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The Law That Helped Consumers Avoid $16 Billion in Credit Card Fees

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It is possible to eliminate gotcha fees and tactics, argues the Consumer Financial Protection Bureau in a report issued on Thursday. The bureau says credit card consumers have saved $16 billion since 2011, thanks to a law banning “gotcha” credit card issuer tactics that were common during the last decade. (Such fees were also a main target of my book, Gotcha Capitalism, published in 2007.)

Remember credit card over-limit fees? How about huge late fees for tiny transgressions? The CFPB says both have largely gone away since Congress passed the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) back in 2009, during a flurry of legislation attempting reform of the U.S. financial system.

The CARD Act limited or eliminated many fees that were unpopular with consumers. The CFPB report claims the law has saved consumers $16 billion since it went into effect in 2011 — $9 billion in over-limit fees, which have essentially disappeared; and $7 billion in late fees, which have dropped by 20%.

The banking industry had warned several times that elimination of fees would reduce the availability of credit, but the CFPB says there’s no evidence of that. In fact, 100 million new credit card accounts were opened last year, and credit card account growth is growing about 3% each year, the agency said.

“The law made it easier for consumers to evaluate costs and risks by eliminating the worst back-end pricing practices in the market,” CFPB Director Richard Cordray said in a press release. “There is more work to do. But with commonsense rules in place, credit cards are safer and more affordable, credit is more available, and companies remain profitable with improved customer satisfaction.”

The CFPB’s claims are consistent with an independent report on the CARD Act published in 2014 by a team of academics led by economist Johannes Stroebel of New York University. The team found that the elimination of many fees, and clarity on other penalties and repayment terms, was saving consumers $12.6 billion annually. It also found that the true cost of credit – interest rate plus fees – has shrunk significantly since implementation of the CARD Act, and even more for consumers with poor credit.

“We find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 1.7% of average daily balances, with a decline of more than 5.5% for consumers with the lowest FICO scores,” the paper said.

Two years ago, the CFPB issued a report arguing that the CARD Act was helping consumers. At the time, many in the industry maintained that the law was hurting both banks and consumers.

“While the CARD Act has provided clear and significant benefits to consumers, there have also been significant trade-offs, specifically, higher costs and less availability for credit card credit,” said American Bankers Association senior vice president Nessa Feddis in a letter to the CFPB at the time. Her letter cited data showing credit limits for subprime cardholders had fallen dramatically, and noted that credit card interest rates had risen during the prior three years, at a time when other rates were falling.

“While many features of the CARD Act provide consumer benefits, other parts of the law have led to negative, unintended consequences,” Feddis said in a statement to Credit.com. “As the CFPB’s own study found, credit card interest rates have increased since the CARD Act, raising the cost for those who manage their credit well.”

Of course, nothing’s perfect, and some gotchas still remain in the credit card industry, the CFPB says. These include, directly from the CFPB’s statement:

  • Deferred-interest promotions can hit consumers with back-end pricing: Deferred-interest promotions on credit cards dangle the possibility of financing purchases without interest. With these products, if the balance is not paid in full by a given date, the accumulated interest is assessed retroactively. Deferred-interest products remain the most glaring exception to the general post-CARD Act trend toward upfront credit card pricing. Consumers with lower credit scores are paying more for these products, but they do so at the back-end of the transaction, with annual interest rates of around 25 percent.
  • Subprime credit card companies charge much more for credit: When the credit is being provided by a subprime specialist credit card company, the total cost to consumers with lower credit scores can be much more than what they would pay on a mass market credit card. These companies charge more for origination and maintenance fees. This puts consumers at risk of more of their monthly payments going toward fees and interest charges, instead of the principal balance. Subprime companies also tend to have longer, more complicated agreements.
  • Rewards programs have obscure and incomplete terms and conditions: Over half of all consumers say they select credit cards based on the rewards they provide. But the terms of rewards programs are often not available to consumers until after they apply for the card. Even then, some rewards terms may be obscured by glossy “program guides” that provide only partial information. And if consumers were to find, read, and understand the terms, they would frequently discover that issuers retain the right to change those terms at any time, for any reason.
  • Debt collection practices pose risks to consumers: When consumers fall behind on their bills, their accounts are moved into collections. Initially, collections are generally handled in-house. There is a wide variation in how aggressively these collectors pursue the debts. After a while, accounts that have not been paid are often placed with third-party debt collectors that compete with other collectors and are paid a percentage of the debts they collect. Banks vary widely on the extent to which they rely on these third-party collectors and also on the extent to which they sell unpaid accounts to debt buyers. The Bureau has found numerous problems in the practices of many of these third-party collectors, including the accuracy and completeness of their information.
  • Some agreements are still long and complex: Today’s report identifies a number of opportunities for card issuers to improve the transparency of their products. For example agreements can still range in length from 3,000 to 8,000 words.

These findings underscore the importance of carefully reading or asking questions about a credit card agreement before you apply for a particular product. Doing so is also important to your credit score, too, since each credit card application generates a hard credit inquiry on your credit report and could subsequently cost you some points. You can see how inquiries and your current credit card balances are affecting your credit score by viewing your free credit report summary on Credit.com.

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