Credit cards have become less costly for consumers during the past few years, an improvement the Consumer Financial Protection Bureau partially attributes to the CARD Act of 2009.
In a report it released today, the CFPB outlined several improvements felt by consumers, including reduced fees and simplified credit card agreements. These and other changes have led to a two-percentage-point decline in credit card costs to consumers from the fourth quarter of 2008 to the same time in 2012. That cost is calculated taking the sum of amounts paid by consumers (like interest and fees) and dividing it by the average of outstanding balances.
Some of the changes that contributed to this decline can be directly tied to the Credit Card Accountability Responsibility and Disclosure Act, the report states. The act required penalty fees to be “reasonable and proportional” to the violation, and late fees are now $6 lower on average than before the act. Bills must now also be due on the same day of the month, and issuers can only charge late fees if a cardholder has been given 21 days to pay the bill. As such, consumers paid $1.5 billion less in late fees last year.
Another cut to consumer costs came in the regulation of overlimit fees. The act specified that consumers must opt-in to charging beyond their credit limits and incur fees as a result. Under this new rule, consumers spent $2.5 billion less on overlimit fees in 2012, and the CFPB said they “have been largely eliminated.”
The Growth of Consumer Protection
To put the analysis in perspective, CFPB Director Richard Cordray highlighted the circumstances under which Congress passed the act.
“The economic landscape in May 2009 was quite poor,” according to prepared remarks for the CARD Act Field Hearing in Chicago today. He touches on the high unemployment at that time and the plummeting Gross Domestic Product. He was Ohio’s Attorney General in May 2009. “We saw firsthand how hard people were struggling to stay afloat. Particularly with respect to credit cards, people were extremely frustrated, and they were complaining loudly and frequently about being dinged by unexpected fees and about dealing with card agreements full of fine print and legalese they could not decipher or understand.”
Now, the CFPB said credit card agreements are an average of 2,000 words shorter and more readable, though the CARD Act didn’t mandate length or form of the agreements.
“The end result is a market in which shopping for a credit card and comparing costs is far more straightforward than it was prior to enactment of the Act,” the report reads. Those costs more closely represent clearly disclosed interest charges and annual fees, allowing consumers to make better-informed decisions.
The act limited hidden fees and changes in interest rates, leading to the upfront pricing, but also an overall increase in interest rates. While the CFPB said the increase does not directly correlate to the CARD Act, it may have been a way for issuers to make up for the loss in fees as a result of the act.
The credit card savings go beyond clearer terms. After the onset of the Great Recession, fewer consumers had access to credit, but conditions of the CARD Act have allowed credit to be more responsibly distributed among the population.
An applicant’s ability to pay must be considered before they are issued credit, cardholders must request an increase in their credit limits (previously, increases were often unsolicited) and potential cardholders under the age of 21 must prove they can independently pay their debt or have a cosigner aged 21 or older before receiving a credit card.
“Based on the information we have available to review changes in the credit card market, the Act eliminated many unfair fees, made some market practices more transparent, paved the way for easier comparison shopping, and created a market where consumers can see the costs upfront,” Cordray said. “These changes are critical to strengthening consumer protections in the marketplace and helping us rebuild our economy.”
The CFPB’s report isn’t saying “All credit card problems in the U.S. have been solved!” In fact, the bureau identified several issues it takes with credit cards. Practices like add-on products, high upfront fees and retroactive interest resulting from promotional financing will receive more scrutiny from the bureau, as well as many areas for improvement when it comes to agreement transparency.
While the country awaits further analysis from the CFPB, consumers can take responsible credit card use into their own hands. When shopping for a credit card, one of the most important things a consumer can do is understand his or her own credit history. By using a free online tool that allows you to monitor your credit scores (Credit.com’s Credit Report Card is one such tool), consumers can evaluate their financial behaviors and how they impact their creditworthiness, which can help them find a credit card that suits their needs.
As the CFPB highlighted, transparency has improved but has room to grow, so it’s important to carefully research products before committing your financial future to them.