One year after sweeping credit card reforms took effect, credit card holders are better off, but confusion still lingers, says the federal Consumer Financial Protection Board
Feb. 22, 2011, marks one year since the startup of the most significant consumer protections of the Credit CARD Act of 2009. That law rewrote the book on how consumer credit cards are marketed, billed and regulated in the United States. Gone are surprise interest rate hikes on existing card balances, shifting due dates for monthly payments and high fees for minor infractions.
It’s working, says the Consumer Financial Protection Bureau. In one of its first major events, the federal watchdog agency issued the results of the first governmental analysis of the CARD Act’s impact during at a conference held in Washington, D.C.
“One year after the CARD Act took effect, we think it is appropriate to ask whether it has had its intended effects and how the credit card marketplace has changed,” Elizabeth Warren, the bureau’s acting director, said in her opening speech to card industry leaders, academics, regulators and consumer advocates. The conference — called “The CARD Act: One Year Later” — focused on what has changed since the law took effect, what those changes mean for consumers, credit card issuers and the market, and what still needs to be done to improve consumers’ ability to compare credit card products and fully understand their terms.
In preparation for the conference, the bureau conducted voluntary surveys of the nine largest credit card issuers, representing 90 percent of the credit cards issued in the United States. The Office of the Comptroller of the Currency (OCC) also conducted surveys of credit card pricing practices and the bureau polled consumers about their experiences since the new regulations took effect. Among the findings released in the fact sheet :
- Surprise interest rate hikes on existing credit card balances have been significantly curtailed.
- Late fees have been substantially reduced.
- Over-limit fees, once common in the industry, have virtually disappeared.
- Consumers say their credit card costs are clearer but terms are still confusing.
According to the OCC’s survey, 15 percent of credit card accounts saw interest rate hikes (known in the industry as re-pricing) over the course of a year prior to the CARD law. Today, only 2 percent are re-priced. The CARD Act allows banks and credit unions to increase interest rates on future purchases only if they first give 45 days’ advance notice of the hike. Rates can be increased on existing account balances if cardholders are more than 60 days late making payments or if the account has a variable interest rate.
The consumer survey found that of the cardholders who were at least somewhat familiar with the CARD Act, a majority (57 percent) said they felt the changes were personally beneficial to them. However, only 32 percent of the respondents who carried balances on their cards from month to month knew how much interest they paid on their primary credit cards last year. The survey was conducted Feb. 3-8, 2011, and was based on random-digit dialing telephone polls with 800 adults who had at least one general purpose credit card.
In her speech, Warren cited some of the many problems that led up to passage of the credit card law: “Some issuers advertised an understated price upfront, counting on interest rate re-pricing, fees, penalties, and other often-unexpected charges to let them impose a much higher total cost for the card than implied by the price advertised. The result was a total cost of credit far more expensive than many consumers had anticipated.”
She added: “The CARD Act was designed to reduce surprises in re-pricing of accounts and to take a major step in improving the overall transparency of credit card costs. As a result of the CARD Act, consumers now have better information about how much they are paying for credit and how much they might save on interest if they pay down their balances more quickly than they might otherwise have planned.”
Banking industry: Consumer protection nice, but costly
The banking industry cited numerous benefits the new law has had for consumers, but said those protections have come with costs.
“While it is still too early to accurately gauge the full impact of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, it is clear the act has ushered in a new era of empowerment for credit card customers,” Kenneth J. Clayton, the American Bankers Association’s senior vice president and chief counsel, said in a statement.
“Improvements to transparency and increased protections against interest rates and certain fees have given consumers greater control over their credit card accounts.
“It is also clear, however, that these benefits have not come without trade-offs, including a reduction in available credit for many consumers and increased prices. Recent data indicates that the cost of credit and its availability have been negatively impacted by the act, particularly for working-class Americans, many of whom have been edged out of the marketplace or are facing higher upfront rates and tougher credit terms.
“Credit card issuers stand ready and willing to continue engaging in constructive dialogue with regulators regarding these important issues, and will also continue to improve the customer experience and meet the needs of the marketplace.”
Praise for industry innovation
Warren praised banks and credit card issuers that have proactively changed their practices to be more consumer friendly. “The data we have assembled indicate that much of the industry has gone further than the law requires in curbing re-pricing and over-limit fees. A number of issuers have eliminated some of the practices that can confuse customers and cost them money they reasonably did not expect to pay. Leaders in the industry deserve credit for moving in the right direction.”
However, Warren noted that the year saw some card issuers focusing their efforts on skirting the new card law by finding loopholes or creating new services that weren’t specifically banned by the law. “As soon as the CARD Act became law, it seems that some industry lawyers were asked to find slightly different ways to accomplish that which the legislation was intended to outlaw. To its credit, the Federal Reserve Board responded with a rule-making proceeding designed to close the loopholes.” Warren said that continually writing new rules to cover every potential industry practice was costly for consumers and the industry, especially small banks and credit unions.
On Monday, the day before the bureau’s credit card conference, Bank of America, the second largest credit card issuer, made clear its cost. The bank issued a statement saying its credit card division’s bottom line was impacted by the CARD Act regulations, and it had to adjust its 2009 financial statements to reflect a $20.3 billion write-down due to “deteriorating credit quality and the adverse impact from The CARD Act on Bank of America’s credit card operations.”
Warren said the consumer financial watchdog agency would work with the industry to help improve the credit card market without relying too much on regulation.
Warren said the new bureau will make credit card clarity a top priority for the future. The agency is scheduled to officially launch in July 2011. Consumer groups have expressed concerns about congressional efforts to cut the agency’s budget to weaken its effectiveness.
“Even with the improvements brought about by the CARD Act, there are a lot of moving parts in a credit card price,” Warren said. “Despite the important progress made in improving the Schumer box disclosure and monthly statement, disclosures, it is still difficult for many consumers to understand the costs and risks of each individual credit card or to compare cards directly. Our next challenges will be about further clarifying price and risk and making it easier for consumers to make direct product comparisons.”