Credit Card Expert Roundup #40 - The CARD Act is now 10 years old. What do you see as its major successes and failure, and what would you change?
The CARD Act made a massive impact on how we as Americans were exposed to credit cards from both an informational and marketing standpoint. It's hard to believe that the legislation was passed and enacted last decade. Our panel of experts this week all remember how it shook-up the industry and now reflect on the regulatory laws years later. Jason Steele asks them this week:
The CARD Act is now 10 years old. What do you see as its major successes and failure, and what would you change?
Ben Luthi - Credit card expert and a freelance personal finance writer
I think the biggest success of the CARD Act is the protections it offers to college students. I got one of my first credit cards from a major issuer shortly before the law went in force and, as a college student with little income, I received a $10,000 credit limit.
I never carried a balance or paid interest, but I can imagine the potential damage that could've caused, especially with the possibility of easily getting multiple credit cards with similar terms.
On the flip side, I wonder if they went a little too far because now it's really difficult for a student with no credit to qualify for a student credit card unless they have significant income. Also, there are very few major card issuers that allow co-signers or joint applicants on credit card applications.
Fortunately, there are some relatively new products, including the Petal Card and the Deserve Edu Mastercard, that can fill that gap, but it would be good to see students have a better selection.
Andrew Schrage - CEO and co-owner of Money Crashers
As far as the successes of the CARD Act, it certainly made for more transparency on the part of the credit card companies. This allowed consumers to have a bit more say in their finances overall. Also, it certainly tightened or closed certain loopholes which had existed previously which allowed these banks and financial institutions to unfairly charge its customers, oftentimes with the consumer not even knowing what they were being charged for. In addition, there were limitations put in place for raising your interest rate, and any monies received over the minimum amount due had to go to the balances with the highest interest rate. One other change which is obviously a positive is that if you close a credit card, the issuer cannot ask for payment in full of the balance in order to do so.
As far as failures, obviously, the banks were not too fond of this legislation. As a result, revenues fell for a lot of credit card companies, and most responded by simply raising interest rates. The average rate on credit cards went up by roughly 2% in the first few years after the Act's implementation, and balance transfer rates increased by about 1%. On the other hand, it's essentially unknowable if the CARD Act was directly to blame for those increases since the economy was in a pretty perilous state around that time.
As far as anything that needs to be changed, the fact that a credit card company can begin charging you a new interest rate only 14 days after notification needs to be stretched out. That's just not enough time for most consumers. Also, if you're late by more than 60 days regarding a payment, your interest rate can be increased retroactively. That is simply too severe.
Gerri Detweiler - Credit card expert, author, and speaker
The Credit CARD Act has provided significant protections for consumers who use credit cards. Thanks to that groundbreaking legislation, expensive traps such as floating due dates and interest rate increases at any time and for any reason are a thing of the past. Those protections make it easier for consumers with debt to pay off their balances. But it left out one important group of cardholders: small business owners.
The Fed’s 2019 Small Business Credit Survey found that credit cards are the second most commonly used form of financing after loans and lines of credit. Yet, Congress exempted small business credit cards from the CARD Act. Fortunately, many issuers have voluntarily adopted numerous CARD Act protections for their small business credit card programs. But most have retained the option to raise rates significantly if the business owner is just one day late with a payment. And because these cards aren’t covered by the Act, there is no requirement they be given the opportunity to earn back a lower rate by subsequently paying on time. This can make it more difficult for business owners to repay their debt.
Business credit cards are an important payment method and a valuable form of financing for entrepreneurs, as well as a helpful tool to build business credit. I’d change the CARD Act by making sure key protections— especially those regarding interest rate increases— be extended to small business credit cards as well.
Bill Hardekopf - CEO of LowCards.com
The CARD Act was designed to curtail some of the abusive practices by credit card issuers, and it was successful in stopping a number of them. Some of the major successes of the bill included: (1) providing an incentive to pay more than the minimum payment by placing a box on your monthly credit card statement that showed how many years it would take to pay off your balance and how much you would spend if you simply made the minimum payment each month; (2) curtailing the outrageous over-the-limit fees incurred by consumers by making it mandatory that cardholders opt-in to having this coverage rather than it being automatically part of your account; (3) stopping the issuers' egregious practice of assigning your payment to the part of your balance with the lowest APR, thus assuring themselves more profit since the balance with the highest APR would be the last portion of your bill to be paid off; and (4) banning the issuance of credit cards to anyone under 21 unless they had a cosigner or proof that they had enough income to pay off their card debt.
The bill had some unintended consequences. While the CARD Act limits when interest rate hikes can be taken once someone is a cardholder, issuers simply raised the rates before people applied, which actually raised the average interest rates throughout the industry. Secondly, since most young adults now have to wait until they are 21 to obtain a card on their own, it actually delays the building of their credit history; this may lead to lower credit scores for them and thus, higher interest rates when they go to make their first big ticket purchase such as a car or a house.
Some suggested changes that could be made: since increases in the interest rate are limited to certain circumstances such as late payments, many issuers take a person's first late payment as an opportunity to raise the APR to a penalty APR rate which is usually 25% to 30%. Perhaps interest rate hikes due to late payments should be limited to a certain number of percentage points, so consumers are not so greatly penalized for a simple mistake. Secondly, the promotional offers on large items that states "no interest if paid in full" is misleading with some issuers. In some cases, if you have a balance when the promotional period ends, the fine print of your contract will state that consumers are charged retroactive interest back to when the purchase was first made. Interest should only be charged on the remaining balance.
Jason Steele - Credit card and travel expert. Founder of CardCon
The CARD Act has been an unmitigated success, and I believe it should be a model for other consumer rights legislation that can also benefit industry. I’ve been covering the credit card industry since 2008, and back then the industry engaged in egregious practices like double cycle billing and predatory lending towards college students. But absent legislation, no company would unilaterally reform and put itself at a competitive disadvantage. Yet they all continue to thrive under a level playing field that’s also consumer friendly.
It’s easy to forget how despised the credit card industry was ten years ago, but that’s largely changed. Consumers may not love the big banks, but they get very excited when new products are offered and new features are added. Thanks to outlets like The Points Guy, it’s cool to use credit cards and earn rewards. Now if only the travel industry could be forced to be as fair and transparent with consumers as the Credit Card industry is.