3/27/2012 6:23 PM ET|
Is card 'reform' costing billions?
Laws designed to protect credit card customers have been in effect for 2 years now, and the effects -- and unintended consequences -- are becoming clear.
Back in 2009, the Credit Card Accountability, Responsibility and Disclosure Act was signed to great fanfare, with the White House lauding it as a "turning point for American consumers." The question is, which way have things turned for consumers? By at least one measure, the CARD Act may have been a multibillion-dollar turn in the wrong direction.
The CARD Act was implemented on Feb. 22, 2010, and two years seems a fair time to assess its successes, failures and overall implications for consumers with credit cards.
Counting the costs of the CARD Act
Though the CARD Act did not take effect until February 2010, it had been signed by President Barack Obama nine months earlier, and it had been discussed openly for months before that. In the interim, there was a flurry of activity among credit card companies as they adjusted their rates and fees, presumably in anticipation of the new law.
So, to get a true reading on the impact of this law, it was necessary to go back to late 2008 for a look at how things were before anticipation of the CARD Act started to change things. To do this, CardRatings.com compared terms on roughly 500 credit card offers from late 2008 and late 2011, and found the following impacts that may be attributed to the CARD Act:
- Higher interest rates. From the end of 2008 through late 2011, the prime bank rate was unchanged and mortgage rates fell. Credit card rates, on the other hand, rose. The CardRatings.com study found that annual percentage rates on new credit card offers rose by an average of 2.1% over that period. While these higher rates wouldn't have immediately affected existing customers, over time this new rate environment would start to affect more and more balances. Based on roughly $800 billion in outstanding U.S. credit card debt over much of the past two years, this 2.1% increase in credit card rates would translate to an annual additional consumer cost of $16.8 billion.
- Heavier burden on customers with poor credit. In part, the CARD Act was intended to protect customers with credit problems. Those cardholders were subject to the steepest rises in their credit card rates. However, these same customers appear to have been hurt the most by rising rates over the past few years. While the lowest rate tier of credit card offers, for consumers with excellent credit, rose by only 1.6% from late 2008 to late 2011, the highest rate tier, for consumers with poor credit, rose by an average of 3.4% over the same period.
- Ballooning balance transfer fees. Balance transfer fees also have risen over the past few years. For one thing, fewer cards cap the maximum balance transfer fee. Instead, they charge a percentage of the amount transferred. In late 2008, 31% of credit card offers had a cap on balance transfer fees. Now, just 4% do. In addition, the average percentage charged has risen to 3.3% from 2.1%, a difference that would cost you an additional $120 on a $10,000 balance transfer.
Can all of these costs be blamed on the CARD Act? Given the aftermath of the 2008 credit crunch and the significant market changes as a result (including credit card companies reducing credit lines or canceling cards outright in order to manage their risk), it's impossible to be certain. But as the most significant change in the industry between the two time periods that were compared, the CARD Act seems to bear much of the responsibility.
More from CardRatings.com:
- 6 surprises hidden in the Credit CARD Act
- 5 unintended consequences of the Credit CARD Act
- Chase probed for improper debt recovery practices
Considering the benefits
At the same time, there have been some benefits to the CARD Act:
- Fewer late fees. The CARD Act required that billing cycles be standardized, and that customers are given at least 21 days to pay a credit card bill. In one snapshot comparison, the Consumer Financial Protection Bureau found that between January and November 2010 monthly late fees had dropped by $474 million. This suggests that consumers may be paying around $5 billion less in late fees every year than before the CARD Act.
- Fewer over-the-limit fees. Similar to overdraft fees on your checking account, over-the-limit fees are charged if you exceed your credit limit. The CARD Act banned credit card companies from charging this type of fee unless you expressly opt into the program. If you don't opt in, transactions that would exceed your credit limit are simply denied. Since the new law, many credit card companies have backed away from over-the-limit fees: Only 40% of credit card offers feature those fees now, compared with 95% before the CARD Act.
- Lower over-the-limit fees. Perhaps because credit card companies now have to persuade you to opt in on fees for exceeding the credit limit, those fees have become more competitive. CardRatings.com found that the average maximum over-the-limit fee is now about $14, down from $33 in late 2008.
Advocates of the CARD Act would claim one other benefit: that the law has limited the circumstances under which interest rates can be raised in reaction to economic events, your payment history and your changing credit status. However, if credit card companies have responded by raising rates in advance and across the board, it hardly seems that consumers are better off.
Shifting the burden among credit cardholders
At this point, it is impossible to tell how much the lower fees in some areas are counteracted by higher fees in others as a result of the CARD Act, but the 800-pound gorilla in the discussion is the $16.8 billion potential added annual cost due to higher interest rates.
Besides the likelihood of a higher overall cost, one thing the CARD Act has clearly done is shift the way the cost burden is distributed among cardholders. By protecting cardholders who are late with payments or have credit problems, the CARD Act seems to have caused cardholders in general, including customers with excellent credit, to pay higher interest rates.
But wait, there's more. The implications of the CARD Act go beyond the reach of that particular law. The CARD Act was followed a year later by the Dodd-Frank financial reforms, which included a variety of regulations addressing checking account fees. The similarity is that both have produced some unintended consequences. The consistent theme is that when regulators micromanage the banking business to benefit certain customers, the outcome seems to be higher costs for everyone.
More from CardRatings.com:
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This 'reform' is another example of government supposed good intentions with unintended consequences. The bottom line is people are responsible for their own credit, save cases of id theft. No one can force an individual to use credit. It is up to the individual to use it responsibly.
The only role government really has in this issue is education. Personal finance is not taught in school. No one shows kids how to balance a checkbook, how credit works or the long term impact of money decisions. I will say I had the pleasure of teaching "Finance University" at Junior Achievement to a group of 8th graders. It was amazing how quickly they caught on. Hopefully it will stick.
If you don't already know these financial companies are going to find way, after way, after way, OF GETTING THEIR HANDS ON YOUR MONEY.....YOU DON'T DESERVE A CC!
Cut em up, throw them away, unless you can keep your spending under control. Don't like annual fees, there are cards out there with ZERO fees, I have two of them and not paid a fee (not even interest) in 6-8 years on my cards.
Just go look, you can find them........if your credit is any good!
Wouldn't have needed to make any changes had credit card companies not been greedy (they still are) and if consumers had lived within their means. It the government cannot run this country within its means, how the bloody hell are consumers going to learn to live within their means.
Think people! Do you really need it, or do you just want it?
Yet ANOTHER Obama failure coming down the pike.............
He needs another term just to try and break even, as he breaks taxpayers bank accounts in the process!
Those people with a poor credit history and are poor credits risks SHOULD pay higher rates IF they have credit cards at all. The banks are taking a risk....and, if they continue their irresponsible behavior, the burden of restitution will be spread over the other card holders in their rates.
Credit cards are, in actuality, short term loans. Would YOU lend some of these people YOUR money ?? If used correctly, credit cards are a convenience and a useful alternative to carrying cash. But we should not be subsidizing poor risks.
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