CARD Act One Year Later: Are We Better Off?

This post was written by Anisha Sekar, staff writer and credit card nerd at NerdWallet.com.

The Center for Responsible Lending recently released a study declaring the Credit CARD Act – a consumer protection law that went into effect one year ago – an unqualified success, claiming it “reversed much of the unclear pricing on credit cards, without leading to higher rates or more difficulty in getting credit.”

Before the act was passed, banks said that as a result of its provisions, they would have to raise rates or tighten credit. The CRL argues that, a year on, this hasn’t happened. Instead, consumers are better off.

Others seem to agree. For example, CardHub.com CEO Odysseas Papadimitriou recently declared, “Whether you look at it intuitively or statistically, it’s obvious that the CARD Act has neither increased interest rates nor limited consumers’ access to credit.”

The U.S. Consumer Financial Protection Bureau is also on board. From a recent article on their website…

Studies demonstrated that one year after the effective date of many provisions of the CARD Act, industry practices have changed in four significant ways.

• The long-standing practice of hiking interest rates on existing cardholder accounts has been dramatically curtailed.
• The amount of late fees consumers are paying has been substantially reduced.
• Overlimit fees have virtually disappeared in the credit card industry.
• Consumers report that their credit card costs are clearer, but significant confusion remains.

At NerdWallet, we say, don’t break out the champagne just yet.

The spread doesn’t say what you think it says

The CRL study measures the difference between the rate that lenders advertise and the rate that consumers actually pay, the “spread.” They argue that since this difference has gone down, the CARD Act resulted in increased transparency: In other words, consumers are getting the rates advertised by issuers, which means card issuers are more transparent in their pricing.

But there are two flaws in that logic. The first one – a major one – is that the advertised rate reflects new offers on a certain date, while the actual rate reflects how much all consumers pay, whether they’re just opening a new account or they’ve had one for years.

The CARD Act prohibited raising rates on existing customers without 45 days’ notice, but lenders can jack up the rates for new customers as much as they want. Sure enough, advertised rates have gone up since the Fed’s regulations – but if new customers pay sky-high rates, they’re few enough relative to all customers that they won’t make much difference in the average actual rate.

In other words, the decreased spread may just be an indication that new customers are paying higher rates compared to existing customers, rather than proving that lenders advertise rates that are closer to what customers actually pay.

The second inconsistency in examining the spread is that many customers with poor credit scores defaulted during the financial crisis, so those that remain are generally more responsible and able to pay their bills. Since the actual rate includes the (generally hefty) cash advance, balance transfer, and other penalty rates, if more consumers are paying only the minimum rate, the actual rate will fall regardless of whether the spread decreased.

We dispute the CRL’s claim that a simple comparison of the rate advertised to the average rate paid is convincing evidence that lending has become more transparent.

A card in the hand is worth two in the mail

Receiving an advertisement for a credit card isn’t the same as actually qualifying for one, as many a consumer can attest. But the CRL uses the amount of credit card offers sent in the mail to prove that credit didn’t tighten. Basically, they equate banks sending out mail to banks actually lending money. Mail is cheap, but defaults are not, and banks who can’t charge interest to cover the risk of default are likely to lend less.

We decided to use a different measure of credit availability: the total revolving outstanding debt. Despite the intimidatingly long name, it’s pretty simple: How much money is loaned out at a given time? Looking at that metric, published by the Fed, credit availability dropped. A lot.

Outstanding debt peaked in December 2008 (incidentally, when the Fed published its regulations), and fell almost 15 percent by the time the CARD Act passed. Now, this isn’t the only way to measure credit availability, but it’s enough that we question whether mail volume actually tells us much about banks’ willingness to lend.

Don’t forget the fees

Finally, we worry that the study’s actual rate paid doesn’t tell the full story. It factors in regular rates plus cash advance and penalty rates, but it doesn’t include one major category: fees. Since the regulations came into effect, we’ve seen:

• A 33 percent increase in average balance transfer fees
• A $9 increase in average annual fees
• A 33 percent average cash advance fee increase

And don’t forget the other fees that banks stick on you, like the Bank of America’s new $59 annual fee being arbitrarily levied on some of its customers. Excluding fees from the study ignores a method many lenders use to recoup lost revenues.

Celebrate with caution

Even Elizabeth Warren of the Consumer Financial Protection Bureau agrees that the CARD Act is not without negative consequences, recently telling a Bloomberg reporter, “We can probably agree that this approach – write a rule, avoid a rule, write another rule – is costly for consumers and the industry. Because it multiplies the number and complexity of rules, this approach creates special challenges for those smaller banks and credit issuers that still offer credit cards to their customers.”

We’re not saying that the CARD Act was harmful, or even that it was ineffective. We applaud increased transparency for consumers, and give special kudos for eliminating unannounced rate hikes and unreasonable overdraft fees. The act addresses other issues too, such as credit for young adults and consumers’ ability to opt out of new fees.

We’re just not ready to say that there were no negative consequences, or even that we know the full effects of the law yet. So let’s hold off on the wild applause and make sure that consumers are actually treated fairly.