Editorial Policy

The Credit CARD Act’s First Year: A Review

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By Eva Norlyk Smith, Ph.D.
March 3, 2011

Just a little more than a year ago, major provisions of the Credit CARD Act went into effect.

Since then, industry analysts have debated whether the rules succeeded in curbing credit card malpractice. Some experts say that the law created greater transparency for consumers and minimized deceptive lending practices. Others say that it led to unintended consequences, such as sky-high interest rates on new credit card offers.

However, two federal studies released last month give the new law a tentative thumbs up. Although it may not have successfully accomplished everything Congress intended, researchers at the Office of the Comptroller of Currency (OCC) and at the Consumer Financial Protection Bureau (CFPB) say that the Credit CARD Act of 2009 has introduced several positive changes for consumers.

Taken together, results from both studies suggest that the law has positively impacted consumers in four major areas:

1. Retroactive Interest Rate Hikes Are Down
The New Rules: In the past, credit card issuers were free to raise interest rates on existing credit card balances retroactively — saddling cardholders with a great deal of uncertainty about what interest rate they would be paying on outstanding credit card debt. The law now stipulates that interest rates can only be increased retroactively if the cardholder is at least two months behind on payments. Card issuers can still raise interest rates on future purchases, but they must give cardholders at least 45 days notice, and the credit card account must be at least one-year old.

The Outcome: According to the study by the OCC, about 15 percent of credit card accounts in the past were routinely subjected to retroactive interest rate increases. That number has now dropped to under 2 percent.

Issues Remaining: According to the CFPB study, several card issuers are experimenting with so-called “delinquent pricing” in which interest rates on future purchases are set to increase automatically if a cardholder falls behind on payments. This kind of delinquent pricing is still in development, and it remains to be seen how widespread it will be.

2. Credit Card Late Fees Are Down
The New Rules: The Credit CARD Act capped credit card late fees at $25 for the first late payment and at $35 for any subsequent late payments within a given six-month period. It also stipulated that late fees must not exceed the minimum payment due. The law further curbed billing practices that could trip up consumers and result in late payments — giving cardholders a minimum of 21 days to pay their bill. The law also stipulates that the payment closing time must be set by 5 p.m. on a weekday.

The Outcome: Credit card late fees have dropped dramatically, from $901 million in January 2010 — before the law went into effect — to $427 million in November of 2010. The average late fee has gone down from $35 to $23, and the number of credit cardholders charged at least one late fee fell by almost 30 percent.

Issues Remaining: According to the CFPB study, six of the nine largest credit card issuers have increased the minimum monthly payment, enabling them to charge higher late fees on some accounts, since the fee no longer exceeds the minimum due.

3. Overlimit Fees Have Become an Endangered Species
The New Rules: Card issuers can no longer charge over-limit fees unless the cardholder opts in for over-limit protection. Card issuers can also only charge one over-limit fee in a given statement period. Consumers can opt-out at any time, and they must be notified of their right to do so, whenever an over-limit fee is levied.

The Outcome: Over-limit fees have become almost a thing of the past. The number of credit card accounts assessed a late fee has gone down from an average of 12 percent per year to 1 percent of accounts.

Issues Remaining: A majority of card issuers are still allowing over-limit transactions for cardholders in good standing, but they are no longer charging a fee. Depending on your disposition, this may or may not be a problem.

4. Credit Card Costs Are Less Confusing
The New Rules: Monthly credit card statements must be easy to read, and they must include information about the cumulative interest charges that you collect when you only pay the minimum amount due each month.

The Outcome: Surveys indicate that almost three out of four consumers have noticed that monthly statements now list the costs of making only the minimum payments, as well as other changes to statements. Of these, 31 percent also report that they have adopted more conservative credit habits and are either paying more each month or have reduced credit card usage.

Issues Remaining: Consumer awareness of the law still lags. Only about half of credit card users say they are knowledgeable about the CARD Act, and almost one third of consumers say that they don’t know about the new law at all.