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Credit CARD Act a success, say studies

by Peter Andrew

Some people believe government should have no role in life beyond defending the nation through an army and providing protection through a law-enforcement service. Others would be happy to have a civil servant set your bedtime. Most probably want the government to regulate or even criminalize the things they personally dislike (abortion and homosexuality, say, or pollution and predatory lending) while keeping its nose out of the things that don't bother them (pollution and predatory lending, say, or abortion and homosexuality).

The prevalence of this sort of thinking was demonstrated last year in a study by the Pew Research Center, which found that most Americans (52 percent) say government regulation of businesses is, on balance, harmful. However, when those same people were asked about the regulation of large corporations, banks and financial institutions and the oil and gas industry, most thought there was too little.

Credit card regulation according to a regulator

Two studies published earlier this month sought to establish whether the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the CARD Act) had on the whole brought good or bad outcomes. Both concluded that its effect had been positive.

The first, from federal regulator the Consumer Financial Protection Bureau (CFPB), listed a number of the law's benefits, including these six:

  1. Overlimit fees and repricing almost eliminated.
  2. The dollar value of late fees greatly reduced.
  3. Many shorter and easier-to-understand credit card agreements.
  4. A requirement for credit card companies to assess a borrower's ability to make payments before issuing plastic.
  5. A closer relationship between advertised rates and fees, and the actual charges paid by customers.
  6. Among customers of the card issuers on the the CFPB's database, which together account for nearly 90 percent of card balances, the total cost of credit fell by 194 basis points in the four years following Oct. 1, 2008.

A federal regulator may not necessarily be a wholly unbiased observer when it comes to federal regulation, and some might question the credibility of its report's conclusions, although its methodologies seem sound. So it's useful to have a second study, from a less-interested party, to consult.

Credit card regulation according to academics

The Social Science Research Network published a study Oct. 3 by four academics under the title "Regulating Consumer Financial Products: Evidence from Credit Cards." Its conclusions about the legislation, based on data from 150 million U.S. card accounts, were, if anything, even more positive:

  1. Since its implementation, the CARD Act has been saving American consumers an estimated $20.8 billion a year.
  2. Across all cardholders, overall borrowing costs have dropped by an annualized 2.8 percent.
  3. The least well-off have benefited most: Those with the lowest FICO scores have seen their borrowing costs fall at an annualized 10 percent.
  4. The requirement to show on statements the benefits of paying down credit card debt quickly has nudged some consumers into increasing their payments, so bringing down their interest liabilities.
  5. The CFPB's findings about fee reductions were largely confirmed.

The run-up to the Credit CARD Act

As implementation of the law approached, IndexCreditCards.com reported some of the ways in which card issuers were trying to moderate its impact on their businesses. For example, annual fees were becoming more common, and credit card rates were being hiked. How likely is it that these pre-Act trends have undermined the latest studies' findings?

Not very, seems to be the answer. A third study, published last year by the Center for Responsible Lending, included a graph that plotted average credit card rates before and after the CARD Act was proposed, passed and implemented. It's true that those rates rose between November 2008 and the law's implementation, but after that they drifted down again, and, by August 2012, were effectively equal to that November 2008 number -- which itself was the lowest since mid-2004. As for annual fees, a quick trawl through IndexCreditCards.com's listings shows a huge number of products that still don't charge them.

The CARD Act may have brought some unintended negative consequences, though these so far seem to be relatively minor. Before it was implemented, card issuers unilaterally closed huge numbers of accounts, apparently on one of two main grounds:

  • The customer was creditworthy, but was using the particular plastic so rarely that the account wasn't profitable.
  • The issuer had doubts about the customer's creditworthiness.

Regulation's unintended consequences

The extent to which this practice, which caused an outcry at the time, actually damaged many consumers is open to doubt, as is the influence of the new law: the Great Recession, which was raging at the time, may have triggered many such actions absent the legislation.

A more worrying trend, which may be more directly attributable to the CARD Act, was the all-but-total disappearance of fixed-rate credit cards. Today, variable-rate cards are close to ubiquitous, and, when the inevitable happens, and base rates start to rise, may cause many consumers problems, although such hikes apply only to new spending.

Of course, no quantity of studies and data is going to persuade those with an ideological objection to government regulation that the CARD Act was a good thing. And they may yet be proved right. But these research findings undoubtedly make it more difficult to argue that case.

Published 10/14/13 (Modified 11/19/13)

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