In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). Its goal was to prevent banks from taking advantage of credit-card users with excessive fees (mainly over-limit fees and late fees) and other tactics. A few of its notable provisions include setting minimum payment deadlines to 21 days after bills are mailed, preventing retroactive rate increases, eliminating two-cycle billing, and banning direct marketing toward young people. Before the law, the banking industry made a lot of money fees, especially those charged to borrowers with poor credit scores. In fact, borrowers with credit scores below 620 paid 25 cents on every dollar borrowed in fees.
Critics of the CARD Act claimed that what banks wouldn’t make in over-limit and late fees, they’d recover in higher annual fees or interest rates, so the question is whether the CARD Act worked without these unintended drawbacks. A paper that appeared in Microeconomic Insights in December found that the answer is largely yes.
Using the full force of “big data,” the authors surveyed a panel dataset of 160 million credit-card accounts from 2008 to 2012, focusing on borrowers with “fair or lower” FICO scores (less than 660, 30 percent of the total) and “bad” scores (below 620, 17 percent).
They began by analyzing the CARD Act’s effects on over-limit fees, starting in February 2010, when banks would only be able to charge borrowers those fees if they “opted-in” to them. The results were dramatic: “Fair or lower” borrowers’ fees collapsed to just 3.3 cents on every dollar borrowed.
On the other hand, the CARD Act’s changes to late fees didn’t have as much of an effect. Prior to the act, banks would usually charge borrowers $40 for every late payment, but the law limited late fees to $25 per late payment or $35 if one of the previous six payments had also been late. The researchers found that two-thirds of borrowers with late fees were paying the $35 rate. The authors concluded that late fees “are non-salient to consumers” and that they are hidden fees.
However, the researchers did not find an increase in annual fees that counteracted the losses from lower over-limit and late fees. They concluded that the CARD Act successfully saved “fair and lower” borrowers $57.69 in fees per year. The aggregate savings to all credit-card holders was $11.9 billion. The authors found no hike in interest rates or other attempts to recover lost revenue from fees, e.g. declines in credit limits or borrowing.
A synopsis of the study can be found here.
Credit-card debt is a common element of bankruptcy filings, and legislation that reduces excessive borrowing and unfair charges benefits consumers. Nevertheless, if you are finding difficulties paying your bills, then contact an experienced New York bankruptcy lawyer for help.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
