The Credit CARD Act of 2009 was created to be a sweeping piece of consumer-friendly legislation that targeted unfair credit card practices. Prior to the CARD Act, credit card companies could charge outrageously high fees if you went over your credit limit, apply your payments to lower interest balances first and include all sorts of hidden fees.
They could also perpetrate more insidious tricks, such as assessing a large late fee on a payment even if you mailed it before the due date by claiming it hadn’t been processed by the due date. Another unfriendly practice has come to an end, and that’s the practice of issuing sub prime cards with initial fees that are nearly as much as the credit line. Now, fees cannot exceed 25% of the initial credit limit.
Despite these victories, more than a year after being enacted the CARD Act still has some shortcomings that may harm consumers more than it helps them.
Unintended Consequences of the CARD Act
Some studies, such as one conducted by the Center for Responsible Lending, claim the CARD Act was successful. That study showed that the spread, or the difference between the advertised interest rate and actual rate paid, has narrowed. This does not paint the whole picture, however, because the study analyzed the interest spread, not the fees—which have increased.
Credit card companies have gotten accustomed to taking in huge amounts of revenue from fees, and they are not giving up without a fight. According to MoneyTalksNews, since the CARD Act came into effect, there has been a 33% increase in balance transfer fees, a $9 increase in annual fees, and a 33% increase in cash advance fees. Other arbitrary fees are also being instituted (such as Bank of America’s new $59 annual fee), all meant to help those credit card companies make up the revenue they lost as a result of some of the requirements of the CARD Act.
Another unintended consequence of the CARD Act of 2009 was that it made credit tighter. In the long run, the new rules are likely to change the nature of sub prime credit card lending by making it more difficult for people with poor credit to obtain credit cards at all. As more vulnerable and lower-income people face greater limits on the amount of credit they can receive, they will turn more to disadvantageous alternative sources such as high-cost payday lending shops.
Banks Still Manage Risk Regardless of the CARD Act
Banks are inherently risk-averse. They balance risk by charging higher interest rates to borrowers they view as more risky. It naturally follows that if they are not allowed to charge higher rates to those types of borrowers, they will stop making credit available to them. In a shareholder letter from JP Morgan Chase, the lender’s CEO noted that they have stopped offering cards to as many of 15% of customers who would have otherwise been offered a card in the past, because the bank now sees them as too risky in light of the CARD Act regulations.
Another way banks have always managed risk is through “universal default” practices, under which a credit card issuer would raise a consumer’s rates if the consumer defaulted on a different loan, even if the card in question was being paid on time. While universal default is a consumer-unfriendly practice, it does serve as a risk management tool, and thus gives card issuers a way to respond to a consumer’s weakening credit profile. Because the CARD Act bans universal default practices, card issuers are not able to respond to consumers suffering from declining credit. As a result, the card issuers are making credit harder to get and qualifications tougher for everyone.
While fees and interest rates that were seen as unfair have been eliminated, the unintended result is that credit is now available to fewer people.
The CARD Act: Faulty but Improving
The CARD Act of 2009 has many positive consumer-friendly elements to it, but the fact of the matter is that the end result has caused unintended consequences for some. It has made credit harder to attain for lower-income people or those with even minor credit challenges, and it has raised the fees that are being assessed to cardholders that have always paid on a timely basis.
The CARD Act was well-intentioned, and does accomplish some—but not all—of its goals, and some of its unintended consequences cause actual harm. Further legislation is needed to refine the Act, and some progress has been made. Recently an amendment to the CARD Act closed some of the loopholes, barring credit card companies from revoking promotional interest rates, or increasing rates on existing balances unless a payment is 60 days late or has a variable interest rate.