The Credit CARD Act became law in 2009 with the intention of providing transparency for consumers on how their credit cards work, while restricting how card issuers can increase rates, charge fees and set deadlines. Now, with the act’s sixth anniversary this month, some studies show that consumers find their bills — and fees — easier to understand. At the core, though, your good credit habits are what make the law most effective.
Has the law helped consumers?
Some signs point to yes. A review of the act by researchers from New York University, the University of Chicago and the U.S. Treasury Department found that since its passage, fees (mostly over-limit, repricing and late payment) have been reduced “by an annualized 1.6% of average daily balances, with a decline of more than 5.3%” for those with lower FICO scores (less than 660). That has saved U.S. consumers about $11.9 billion a year, the researchers say.
Consumer confidence is also up. A 2011 survey by the Consumer Financial Protection Bureau found that cardholders believe statements are now easier to read and understand. In the same survey, 30% of participants making less than $25,000 a year said they now pay more than the minimum payment on their balance. This type of information-driven action was a major goal of the act.
A related review of the act by the CFPB notes that overall costs associated with credit cards are now weighed substantially toward front-end fees (interest and annual fees) rather than back-end fees (penalty fees and APR repricing). Most agree that this shift increases transparency, while making the actual costs associated with credit cards more clear.
However, critics of the Credit CARD Act say that while consumers have clearly saved money on fees directly affected by the act, the credit card industry has made up for it in other areas. The same NYU study also found a small rise in fee-based revenue toward the end of 2011, when the study concluded, particularly in accounts of those with credit scores below 660.
Life before the Credit CARD Act
Before the act, issuers had much more freedom over how and when they could increase interest rates on a cardholder’s balance. With the act in place, guidelines now dictate the specific circumstances under which issuers can raise interest rates, such as a cardholder having missed two consecutive bill payments, or the end of a promotional period. In addition, if an issuer is raising a cardholder’s APR, it is usually required to give 45 days’ notice. (Exceptions include the end of promotional APR periods and if the prime rate goes up.)
The Credit CARD Act has also standardized a handful of informational requirements on monthly credit card statements. Cardholders are now presented with information such as how long it will take them to pay off their bill by making minimum payments, what level of payment is needed to pay off a balance within three years, and the amount of interest that has been charged throughout the life of the card. This portion of the act goes hand in hand with components that require issuers to set reasonable monthly payment deadlines, giving cardholders a clear idea of when their payment is due and providing ample time to submit it.
Additionally, people who found themselves burdened by recurrent overdraft fees were given some support from the act, which says cardholders must explicitly choose to allow over-the-limit spending. For those who do, the act notes that penalty fees must be “reasonable and proportional” to the violation. Similar boundaries also exist on late payment fees (most issuers interpret this as $25 for the first late payment, and $35 per violation thereafter).
In the end, it’s up to you
Many parts of the Credit CARD Act still require more time and more data collection to assess total effectiveness. If you pay your bills on time and manage credit responsibly, the Credit CARD Act at least helps you avoid some of the issuer traps once permitted by law. But it can’t protect you if you have poor credit habits. Brush up on how to use debt wisely to make the act work for you.
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