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This is a guest post by Josh Frank in response to Richard Barrington's article "CARD Act may have cost consumers billions." Opinions presented in this post are not necessarily endorsed by CardRatings.com.
New credit card rules mandated by the Credit CARD Act of 2009 have made prices significantly more transparent and lower for consumers—contrary to industry’s claims. My research report, “Credit Card Clarity,” shows what has gone up is the advertised interest rate on credit card offers, not the actual rate cardholders pay. In short, new rules have curbed the bait-and-switch tactics that permeated the credit card market.
Before the CARD Act, the gap was wide between the interest rates offered in solicitations and the actual rate cardholders paid. Card companies used a host of practices to increase price without consumers realizing. They applied monthly payments using obscure rules that, when a customer had one interest rate for purchases and a higher one for cash advances, caused the overall rate to migrate towards the higher of the two. Card issuers also manipulated how they used indexes to set variable rates, always to a cardholder’s disadvantage. These practices became so widespread that the gap widened to unprecedented levels by 2004 and stayed there until 2008.
Then along came reform with, let’s remember, wide bipartisan support in Congress. After all, who didn’t find credit card practices irksome, if not outright maddening? The gap narrowed markedly after the new law passed, with advertised prices rising to become much closer to actual prices. Not only are prices more transparent as a result, they also are lower. According to Federal Reserve data, the interest rate consumers pay right now on average is at its second lowest level since 1994, when the agency began tracking it.
And the average amount of credit card fees paid has dropped sharply. This has been driven largely by a drop in penalty fees that far outweigh issuers’ efforts to raise nuisance fees for cash advances and international transactions. And while credit card offers dropped because of the financial crisis—itself caused by bad lending practices—card offers are widely available again to both prime and subprime consumers. To top it off, complaints about credit cards to the Federal Trade Commission and the Better Business Bureau are down.
Price transparency: Up. Prices and complaints: Down. Offers: Widely available. So who’s grousing? Industry-led critics making unfounded claims that commonsense rules and oversight led to higher prices and scarcer credit for consumers. Credit card issuers spin the yarn that credit card reform has been harmful in the hope it will help in their parallel campaign to undo commonsense reform in the mortgage arena and, with the creation of the Consumer Financial Protection Bureau, all areas of consumer finance. The ongoing crisis in the mortgage market is an example of the harm a lack of commonsense rules brings. Our research shows that, prior to the CARD Act, the credit card industry was another. Price transparency fosters competition, lowering costs long term. Market evidence after the CARD Act confirms this.
Josh Frank is a senior researcher at the Center for Responsible Lending. CRL is a non-partisan research and policy group working to ensure the U.S. financial system promotes and protects home ownership and family wealth. CRL is one of 15 recipients of a 2012 MacArthur Award for Creative and Effective Institutions, in recognition of CRL’s work fighting predatory lending. More at responsiblelending.org or @CRLONLINE.