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The Credit CARD Act of 2009, which had its 5th birthday on May 22, is a government success story that cleaned up a Wild West credit card marketplace by eliminating unfair tricks and traps without destroying the market. Despite “sky is falling” claims of impending doom from industry apologists at the time, the credit card industry is still strong and consumers can choose from a variety of cards.
Let’s celebrate by taking similar steps to fix the problems in the growing prepaid and debit card markets. In particular, we need to rein in unfair overdraft fees.
First, let’s take a look at the credit card market before the CARD Act passed.
For over ten years, with lax regulators ignoring them, card issuers ratcheted down the thumbscrews on consumers.
- First, they increased late fee penalties on late-pay consumers.
- Then, they said a late-fee of up to $35 wasn’t good enough, so a late payment also resulted in a “penalty interest rate” as high as 36%, or nearly 3 times a typical credit card rate. These penalty APRs were imposed retroactively on existing balances.
- Then, they tricked more consumers into paying late by changing due dates randomly, shortening the period between when a bill was mailed and when it was due, and even making bills due on a Sunday (and imposing penalties if it arrived on Monday). They charged late fees and imposed penalty interest rates on bills as little as one hour late.
- This wasn’t enough. Issuers next saw an opportunity to increase penalty fees and interest from consumers who’d always paid on time. They invented the practice of “universal default,” allowing them to impose penalties on always on-time customers who’d had their credit score decline for any reason.
- But the card issuers weren’t done. Finally, they used their contractual provision stating “We can change the rules at any time, for any reason, including no reason” to raise everyone else’s rates.
This last tightening of the screw even got the attention of Congress. It was enough of an outrage, especially since it occurred in the runup to the 2008 Wall Street-induced economic collapse, to override the longstanding love affair between Congress and the credit card companies. The CARD Act, championed by Rep. Carolyn Maloney (NY), passed overwhelmingly.
- The CARD Act made it harder to impose egregious penalty interest rates. It banned tricks designed to make you pay late and, most importantly, prohibited imposition of retroactive interest rate hikes on existing balances until a consumer was 60 days late.
- It provided protections for young consumers and students, including an “ability to pay” provision and restrictions on on-campus “free pizza if you sign-up” marketing. It also required establishment of a public database of lucrative campus credit card contracts. A recent CFPB report highlights the benefits of this last provision.
In October, I testified at a Consumer Financial Protection Bureau (CFPB) field hearing on the CARD Act in Chicago. By all accounts, it’s been a very successful law.
CFPB Director Cordray’s remarks that day highlighted the act’s successes.
- The CFPB found that in 2012 consumers saved $4 billion in unfair late and over-the-limit fees. A separate academic study estimates that fee savings annually have totaled $12.6 billion.
- The size of the typical late fee declined by $6.
- Late fees, over-the-limit fees, and other penalty fees have declined as a percentage of outstanding balance
- Cordray: “Consumers have responded positively to these market-wide changes. When JD Power released its 2013 U.S. Credit Card Satisfaction Study, it showed credit card satisfaction at an all-time high since the study was first conducted.”
- Cordray: “The CFPB found that annual fees and interest rates increased since 2008, which indicates a shift from hidden back-end pricing toward more transparent front-end pricing that consumers can understand and evaluate more easily.”
Our next step is to extend the benefits of the CARD Act to two less-regulated but growing card markets, debit cards and prepaid cards. In particular, if you aren’t careful, your debit card (which is associated with your bank account) can put you at risk of high overdraft fees. Further, people who use prepaid cards often do so because they either don’t qualify for a bank account or want a safe harbor from high bank account fees, particularly overdraft fees.
While the regulators have imposed some limits on overdraft policies associated with debit cards – in particular a requirement that you must opt-in to allow overdrafts at retail, such as in a coffee shop, otherwise your card will simply be declined. Who wants to pay $39 for a latte anyway ($4 for the latte plus $35 for the overdraft fee)? But the opt-in rules don’t apply to overdrafts caused by checks, exacerbating the common policy of re-ordering checks and debits from highest to lowest, making it more likely that more items will bounce.
Nor do the overdraft rules apply to prepaid cards. The prepaid card market is growing rapidly, but there are no federal laws or regulations to protect consumers from hidden fees, expensive credit features, and other hazards. Moreover, there are no federal rules requiring prepaid card disclosures. U.S. PIRG Education Fund research has documented the problems college students, including those who receive student loan refunds on cards, face from unfair campus debit card practices.
On the fifth anniversary of a government law that worked to protect some cardholders, let’s take the next step to protect other card users.
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