance.gov.