Federal legislation tightening the regulation of credit cards has produced more responsible and satisfied consumers and fewer young people in credit card debt.
The trade-off? More expensive credit cards.
Three years after the landmark Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, was fully implemented, the credit card world has settled into its new rule-bound reality with mixed results.
Cardholders are making larger monthly payments, and fewer have fallen behind on credit card payments. At the same time, interest rates on credit cards have risen a full percentage point, and annual fees have increased more than 41 percent. Also, credit limits have been slashed.
"This was a well-intended law, and it came at a time when the country was having a hard time economically," says Brian Riley, senior research director in retail and banking at CEB TowerGroup. "There has been more conservative lending, but not everything is bad. It has woken people up about their debt."
Happier, better consumers
One of the most applauded provisions in the CARD Act is the payoff math that must be included on the credit card statement. It shows how long it will take for the minimum payment to eliminate a card's balance along with how much interest will be charged during that time. It compares that with another payment that will get rid of the balance in three years along with how much money a consumer will save on interest.
"It's a real eye-opener," says John Ulzheimer, president of consumer education at SmartCredit.com. "I bet some people think that it's a mathematical error because they can't believe the numbers."
It appears to be working. Survey results released in February this year by Consumer Action, a consumer advocacy group in San Francisco, showed that 45 percent of consumers polled said they paid more each month because of that minimum-payment warning.
And the rate at which cardholders pay off their balances hit an all-time high of 25 percent in May, according to a Fitch Ratings index that measures credit card performance.
"Consumers told us that (the disclosure) scared them," says Ruth Susswein, deputy director of national priorities at Consumer Action, a consumer advocacy group. "Unless you're confronted with this information quite directly, it's easy to not realize how costly these cards can be."
Cardholders also are making more payments on time since the passage of the CARD Act. The percentage of accounts that were at least 30 days past due fell to an almost 23-year low in the first quarter of 2013, according to the American Bankers Association.
According the credit reporting bureau TransUnion, the percentage of accounts more than 90 days past due fell to 0.69 percent in the first quarter, compared with 1.11 percent in the first quarter of 2010. Part of the decline could be attributed to how the act requires issuers to bill their customers. Issuers now must deliver credit card bills to cardholders at least 21 days before the payment is due. The due date must fall on the same day every month, and the cutoff time can't be earlier than 5 p.m. If the due date falls on a weekend or holiday, cardholders have until the next business day to make their payment.
"It adds consistency to the process and makes it reasonable for people to pay their bills in a timely manner," Susswein says.
All this has created better relationships between cardholders and their issuers. The percentage of credit card complaints that Consumer Action's hotline received fell to 4 percent in 2010, the year the CARD Act was implemented, from 12 percent in 2009. And J.D. Power and Associates' credit card satisfaction index reached its highest level this year after rising for four straight years, starting in 2010.
Less debt for young people
The CARD Act also made it harder for people younger than 21 to get credit cards as a way to curb debt among young adults. That, too, has succeeded. A quarter of students this year reported having a credit card in their name, down from more than third in 2009, according to Student Monitor, a college market research firm. And 28 percent of students carried a balance this year, down from 40 percent in 2009.
Still, the decline of students with credit cards has troubling consequences, Ulzheimer says. Banks are wooing young people with prepaid debit cards, a payment type that isn't regulated as closely. And young people face a harder time building good credit without access to credit cards, one of the easier types of credit to qualify for.
"It's good to have no debt, but it doesn't help you to not have a track record of responsibly managed credit accounts," Ulzheimer says. "It's like having a resume with nothing on it."
Worse card terms
That's one of a few negative consequences that came out of the CARD Act, says Ulzheimer. Adding to that, credit card terms are not nearly as attractive as they were before federal regulations kicked in.
The act capped penalty fees, limited how penalty interest rates can be applied, and eliminated certain fees and practices altogether. The rules have hampered how issuers can hedge against lending to riskier borrowers and have slashed profits they make from these consumers.
The average annual percentage rate, or APR, for variable credit cards -- the most popular type of credit card -- has risen by a percentage point to 15.31 percent from 14.3 percent before the CARD Act was enacted, according to Bankrate's weekly interest rate data in August.
Annual fees also have risen. They averaged $113 last year, up from $80 in 2010, says Roy Persson, director of competitive tracking services at Ipsos Loyalty, a research services company headquartered in Paris.
"That's huge," Persson says. "We're seeing annual fees changing rapidly."
At the same time, credit limits on new credit cards have fallen 30 percent since 2008, and limits on existing accounts have dropped 17 percent, says Riley.
"The CARD Act doesn't allow creditors to push the risk toward where the risk is coming from," Riley says. "So everyone has to pay for it."
What did it leave out?
While the act was comprehensive, it did miss some key areas. For example, consumers didn't have to get 45 days' advance notice if their credit limits were cut, says Susswein. The act requires issuers to give consumers a heads-up if their interest rate rises, certain fees are increased or other significant changes are made to card terms. However, that doesn't include credit limits.
"That can be a rude shock to people who thought they had a higher limit when in fact they didn't," Susswein says.
Ulzheimer also pointed out that the Consumer Financial Protection Bureau had to step in to clear up one provision that made it harder for stay-at-home spouses to qualify for credit cards. The act mandated that issuers must consider an individual's income -- not household income -- to qualify an applicant. The rule was designed to make it harder for college students to get credit cards based on their parents' income. But the rule also kept nonworking spouses from qualifying for credit cards.
After a massive online petition started by a Virginia stay-at-home mom, the CFPB said in April credit card issuers can consider income and assets that a nonworking individual shares with a spouse or partner when granting a credit card or credit limit increase.
The act's consumer-friendly protections also left out small-business credit cards, which typically are personally guaranteed by the cardholder. In the year after the act was put into law, banks introduced more small-business cards or enhanced existing ones to woo everyday consumers.
"If they really wanted to spread the blanket across the entire bed, the act really should have included small-business cards," Ulzheimer says.
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