In 2009, the Credit CARD Act (Credit Card Accountability Responsibility and Disclosure Act) was passed by Congress and signed in to law by President Obama. The law was meant to bring more transparency to the financial services sector, and to protect consumers from some of the practices associated with the credit card industry.
The point of the law was to create an environment that encourages consumers to make smarter credit choices. But, more than four years after the passage of the CARD Act, has it been a success?
“Yes,” says Kimberly Rotter of Credit Card Insider, “it’s an overall success.”
What Did the Credit CARD Act Accomplish?
A number of changes to the way the credit card industry does its business were made with the passage of the Credit CARD Act, especially in terms of consumer credit cards. Some of the differences include:
- No more charging over-the-limit fees.
- Consumers under the age of 21 must have cosigners if they can’t prove adequate income.
- Notice of 45 days much be given before making changes to your account terms. This provides adequate time to reject the terms, and plan to make your own changes.
- Credit card statements must include comparisons between the total payback amount when paying the minimum, as compared to how much it takes to pay off the card in three years.
- Payments made on balances with different interest rates must be first applied to the debt with the highest rate. Over time, this reduces the overall amount consumers pay, since they are no longer carrying the highest-rate portion of the balance for the longest period of time.
- Penalty rates can only be applied to new balances, unless you are 60 days delinquent on your account.
- Consistent due date that makes it easier to predict when you need to make a credit card payment to avoid late fees.
These provisions, and others, are designed to increase consumer awareness of debt, and provide consumers with the tools needed to make better decisions. “To me, the biggest success is the drop in solicitations to young people who are easily lured into debt,” says Rotter. “There is a higher barrier to entry for young people just getting into the credit card market.”
Even the so-called drawbacks of the Credit CARD Act might be considered victories for consumers. “The regulations resulted in higher average interest rates and higher annual fees for many cards that charge annual fees,” Rotter says. But that isn’t necessarily a bad thing. Once again, this adds another barrier to entry, and Rotter points out that “Many of us — at any age — pay a hefty price for naivete about debt. Barriers are a good thing.”
Besides, even with the increased interest rates and annual fees that some cards put into place in response to the passage of the bill, there is still a net benefit for consumers. “Many industry experts see these consequences as drawbacks, but the truth is that with the reduction in other fees, like over-the-limit fees, the overall cost of credit has come down.”
Not only that, but the fact that consumers are confronted with easy-to-read credit card statements that show them exactly how much interest is costing them, could lead to a reduction in debt. When consumers understand what they are paying, and how they could significantly reduce the overall cost of the credit by making larger payments, they might be more willing to modify their behaviors. It also makes a difference when consumers can see an end in sight. If they know that just by making a slightly larger payment they could pay off the credit card in three years — instead of languishing in debt indefinitely — it can provide solid motivation to make changes.
The increased transparency seen in credit card statements can also prompt consumers to look for credit cards with better terms. There are online resources, including sites like Quizzle, that can help you compare credit card offers and find the best deals. Using the information you receive from credit card issuers can help you find cards with lower rates and fees so that you save money and pay off your debts faster.
What More Can Be Done?
While Rotter sees the results of the Credit CARD Act as a victory for most consumers, she acknowledges that more could be done. The law didn’t provide the same protections for business credit cards. Business credit cards are still, quite often, subject to the whims of the issuer. They don’t have the same interest rate protections, or protection from fees. “I’d like to see some of the same protections offered to business consumers,” she says.
“For example, a constantly changing payment due date is maddening and can easily lead to missed payments, late fees, and credit score dings,” Rotter continues. “I see no reason that a business credit card account should not be subject to the consistent due date requirement now imposed on consumer accounts.”