With anti-regulatory fervor gripping Washington, it’s difficult to imagine both parties working together to enact successful public safeguards that protect Americans. But it wasn’t that long ago that strong, bipartisan majorities in both the House and Senate took action to defend consumers against predatory practices in the credit card industry. Three years ago today, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) into law. Evidence of its effectiveness and success at saving American families money continues to roll in.
Demos’ 2012 national survey of low- and middle-income American households who carried credit card debt for three months or more is an in-depth look at how the recession and its aftermath affected the financiallives of American households – including how the passage of major new consumer credit card protections is helping households pay down balances faster and avoid fees.
One of the Credit CARD Act’s key provisions limits unfair fees: companies are now required to provide 21 days between the time they mail a bill and when they charge a late fee. The number of households who reported paying late fees on their credit cards declined dramatically: in 2008, half of households reported accruing late fees – in 2012, it was just 28 percent. Another critical provision of the law prevents unfair interest rate hikes: in 2012, 24 percent fewer households experienced an interest rate hike due to a late payment than in 2008.
Prior to the passage of the Credit CARD Act, one particularly damaging credit card practice was the imposition of over-the-limit fees. Rather than denying transactions that exceeded a consumer’s credit limit, credit card companies processed them and then charged consumers a hefty fee – whether the consumers wanted to go above their credit limit or not. Earlier government research found that the Credit CARD Act virtually eliminated over-the-limit fees. Our study finds that the elimination particularly benefitted African American and Latino households, who were more likely to report a reduction in over-the-limit fees.
Finally, the Credit CARD Act mandates that credit card companies include more information on billing statements, such as how long it would take a consumer to pay off her current credit card balance if she were to only make minimum monthly payments. One third of households say they are responding to new information included on credit card statements by paying their balances down faster. By making bigger payments, they get out of debtsooner and save money on interest.
But as successful as the Credit CARD Act has been, credit card reform alone cannot address the deeper issues related to household debt uncovered by Demos’ studies. Despite savings from the Credit CARD Act and significant household deleveraging in the wake of the financial crisis, we find that many low- and middle-income households are still relying on their credit cards to make ends meet. Forty percent of households used credit cards to pay for basic living expenses such as rent or mortgage bills, groceries, utilities, or insurance, in the past year because they did not have enough money in their checking or savings accounts, a rate comparable to 2008.
In effect, credit cards continue to serve as a self-made safety net for low- and middle-income households. In a country that still lacks a fully-functional national health care system, nearly half of indebted low- and middle-income households said medical expenses contributed to their credit card bills. When asked about the single largest contributor to their current level of credit card debt (excluding health care) more than half of households cited a safety net expense such as coping with a layoff, getting a vehicle repaired, or helping a relative pay off debt. In effect, Americans are using credit cards to make up for the inadequacy of the public safety net, and to give themselves a raise at a time when unemployment remains high and real wages are in decline.
It’s time for businesses and the government to step up to the plate, and this time we need more than credit card regulation. We should be bolstering unemployment benefits, rather than threatening to cut them back;raising the minimum wage to help the lowest-income working people make endsmeet without borrowing; and strengthening the right of workers to organize so that wages will rise. We must ensure that the implementation of the Affordable Care Act helps prevent crippling medical debt. Reforms along these lines would unquestionably be harder to enact than improved credit card regulations, but unless we strengthen the true public safety net and enable Americans to earn enough to meet their needs, American families will have no choice but to keep relying on plastic.