Photo (cc) by 401(K) 2013
This post comes from Christine DiGangi at partner site Credit.com.
Credit cards have become less costly for consumers during the past few years, an improvement the Consumer Financial Protection Bureau partially attributes to the Credit CARD Act of 2009.
In a new report, the CFPB outlined several improvements for consumers, including reduced fees and simplified credit card agreements. These and other changes have led to a 2-percentage-point decline in credit card costs to consumers from the fourth quarter of 2008 to the same time in 2012. That cost is calculated by dividing the sum of amounts paid by consumers (like interest and fees) by the average for outstanding balances.
Some of the changes that contributed to this decline can be directly tied to the Credit Card Accountability Responsibility and Disclosure Act, the report states. The act required penalty fees to be “reasonable and proportional” to the violation, and late fees are now $6 lower on average than before the act. Bills must now also be due on the same day of the month, and issuers can only charge late fees if a cardholder has been given 21 days to pay the bill. As such, consumers paid $1.5 billion less in late fees last year.
Another cut to consumer costs came in the regulation of overlimit fees. The act specified that consumers must opt in to charging beyond their credit limits and incur fees as a result. Under this new rule, consumers spent $2.5 billion less on overlimit fees in 2012, and the CFPB said they “have been largely eliminated.”
The growth of consumer protection
To put the analysis in perspective, CFPB director Richard Cordray highlighted the circumstances under which Congress passed the act.
“The economic landscape in May 2009 was quite poor,” Cordray said in prepared remarks for a CARD Act field hearing in Chicago this week. He touched on the high unemployment at that time and the plummeting gross domestic product. He was Ohio’s attorney general in May 2009.
We saw firsthand how hard people were struggling to stay afloat. Particularly with respect to credit cards, people were extremely frustrated, and they were complaining loudly and frequently about being dinged by unexpected fees and about dealing with card agreements full of fine print and legalese they could not decipher or understand.
The CFPB said credit card agreements are now an average of 2,000 words shorter and more readable, though the CARD Act didn’t mandate length or form of the agreements.
“The end result is a market in which shopping for a credit card and comparing costs is far more straightforward than it was prior to enactment of the act,” the report says. Those costs more closely represent clearly disclosed interest charges and annual fees, allowing consumers to make better-informed decisions.
The act limited hidden fees and changes in interest rates, leading to the upfront pricing but also an overall increase in interest rates. While the CFPB said the increase does not directly correlate to the CARD Act, it may have been a way for issuers to make up for the loss in fees as a result of the act.
The changes go beyond clearer terms. An applicant’s ability to pay must be considered before they are issued credit, cardholders must request an increase in their credit limits (previously, increases were often unsolicited), and potential cardholders under the age of 21 must prove they can independently pay their debt or have a co-signer age 21 or older before receiving a credit card.
“Based on the information we have available to review changes in the credit card market, the act eliminated many unfair fees, made some market practices more transparent, paved the way for easier comparison shopping, and created a market where consumers can see the costs upfront,” Cordray said. “These changes are critical to strengthening consumer protections in the marketplace and helping us rebuild our economy.”
The CFPB’s report isn’t saying, “All credit card problems in the U.S. have been solved!” In fact, the bureau identified several issues it still has with credit cards. Practices like add-on products, high upfront fees, and retroactive interest resulting from promotional financing on private-label credit cards will receive more scrutiny from the bureau, as well as many areas for improvement when it comes to agreement transparency.
Meanwhile, consumers can take responsible credit card use into their own hands. One of the most important things a consumer can do when shopping for a credit card is understand his or her own credit history. By using a free online tool that allows you to monitor your credit scores (Credit.com’s Credit Report Card is one such tool), consumers can evaluate their financial behaviors and how they impact their creditworthiness, which can help them find a credit card that suits their needs.
As the CFPB highlighted, transparency has improved but has room to grow, so it’s important to carefully research products before committing your financial future to them.
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