4 reasons the CARD Act was really, really good for Americans

A 2009 law designed to protect consumers from predatory credit card companies looks like it's working

Credit Card Accountability, Responsibility, and Disclosure Act
(Image credit: (Mark Wilson/Getty Images))

In 2009, Washington did Americans a $209 billion solid when it passed the Credit Card Accountability Responsibility and Disclosure Act, according to recent studies.

Known as the CARD Act, the law aimed to protect consumers from the traps banks were hiding in the fine print of credit card deals. While drawing attention to the APR and yearly fees, banks were raking in profits from late penalties, variable interest rates, and unlimited over-limit fees.

"Banks would vary the due date from one month to the next and would sometimes set a deadline in the middle of a day," says Floyd Norris at The New York Times. "A consumer could pay the bill that afternoon and still face a penalty."

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Four years later, it looks like the CARD Act achieved many of its goals, say two reports, one from the Consumer Financial Protection Bureau, and the other from the Office of the Comptroller of the Currency in conjunction with economists from three universities. According to the latter study, the rules — which regulated fees, limited how and when banks could raise interest rates, and placed tighter restrictions on issuing credit to risky borrowers — have saved Americans $209 billion.

Here, four things that have gone right since the CARD Act.

The cost of credit cards has dropped

The total cost of having a credit card — including fees, interest, and finance charges — has dropped two percentage points between 2008 and 2012, says the CFPB report.

A big chunk of savings comes from the new rules involving over-limit fees. Banks used to milk consumers with these fees, often using questionable tactics. The New York Times:

Banks would arrange the order in which they processed transactions by assuring that the biggest transaction was tallied first. Then, as each new transaction came in, a new fee could be charged for going further over the limit. (The bank could have simply not allowed such transactions, but permitting them and charging large fees was much more profitable.) [The New York Times]

The CARD Act put the kibosh on this by mandating that customers had to "opt-in" to any over-limit program. It also trimmed late fees by limiting banks to one per month and capping the size of the fees. As a result, in 2012 customers spent about $2.5 billion less on over-limit fees, and $1.5 billion less in late fees than they did in 2008.

Our collective credit card debt is way down

While student loan debt is higher than it was before the housing crisis, and auto debt is about even, credit card debt has dropped since the law went into effect. Data from the Federal Reserve Bank of New York shows collective debt in the first quarter of 2013 was $670 billion, down from $860 billion in 2009. It's even lower than it was in 2004, years before the financial crack-up.

Of course, part of the dip can be attributed to a weaker economy. But the CARD Act also made it harder for banks to snap up vulnerable consumers with shaky credit histories.

Fewer people are defaulting

This may be the result of a few factors, including a slowly recovering job market. But the CARD Act likely helped by making it harder for certain borrowers, especially those under 21 with no income, to get access to a credit card.

"As riskier borrowers are getting more limited access to credit, consumers with credit cards have gotten incredibly conscientious about paying on time," says Matt Philips at Quartz. "Delinquencies and charge-offs — credit card debt that has to be written off as a loss — have fallen to some of the lowest levels on record."

The 90 day-plus delinquency rate for credit card debt has declined to 10 percent, from 13.7 percent in 2010, according to the New York Federal Reserve.

Interest rates stayed the same, and people didn't lose access to credit

These were the two biggest criticisms of the act before it passed: That lower fees would force banks to hike up interest rates, and that people with low credit scores would have less access to credit. But researchers found otherwise. Businessweek's Karen Weise explains:

The researchers found that the law did not cause credit card issuers to jack up interest rates to compensate for lost fee revenue. They hypothesize that this is because the card issuers had to compete on interest rates when they market to borrowers. They also found that the law did not constrict the availability of credit. “During all implementation phases of the CARD Act, we observe a steady increase in the number of accounts,” [the authors] wrote. “Moreover, low FICO score groups, for which lenders experienced the steepest decline in total net income, show the fastest increase in the number of accounts over this period.” [Bloomberg Businessweek]

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