Inside Financial Services

The CARD Act: As Expected, Costly To Consumers

. . . despite what the CFPB would have you believe.

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In the course of marking the one-year anniversary of the implementation of the CARD Act (and you’ll forgive me if I don’t send flowers) the new nannies at the Consumer Financial Protection Bureau want everyone to know what a boon to consumers the act has been. They’ve even done a survey. A “fact sheet” on the CFPB’s web site, put out as part of a one-day conference on the law the bureau is holding today, contains a summary of the survey’s results. Since the CARD Act’s implementation, the CFPB reports that:

– Rate hikes have been “dramatically curtailed.”

– Over-limit fees have “virtually disappeared.”

– The amount of late fees has been “substantially reduced.”

Thank goodness for our protectors in Washington! The conventional wisdom says that added regulation tends to increase provider costs which are then passed on to the consumer in the form of higher prices. But the folks at the CFPB seem to be implying that the CARD Act has saved consumers money. I don’t believe that. Do you believe that?

Of course not. And, sure enough, the CFPB’s fact sheet makes no mention of the one fact about holding a credit card that’s more important to most cardholders than any other: the interest rate. Since the CARD Act has gone into effect what’s happened to rates?

Please dispense with the drumroll; you know the answer as well as I do. Back in late 2009 as the CARD Act was being debated, issuers made no bones about the fact that they were going to have to raise rates to offset the restrictions (such as the banning of over-limit fees) the law would impose. And sure enough-even though the CFPB somehow failed to mention this-average card rates have surged since the law went into effect. According to IndexCreditCards.com, a web site that tracks these sorts of things, the rate charged on the average credit card is 16.89%, up from 15.39% back in September of 2009. That increase occurred, by the way, at a time when other consumer lending rates fell. By a lot. For example, while the average card rate was rising by 150 basis points, the rate on the average 60-month auto loan dropped by 218 basis points, to 5.21%, according to Bankrate.com. Similarly, the rate on the average personal loan fell by 260 basis points, to 9.89%. You can argue if you’d like that those rate declines had a lot to do with tighter underwriting and higher borrower FICOs. Fine. But surely card lenders tightened their underwriting over the same period.

This self-congratulation from the CFPB is a bunch of hogwash. The bureau can cherry-pick survey results and host celebratory conferences as much as it likes, but the fact is that the CARD Act, as everyone predicted, has cost consumers billions of dollars in the form of higher interest costs. Why that’s a good thing for consumers eludes me entirely.

What do you think? Let me know!

24 Responses to “The CARD Act: As Expected, Costly To Consumers”

  1. JimBob

    I don’t know that I would call that a ‘surge’ in rates. However, I would suggest that in addition to the interest rate, one also has to consider the bringing back of the annual fee that card companies are now charging in droves. So even if you pay off your entire balance, like I do, each month, you’ll still have to pay for the ‘privilege’ of having a card. Some benefit! Thanks CFPB!

  2. Noam Grunes

    Hogwash. It made card issuers earn money honorably — straightforwardly — rather than through unexpected rate hikes or unexpected fees. That tradeoff is superb. A consumer protection agency isn’t by definition a nanny: it can negotiate decent practices vs. collusive oligopolies on behalf of a distributed public that otherwise lacks negotiating power. Stick to the investment analysis rather than ideological rants.

  3. simple

    There are 3 main sources of revenue for a card: 1. interest revenue, 2. annual fees, 3. penalty/special fees. In recent years issuers lured us with no annual fees (thank you AT&T universal card), teaser rates, lower APRs. Where did they make up the lost revenue? penalty/special fees. For example that 0% balcon carried a 4% transaction fee for the 9 month period it was valid for making it more like 6% effective APR…the late fees, over the limit fees, double cycle interest calculation, and other rules made cards too complicated even for execs at card companies to explain. Consumers got tricked.

    The point is that absent regulation we have card offers that appear cheaper but in reality have a ton of surprise fees and other hidden costs. Some of us avoid them…others end up paying a fortune. Same thing that happened with OD fees and “free” checking.

    So in this case regulation is good. Regulators in this case have not become nannies. Instead they have created a level playing field. That is good for competition and it is good for the consumer.

    I think that arguing against the CFPB in this case is like saying that the NTSB (or whoever does this) by mandating seat belts in all cars is being a “nanny” regulator and that by doing so it is increasing the cost of the car to the consumer.

    Lets be responsible in our criticism or regulators. Not all regulation is bad and not all regulation is “nanny” like. We need the right level of regulation and we need it to be well thought out and applied by intelligent examiners and regulators.

    if we had, we wouldnt have suffered through the mortgage crisis. Regulators failed. We need better regulation. Not a lot more, but a lot better. And yes we do need some new areas like the CFPB but we dont need them on a crusade against the banks but on a responsible role to protect the consumer.

    Having said that there are other cases where new regulation has gone off the reservation. A good example is Durbin…

  4. Noam Grunes

    Hogwash. It made card issuers earn money honorably — straightforwardly — rather than through unexpected rate hikes or unexpected fees. That tradeoff is superb. A consumer protection agency isn’t by definition a nanny: it can negotiate decent practices vs. collusive oligopolies on behalf of a distributed public that otherwise lacks negotiating power. Stick to the investment analysis rather than ideological rants.

  5. simple

    There are 3 main sources of revenue for a card: 1. interest revenue, 2. annual fees, 3. penalty/special fees. In recent years issuers lured us with no annual fees (thank you AT&T universal card), teaser rates, lower APRs. Where did they make up the lost revenue? penalty/special fees. For example that 0% balcon carried a 4% transaction fee for the 9 month period it was valid for making it more like 6% effective APR…the late fees, over the limit fees, double cycle interest calculation, and other rules made cards too complicated even for execs at card companies to explain. Consumers got tricked.

    The point is that absent regulation we have card offers that appear cheaper but in reality have a ton of surprise fees and other hidden costs. Some of us avoid them…others end up paying a fortune. Same thing that happened with OD fees and “free” checking.

    So in this case regulation is good. Regulators in this case have not become nannies. Instead they have created a level playing field. That is good for competition and it is good for the consumer.

    I think that arguing against the CFPB in this case is like saying that the NTSB (or whoever does this) by mandating seat belts in all cars is being a “nanny” regulator and that by doing so it is increasing the cost of the car to the consumer.

    Lets be responsible in our criticism or regulators. Not all regulation is bad and not all regulation is “nanny” like. We need the right level of regulation and we need it to be well thought out and applied by intelligent examiners and regulators.

    if we had, we wouldnt have suffered through the mortgage crisis. Regulators failed. We need better regulation. Not a lot more, but a lot better. And yes we do need some new areas like the CFPB but we dont need them on a crusade against the banks but on a responsible role to protect the consumer.

    Having said that there are other cases where new regulation has gone off the reservation. A good example is Durbin…

  6. I am in banking...

    Oh, where do I begin…being that I am in banking and work with credit card customers all day long I can definitely attest to how the act has POSITIVELY impacted customers. We were getting out of hand with late fees and over limit fees. Now that those are gone our clients are able to better manage paying off the credit cards. The interest rate is not important to the majority of card holders unless #1 It is a very low rate between 0% and 3% which is used in place of short term loans or #2 the rate is extremely high, above 15% (with an outstanding balance). For those customers with interest rates above 15% and a continuous outstanding balance they are obviously in trouble financially. They have chosen to carry high interest debt. We were hitting them month after month with $35 overage charges and $35 late charges etc…believe me they are more than happy to bay 16% interest instead of 15% if it saves them $70 in interest.

    I am sure you are all excited about the banks fighting off the debit card fee changes that were supposed to come in. That’s another rip-off. You really think it costs the banks 30 cents and 1.5% to process a purchase? I didn’t think so. Let’s limit the price gouging and leave the money in the hands of the merchants…after all the banks aren’t doing any good with that extra $12 billion. i am not sure what percentage of sales is from small businesses, but even if it is 10% that’s an extra $1.2 billion in the hands of people that we know will spend the money putting the money back into the economy. You are all about trickle down, right? Or is that too far down…?

  7. No Banker Left Behind

    TB: NBLB here with, shockingly, an alternate take on your take. First, I didn’t realize you were so concerned about the consumer———maybe you should take those concerns and go to work for the CFPB! Ok, back to the civil discourse. My hunch is that as a banking analyst, you are most concerned about bank profits and ROA; the consumer, not so much. Late fees, over limit fees, etc turbo charged profits in what is already an incredibly lucrative part of the banking business. That’s a big hole to fill! How big? Let’s go to the Bloomberg terminal: ” Late fees fell to $427 million in November, less than half the $901 million total for January 2010, the last month before the rules took effect. The average late fee declined to $23 from $35 over the same period, according to the study.” I can’t help but think that it’s those missing $’s you’re concerned about, not the Joe-sixpack carrying around a credit card balance at 16.89%. Also, if your concern for the consumer is so high, why didn’t we see a column deploring the practice of using algorithms to bounce the greatest number of checks possible on a bank overdraft? Finally, I’m sure the rates on the various loans you quoted are correct, so credit card rates have moved against the trend. That said, auto loans are secured by the vehicle and the scary looking guy with the big tow truck. Personal loans while available, would, I believe, require a personal guarantee on the part of the borrower. Credit card debt, on the other hand, is unsecured and, given the difficulties we’ve been through in the last 3 years, it would make sense that it would be more expensive. Almost every commentator agrees that access to easy credit was our undoing. How do we ration things in our system? Through higher prices. Thanks for listening.

  8. Lori

    Tom, you are so right. My rates have been raised even though I have excellent credit. Darn, bureaucrats. Keep spreading the word!

  9. Scott Hein

    Send this comment to the Wall Street Journal. It is of more widespread interest than just the “banking” community.

  10. cashmoney

    Come on, Tom, remember Price Theory 101 from fall semester freshman year — that the effect of a price increase can be decomposed into a substitution effect and an income effect?

    How much of that price increase gets absorbed by the sell/producer and how much gets passed through to the consumer is determined by the good’s elasticity of demand.

    Call me cynical, but arguing banks have no choice but to raise interest rates because the feds cut off other sources of fee income only confirms what most of us always suspected: that banks, the big ones especially, have lots and lots of pricing power.

  11. Joe V

    After a couple of worthwhile posts, Tom’s drivel has returned. Bank card rates would still make the Mafia blush. 15%+ to the customer when banks’ cost of money is near zero is downright obscene. SNL would pay you top dollar as a comedy writer, Tom.

  12. simple

    There are 3 main sources of revenue for a card: 1. interest revenue, 2. annual fees, 3. penalty/special fees. In recent years issuers lured us with no annual fees (thank you AT&T universal card), teaser rates, lower APRs. Where did they make up the lost revenue? penalty/special fees. For example that 0% balcon carried a 4% transaction fee for the 9 month period it was valid for making it more like 6% effective APR…the late fees, over the limit fees, double cycle interest calculation, and other rules made cards too complicated even for execs at card companies to explain. Consumers got tricked.

    The point is that absent regulation we have card offers that appear cheaper but in reality have a ton of surprise fees and other hidden costs. Some of us avoid them…others end up paying a fortune. Same thing that happened with OD fees and “free” checking.

    So in this case regulation is good. Regulators in this case have not become nannies. Instead they have created a level playing field. That is good for competition and it is good for the consumer.

    I think that arguing against the CFPB in this case is like saying that the NTSB (or whoever does this) by mandating seat belts in all cars is being a “nanny” regulator and that by doing so it is increasing the cost of the car to the consumer.

    Lets be responsible in our criticism or regulators. Not all regulation is bad and not all regulation is “nanny” like. We need the right level of regulation and we need it to be well thought out and applied by intelligent examiners and regulators.

    if we had, we wouldnt have suffered through the mortgage crisis. Regulators failed. We need better regulation. Not a lot more, but a lot better. And yes we do need some new areas like the CFPB but we dont need them on a crusade against the banks but on a responsible role to protect the consumer.

    Having said that there are other cases where new regulation has gone off the reservation. A good example is Durbin…

  13. Dan B

    The best description of a credit card I ever heard called them “Personal Junk Bonds”. As pointed out in another post, the debt is unsecured. The loss rate exceeds that of other forms of personal debt. Banks deserve to make a lot of money for providing this consumer liquidity service. The way they make their money however, should be visible. Banks got too cute at complicating their fee structure. Keep it simple – crank up the rates because this is a 20%+ product for people who carryover balances.

  14. czhv18a

    Tom, I am self employed, and the timing of when I receive revenues is often quarterly. Although I typically do not have long term credit card debt, there are times when I can accumulate it during the quarter, and then pay it off at the quarter end. In the past, it was easy to find a balance transfer offer that I could use for the short term with a “teaser rate”, where if I paid it off in a short time frame, the interest cost would be very low. These have ceased after the new regs went into effect. Although teaser rates are still there, now I cannot find one that doesnt have a 3% upfront transaction fee- in the past it was easy to find ones without the fee that could be paid off within 30 days, or if not a ‘teaser’ short term rate without this 3%. The 3% upfront fee means thanks to the alleged government knows best “help”, it can be more costly to manage cash flows. Maybe the government could pay the rating agencies for a ‘fairness’ opinion on how well they have done, and then congratulate themselves more.

  15. cashmoney

    Come on, Tom, remember Price Theory 101 from fall semester freshman year — that the effect of a price increase can be decomposed into a substitution effect and an income effect?

    How much of that price increase gets absorbed by the sell/producer and how much gets passed through to the consumer is determined by the good’s elasticity of demand.

    Call me cynical, but arguing banks have no choice but to raise interest rates because the feds cut off other sources of fee income only confirms what most of us always suspected: that banks, the big ones especially, have lots and lots of pricing power.

  16. Carduser

    Two changes that I have noticed: 1. One card I carry increased the annual fee by more than 50%. 2. Another card “enhanced” the rewards program by obfuscating the ways points are earned/redeemed. The net result if you deconstruct the program is lower rewards to cardholders. The card companies brought this regulation on themselves with some truly awful business practices. But don’t think for a minute that cfpb helped most consumers. Responsible card users are just paying more to replace revenue lost to regulation.

  17. No Banker Left Behind

    To czhv18a: Yes, these cards with the teaser rates were once available with no upfront fee, and busboys once bought $400,000 houses with no money down and no documentation. Those days are over, at least for the time being. I’m not one to “flame’ other folks on the comment board, but I’ve owned two businesses and done two stints as an independent contractor. I would suggest to you that getting paid but four times per year is the source of your cash flow problems. Every company I have ever worked with paid out expenses every 15 days and fees every 30. When I used contractors at the firms I owned I followed the same protocols. Getting paid on net 90 leaves your fate to the kindness of strangers. Finally, those teaser rates with no upfront points began disappearing long before the CFPB ever appeared on the scene; the world changed on September 15th, 2008 when Lehman Brothers failed. The punch bowl is long gone, but man, the hangover. I post this with no malice and wish you the best in your efforts to manage your business in these very uncertain times.

  18. 6200high

    Tom, good point. Do you think the issuers happy with the higher rates as well? I assume they have more than made up for the loss in fees. In the long run, this may be a better outcome than the former, regardless of how we got there.

  19. Josh Frank

    The claim that rates have gone up is simply untrue. The fact is that rates offered now more closely match what people actually pay in finance charges, which is a sign that rates are more honest—not that they are higher. You don’t have to take my word for it, all you have to do is look at the Federal Reserve’s G.19 credit card rate data to see that actual finance charges (“Credit Cards Assessed Interest” in their labeling) have not gone up. We analyze this in depth and confirm this with several other data sources in the report here http://www.responsiblelending.org/credit-cards/research-analysis/credit-card-clarity.html . And in fact data from industry consulting group Argus also confirms that finance charges as a percent of balances are not up, and finance charges plus fees are down.

  20. BONO

    Another example of government requiring those who do the right things to pay for those who are irresponsible!! We must take care of those who do not take care of themselves!

  21. BONO

    Another example of government requiring those who do the right things to pay for those who are irresponsible!! We must take care of those who do not take care of themselves!

  22. creditcardassist

    Does anyone know the details about how the CARD Act is going to affect small to medium sized business and how do I know if I need to get a different business credit card?.

  23. Anonymous

    I totally agree. The only effect of the CARD Act on me was that my Citi credit card interest rate went from 7.99% to 14.99% even though I have perfect credit and wasn’t doing anything to damage my credit. Thanks a lot.

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