New federal credit card rules mean American consumers are now aware of $12.1 billion a year in previously hidden fees and interest charges, without hurting consumers’ ability to access credit, according to a new study by Center for Responsible Lending.
For years, credit card issuers used confusing language in their sales pitches to make it appear as though credit cards would cost significantly less than they actually do, according to the report. At its peak, in 2007 and 2008, this practice meant the average credit card’s interest rate was 2.3% higher than advertised, resulting in consumers paying $16.3 billion more than they expected.
Soon after passage of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, the gap between advertised and actual interest rates plummeted to .2%, according to the report. Translation: the gap between what consumers thought they’d be paying and what they’re actually paying has closed by $12.1 billion, says Josh Frank, the center’s senior researcher and author of the report.
“In one word, I would characterize it as a success,” Frank says. “The CARD Act has made pricing more clear, it has eliminated a lot of unclear pricing tactics, and has made the market more transparent.”
The report’s results shed some light on poll results in a recent Credit.com survey, in which 36.5% of respondents said they had recently experienced some combination of higher interest rates, increased fees, increased minimum payments and other costly changes.
The report also contradicts the expectations of credit card companies and conservative political commentators, who argued that the CARD Act would lead to higher rates, and make it more difficult for consumers to obtain credit.
“It was among our safest predictions that reduced credit to consumers would result” from passage of the law, the Wall Street Journal editorial board wrote on Aug. 24, 2010. “By limiting the ability of banks to increase rates on delinquent borrowers and to charge fees on unprofitable customers, Washington encouraged card issuers to be more selective in advancing credit and to demand higher rates when they do.”
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According to the center’s report, however, none of those things actually happened. When adjusted to factor in the effects of the recession, data from the Federal Reserve Board shows that interest rates held steady after passage of the act.
Nor did issuers cut back on the number of times they offered to credit cards to new consumers. The ratio of American families receiving credit card solicitations in the mail actually increased after the act passed, from 40% in 2009 to 60% recently, according to mail volume data from Mintel Comperemedia.