This week marks the five-year anniversary of the passage of the CARD Act, a piece of legislation that cleaned up some of the worst tricks and traps harming consumers in the credit card marketplace. The purpose of the CARD Act was two-fold: to prohibit certain unfair and abusive practices and to increase the transparency of rates and fees associated with credit cards. Congress passed the CARD Act — also often referred to as the Credit Cardholders Bill of Rights — in May 2009 with broad bipartisan support in both chambers of Congress, but after a hard fight.
Credit card lending had always been the most profitable form of consumer lending, according to annual reports by the Federal Reserve Board. But in the 10 years leading to the CARD Act, the largest card companies ratcheted the thumbscrews down on consumers, aided by lax regulators and by a series of court decisions preempting stronger state consumer laws.
The card companies did a number of things. First, they increased penalties on late pays. Then they tricked more consumers into paying late by using unfair practices, such as changing due dates randomly, shortening the period between when a bill was mailed and due, and even charging late payments when a bill arrived on a Monday, but its due date was the impossible Sunday before it. They then said that higher late fee penalties weren’t enough; they imposed penalty interest rates as high as 36 percent APR on bills received as little as an hour late. This wasn’t enough. They invented “universal default”: imposing penalty rates on consumers who’d never been late, but whose credit score had dropped.
Basically, the widespread use of penalty interest rates meant that consumers often experienced a gap between the stated interest rate of a credit card at the outset and the actual cost of the card over time. Much of this was due to these “penalty” interest rates — those triggered by late payments or by going over one’s credit limit. And when penalty rates were applied, they could be applied to both new purchases and existing balances, adding significantly to the cost, and meaning that the rate increased retroactively on purchases already made.
In short, pricing was opaque and the fine print that came with cards was difficult to decipher — often leading to costs much higher than those card users anticipated.
Thanks to the CARD Act, tricks like these have significantly declined. Now, interest rates provided at the outset of receiving a credit card more accurately reflect the actual cost of the credit card. The legislation restricted the amount of upfront fees card issuers can charge, limited “back-end” penalty fees when late payments are made or credit limits exceeded, and perhaps most importantly, narrowed circumstances when issuers could raise interest rates, especially on previous balances. The act also prohibited issuers from extending credit to consumers without determining an ability to repay, determined that late fees and other penalties must be “reasonable and proportional” to the violation of the account terms, and imposed new rules to protect young consumers.
Unsurprisingly, and in spite of industry arguments during the fight over the legislation that it would only shift or increase costs for consumers, changes to the credit card marketplace have saved card users money. A lot of money. The Consumer Financial Protection Bureau found in its report on the CARD Act, which reviewed impacts of the legislation, that provisions limiting penalty fees have saved consumers $4 billion annually. Additionally, the report found that the overall cost of credit has fallen by roughly 2 percentage points. An academic study on the CARD Act found that the legislation’s limits on fees reduced borrowing costs to consumers overall by 1.7 percent a year, and had a still more dramatic impact for borrowers with lower credit scores; people with credit scores below 660 saw their borrowing costs go down by 5.5 percent. All in all, this study found an even larger impact than the CFPB report, calculating that fee reductions as a result of the CARD Act have saved consumers a whopping $12.6 billion per year.
Five years after passage of the CARD Act, the CFPB is continuing to take needed action to protect consumers from abuses that continue in this market. First, the agency is doing the important and necessary job of enforcing the CARD Act. In October 2012, the bureau took action against three American Express subsidiaries for multiple violations, including charging late fees that were unlawful under the CARD Act. Second, the agency is using its authority to stop companies from using deceptive tactics when dealing with consumers, in particular from selling abusive add-on products, such as for payment protection, which frequently provide very little, if any, actual benefit.
In April 2014 the agency reached a settlement with Bank of America around its findings that the bank misled customers regarding what they would receive if they purchased payment protection products, as well as charging them for those products without their consent. The CFPB investigation found that some consumers were actually being enrolled in payment protection plans when they were being told they were simply consenting to receive more information about the product. These payment protection products generated hundreds of millions in revenue for the bank, with many customers paying $12.99 per month for services they either thought were more robust than they actually were, or did not know they had signed up for at all. The bureau ordered the bank to pay $727 million to nearly 2 million consumers who had been subject to illegal practices.
In total, the CFPB’s actions — since it fully opened its doors only three years ago — to curb illegal and deceptive credit card practices have resulted in about $1.5 billion in restitution for roughly 10 million consumers, along with around $100 million in civil penalties paid to the CFPB. In addition, the bureau has changed practices in the marketplace. Whereas most big banks used to sell add on products, a number of them have changed their practices, thanks to the CFPB’s enforcement actions. Discover and Capitol One, for instance, were ordered by the bureau to stop their deceptive marketing practices for these products.
The CFPB is doing good work in the wake of the passage of the CARD Act to increase fairness and transparency in the credit card marketplace, but the job is not finished. Even with the CARD Act in place, it remains difficult for consumers to understand the costs of, and risks associated with, specific credit card choices, and to compare cards to each other. As Sen. Elizabeth Warren, D-Mass., has said, “our next challenges will be about further clarifying price and risk and making it easier for consumers to make direct product comparisons.” Along with further improvements in the credit card market, there is important work to be done to make sure prepaid and debit cards develop as safe and convenient products, and are not loaded up with hidden fees or gotcha credit features.