When passed in 2009, the federal Credit Card Accountability Responsibility and Disclosure (CARD) Act had a lofty plan of attack. High fees, predatory lending to subprime borrowers and sneaky terms were all in its crosshairs.
So how far have we come in four years?
Nonprofit consumer watchdog group the Center for Responsible Lending (CRL) just did an evaluation and found that, while the CARD Act’s reforms have made credit cards more fair and easy to use, there are still problems that need to be fixed.
The good news
The center in December 2012 released the first report in its three-part series, “The State of Lending in America and its Impact on U.S. Households.” The report found that credit card reform has helped consumers to better manage their debt.
“It’s made pricing on credit cards much clearer, and that’s a huge improvement,” says Ellen Schloemer, executive vice president for CRL. “If people know what the cost of credit is, it lets them make good financial decisions.”
Research conducted since the CARD Act’s major provisions took effect in 2010 shows that the law has helped consumers in several ways, according to the report. For example:
Consumers know the cost of credit upfront: Before the CARD Act, bait-and-switch marketing ploys were common, according to CRL. Now, the gap between advertised interest rates and actual interest rate a consumer pays has narrowed significantly.
“Before, you would get a credit card offer that might say 0 percent [interest], but you never actually paid 0 percent,” Schloemer says. “The credit would end up being much more expensive than you thought.”
Cardholders are paying less in late fees and penalty interest rates: Federal credit card reform has cut the total amount of late fees consumers pay, according to the report. After reform went into effect, the number of credit card accounts that got hit with one or more late fees declined by 30 percent, and the average late fee went from $35 to $23, according to research cited in the report. The CARD Act also banned “universal default,” in which consumers could be charged a higher, penalty interest rate on a credit card for a totally unrelated issue, such as making a late payment on a utility bill.
“[Reform] got rid of some really unfair practices where the game was pretty much rigged against the consumer,” Schloemer says.
Consumers are paying down more of their debt: Now, credit card statements must clearly show how much a consumer will pay in interest and how long it will take to pay off the balance if they make the minimum payment instead of paying slightly more.
“It says, if you pay more, here’s how much faster you’ll pay this off and how much you’ll save. That has had a really big impact and consumers are paying down debt faster now,” Schloemer says.
In 2012, the average credit card debt for low- and middle-income households was at $7,145, down from $9,887 in 2008, according to the report. Plus, according to one study cited in the report, one-third of households that carry debt are paying more on their balances than before the CARD Act.
Room for improvement
Overall, credit card reform has helped cardholders, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies.
“Statements and contracts are simpler, and consumers have a better grasp of their rights,” Jones says. “We have a smarter, savvier consumer.”
Still, there are some problems that persist with credit card companies, according to the CRL report.
Marketing of insurance and other add-on products: Credit card companies are pushing add-on products, such as credit insurance and credit monitoring. Credit insurance, for example, is a product that is supposed to make payments on your credit card bills if you become sick or disabled, or if you lose your job. Yet these products often cost more than 10 percent of the average monthly balance, have confusing terms and often do not deliver as promised, according to the report.
Worse yet, some credit card companies have been misleading consumers to get them to buy these products. Federal consumer protection agency the Consumer Financial Protection Bureau (CFPB) forced Capital One to pay $140 million back to millions of consumers who bought certain add-on products. The CFPB found that third-party sales representatives hired by Capital One misled customers into believing that the products would increase their credit scores or limits, that the products were mandatory and that the products were free. Sales reps also convinced disabled and unemployed customers, who were not eligible for full benefits, to buy the products. The CFPB also has taken action against Discover and American Express.
Some prepaid cards have high fees and lack protections: Prepaid cards are the fastest growing segment in plastic payments, but some come with high fees that can be hidden from the consumer. Prepaid cards sometimes charge fees for signing up, depositing money, checking a balance, getting money from an ATM and closing the account, according to CRL.
“Because the disclosure of fees varies from card to card — many are hidden altogether — consumers have difficulty knowing what their costs will be, let alone comparison shopping,” the report states.
However, Jones says, some prepaid cards can provide a good option for consumers who are having trouble getting traditional credit cards. Just look carefully at fees before choosing a card.
“Prepaid cards are getting pretty cheap and available and easy to use,” he says.
Fee-harvester cards target people with poor credit: So-called “fee-harvester cards” target consumers with poor credit and offer tiny credit lines in exchange for huge fees. The report mentions one card that offered a $51 credit line with a $20 fee to open the account and $19 in monthly fees. The CARD Act did put some limits on fees, but fee harvesting is still a problem, according to the report.
“Some of these cards are absolutely ridiculous when it comes to interest rates and fees and do take advantage of consumers who have bad or no credit,” Jones says.
Despite the persistence of some problems, credit card reform has been good not just for consumers, but also for card issuers, the report concluded. That’s because it has cut credit card delinquencies and defaults.
“When consumers get a fair shake, they will do everything they can to pay down their debt,” Schloemer says.