At first, the University of Chicago economist didn’t think credit card regulation could possibly work. “I went into the project with this sort of conventional wisdom that well-intentioned regulators would force down fees and that other fees and charges would increase in response,” explained Neale Mahoney, of Chicago’s Booth School of Business. But “the data changed our view of the world.” The verdict of Mahoney and his similarly skeptical co-authors was that the CARD Act was highly successful, saving U.S. consumers $12.6 billion per year, just from the provisions that reduced consumer fees.
Signed into law by President Obama on May 22, 2009, the CARD Act is the kind of smart, bipartisan regulation that barely seems possible in Washington five years later. The law limited gotcha fees and rate hikes, and essentially wiped out the abusive practice of repeatedly charging over-limit fees when consumers unwittingly exceeded their credit limits. The law also set new regulations for clarity and disclosure in monthly billing statements – information that a full third of households in Demos’ 2012 Nation Survey on Credit Card Debt say moved them to pay their balances down faster.
A 2013 study by the Consumer Financial Protection Bureau found similarly powerful results:
Late fees must be be reasonable and proportional to the violation of account terms, a rule resulting in a $1.5 billion decrease in fees in 2012.
Overlimit fee for transactions that put cardholders over their credit limit, saving $2.5 billion in overlimit fees since 2008.
Americans under the age of 21 can only get a credit card if they demonstrate an independent ability to repay the debt or they have a cosigner over 21. As a result, the percentage of young adults ages 18-20 that have a credit card account has dropped by half.
In short, the CARD Act made credit cards a safer and more fair consumer product. Demos is proud to have lobbied and worked to make the CARD Act a reality, drawing on our long experience of researching the impact of credit card debt on American families. But we also recognize the challenges that remain in the credit card marketplace. In our most recent study, The Debt Disparity we underscore the Consumer Financial Protection Bureau’s recommendations for further regulation:
Treat add-on products, such as supplementary protections and credit monitoring, with the same standards of transparency and disclosure as are required for lines of credit, even when provided through third-party contracts. Application fees—currently excluded from the standard imposed by the CARD Act that states that fees cannot exceed 25 percent of the total credit line in the first year—would be included in the first-year calculation of fees to ensure that the ratio of costs to credit remains reasonable. Moreover, a high standard for clear disclosure related to rewards programs, grace periods, and products that defer interest for an introductory period, would complement the practices already covered by the CARD Act.
Anyone open to allowing data to “change their view of the world” should recognize the accomplishments of the CARD Act and be eager to extend that success in ways that save American households more money.