May 22 saw the fifth anniversary of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (aka the Credit CARD Act, or just the CARD Act) being signed into law. True, it was implemented in stages over the following 15 months, but this seems as good an opportunity as ever to revisit the act, and to try to assess whether its impact on consumers and the industry has been good or bad.

There’s a risk such an assessment could be seen as political: Some people take a principled stand against all — or nearly all — government regulation in private commerce, and can point to countless examples of the unanticipated and dire consequences that often arise when politicians meddle where they have no business. If you’re one of them, take heart. The fact that one meddlesome law worked (and the evidence below suggests it did), doesn’t necessarily mean you’re wrong about some or all the rest. And, anyway, if you disagree with conclusions drawn here, there’s a comments section below in which you can disprove or disagree with them.

What the CARD Act did

Quoting Federal Reserve figures, U.S. News and World Report recently said credit cards have always been the most profitable form of consumer lending. In spite of that, some card issuers had become distinctly customer-unfriendly by the middle of the “noughties” decade. Common practices included:

1. Hiking credit card rates without notice. One major card issuer nearly doubled its rate (from 15 percent to 28 percent) in 2008, according to the Center for American Progress. The CARD Act ensured interest rises could only be implemented on variable-rate card, and then only after 45 days’ notice. As importantly, new rates could only apply to new transactions charged after that notice period. Exceptions were made for expiring introductory offers and legitimate late payment penalties.
2. Permanent penalty rates. The CARD Act made credit card companies review accounts six months after a penalty rate was imposed, and normally reduce that high rate.
3. “Universal default.” Nearly half (45 percent) of cards allowed issuers to hike rates if a customer made late payments on unrelated accounts, such as auto loans or mortgages. The new law banned this practice.
4. Tricky due dates. Some banks arbitrarily and frequently changed the dates on which payments fell due. It was almost as if they wished to trap customers into paying late so that they could gouge them with fees and penalty rates. Now statements must be mailed at least 21 days before the due date.
5. Over-limit fees. Customers must opt in before these can be charged (otherwise the bank must reject the payment or swallow the fee), and over-limit fees can no longer be levied if it’s an interest charge or fee that pushes the consumer over his or her limit. As a result of these changes, many major credit card companies have discontinued over-limit fees entirely.
6. Excessive fees. Penalty fees were capped at $25 for a first offense, and $36 for subsequent violations within the following six months.

Other changes brought about by the CARD Act affected gift cards, the marketing of plastic on college campuses, how payments are allocated (now to the part of the debt with the highest rate) and the information provided on monthly statements.

Impact on consumers

In April 2014, three academics and an economist with the Office of the Comptroller of the Currency published a report, “Regulating Consumer Financial Products: Evidence from Credit Cards.” This sought to measure some of the effects the CARD Act had on consumers. Based on the 160 million card accounts studied, it found:

1. The overall cost of borrowing (interest, fees and all charges) for average credit card customers fell by 1.7 percentage points. That’s an annualized figure, based on average daily card balances.
2. For those most likely to have suffered gouging before the CARD Act — people with FICO credit scores below 660 — that same saving was 5.5 percentage points. That’s a saving of $59.86 per account per year.
3. The fee reductions imposed by the new law have saved American consumers $12.6 billion a year.
4. There is little or no evidence that these savings have been offset by higher interest rates or a reduction in the supply of credit.

Using a slightly different methodology, federal regulator the Consumer Financial Protection Bureau last year found a similar reduction in the overall cost of borrowing. In the “CARD Act Report,” it identified a fall of 2 percentage points, as opposed to the other study’s 1.7 percentage points.

Impact on credit card companies

The effect the CARD Act has had on banks is less clear, not least because it’s difficult to separate out the impact of regulation from that of the Great Recession, the effects of which were still current when the law was implemented. However, in 2011, the first year after final implementation, JPMorgan Chase, America’s biggest card issuer, reported that its credit card division had seen a rise in profits of 58 percent, according to Barron’s.

Of course, none of this is likely to make bankers like the CARD Act. Even if some of their more colorful pre-enactment predictions about its effects are yet to materialize, and their profitability remains enviable compared with most, they must eye that $12.6 billion a year that consumers are saving and think it would look so much more attractive were it to be on their bottom lines.

But even the most avaricious card executives must be pleased that consumers’ satisfaction with their plastic, as measured by J.D. Power’s annual survey, has increased every year since the law was passed. It may just be that one day they might join the many consumers who rather like the CARD Act.

Published 06/02/14 (Modified 06/17/14)