Study: CARD Act Making A Positive Difference

When Congress passed the CARD Act two years ago, to curb some of the worst credit card industry abuses, there were plenty of skeptics who said the measure would backfire, creating other problems for consumers.

But new research by the Pew Health Group's Safe Credit Cards Project says that hasn't happened. In a study, the group says the CARD Act appears to be doing its job. Credit card holders are seeing stabilized interest rates, the elimination of over-limit penalty charges, a reduction in late fees charged by banks and minimal changes in annual fees since the Credit CARD Act of 2009 took effect.

Stability

For example, the data shows that median advertised interest rates for purchases on bank credit cards remained the same as in 2010. Bank cash advance and penalty rates held firm.

The percentage of cards with annual fees held steady for credit unions, at 14 percent, and increased for banks, from 14 percent in 2010 to 21 percent in 2011. The amount charged for annual fees remained unchanged.

One of the biggest changes stops credit card companies from raising the interest rates on existing balances. When a lender increases the rate now, it only applies to new purchases. In the past, consumers with large balances found their payments rose sharply when lenders significantly raised the interest rate on their account, which at the time applied to existing balances.

"Pew's research shows that predictions that the legislation would spark new charges and long-term interest rate growth have not materialized," said Nick Bourke, director of Pew's Safe Credit Cards Project. "Whatever increases in advertised interest rates we saw going into 2010 have not continued into 2011.”

Positive changes

Bourke says the legislation has created what he calls “a new equilibrium” where interest rates have flattened, penalty charges have declined and a number of practices considered unfair or deceptive have disappeared.

“Consumers are enjoying safer, more transparently priced credit cards - and banks and credit unions are able to compete on a more level playing field," Bourke said.

The Credit CARD Act, signed on May 22, 2009, is a comprehensive law that aims to protect consumers by restricting when interest rates can be raised on existing balances and banning "unfair or deceptive" practices. It also allowed new rules to be created to ensure that late charges and other penalties charged by issuers are "reasonable and proportional." The bill passed with bipartisan support by both the House of Representatives and the Senate.

"The Credit Card Act is an excellent example of how bipartisan legislation can be enacted that both protects consumers from potentially harmful practices while simultaneously creating a marketplace where banks and credit unions are able to compete based on clear and predictable pricing," said Eleni Constantine, director of the Financial Security Portfolio at the Pew Health Group. "Congress should take a similar approach to make other financial products, such as checking accounts and short-term, small-dollar loans, safer and more transparent."