By Andrew Housser
It has been three years since the Federal Reserve's Credit CARD (Card Accountability, Responsibility and Disclosure) Act went into effect. The law was designed to protect consumers by regulating credit card lender practices, including how they communicate with consumers. In these three years, the act has had mostly positive impacts.
The CARD Act has helped many cardholders reduce their credit card debt load in four essential ways:
1. Significantly cutting interest rate hikes. The CARD Act prohibits card issuers from raising interest rates on existing purchases unless the cardholder misses two payments in a row. Consumers also must be given 45 days' notice before rates are raised on new purchases. Consumers may cancel the account during this time. Before the CARD Act, 15 percent of accounts experienced rate hikes. Today, fewer than 2 percent do.
2. Restricting late fees. In the first 10 months after the CARD Act took effect, the total late fees consumers paid was slashed from $901 million to $427 million. In 2008, 52 percent of households paid late fees. In 2012, just 28 percent paid these fees. In addition, the average late fee has decreased from $35 to $23.
3. Eliminating over-limit fees. In the past, companies could charge a fee of about $39 for a purchase that exceeded the card's credit limit. Over-limit fees could be charged monthly until the balance was under the credit limit. Now, a charge cannot exceed a card's credit limit unless the cardholder has given permission. Today, only 1 percent of accounts incur over-limit fees. This is down from 12 percent.
4. Raising awareness of credit card costs and fees. Surveys suggest one-third of households are paying down balances faster now. Some credit this change to new information on credit card statements. The law requires creditors to clearly state how long it will take to pay off the bill and the total cost if a borrower pays only the minimum.
Problems with credit access
One group of consumers is complaining that the CARD Act is overprotecting them -- and harming their access to credit. Since October 2011, a rule requires card issuers to consider only an individual card applicant's income or assets when making lending decisions. Total household income cannot be considered.
This rule was intended to keep college students and young adults from using a parent's income to qualify for credit. The concern was that young people would receive falsely high credit limits, and then rack up debt that they could not repay. However, the rule also has had an effect on households that share one income. About 5 million full-time stay-at-home moms and 150,000 stay-at-home dads are impacted, and can find it difficult to get credit. The rule also affects unmarried couples, part-time working parents, married couples with no children, retirees and adults caring for their aging parents.
To correct the problem, the Consumer Financial Protection Bureau (CFPB) proposed rule changes in October 2012. The revision would let creditors include shared income for a stay-at-home spouse or partner age 21 or older. Lenders would need to confirm how much money the applicant has access to in order to pay bills. This rule would apply to all applicants regardless of marital status. Recommended changes are not yet final; any modifications would take effect in mid-to-late 2013, at the earliest. To learn more about the current rule and the proposed revision, visit CFPB.
Whatever the outcome of the rule change proposal, consumers should be careful not to overextend themselves. Consumer watchdogs have cautioned that the rules are in place for a reason. Anyone who uses a credit card, whether they share income or not, should be wary of overspending. The smartest thing to do? Live within your means, and never borrow more than you can pay off monthly. It's a policy that will pay off.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.