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Credit Card Act of 2009 In Review (Part 1)

Credit Card Act of 2009 In Review (Part 1)

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The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 represents what is arguably the biggest attempt in history to overhaul credit card industry regulations.

President Obama signed the Credit Card Act in May of 2009. At that time some of the rules went into immediate effect, others kicked in three months later, and all of them were in full force by February of 2010. These include things like how your monthly statement is formatted and the way your card company makes decisions regarding your interest rate. But there is also a lot more to the Credit Card Act than meets the eye – and much of it can potentially have a direct impact on your finances. Now that it is up and running it is a good time to take a closer look into what it says, how it is being implemented, and what it all means to you.

Credit Card Act of 2009 Praise and Criticism

Since it was unveiled, CARD has been hailed for giving cardholders more control over their finances and for forcing credit card companies to be more honest, transparent, and fair. But critics complain that the new rules don’t go far enough, and that banks are exploiting loopholes in the Act in order to continue taking advantage of consumers who have little power to protect themselves. Meanwhile card companies complain that the legislation is too burdensome for them. They claim that in order to follow the regulations they are forced to reduce credit and pass the costs of implementing the Credit Card Act on to customers.

My take on the controversial issue is that there will probably always be room for improvement when it comes to how the banking industry is regulated and how it behaves. There is no easy solution to complex problems like these, and consumers and bankers will never see exactly eye to eye.  The problem for me is that I don't think the problem lied in banks, rather in consumers and they're lack of education toward the banking industry.

We need a lot more emphasis on financial literacy, because an educated consumer is a better consumer. Of course a PhD in finance or law might not give you the tools necessary to decode the fine print on a cardholder agreement. There was a study done a year or two ago, for example, that found that even licensed, practicing attorneys were unable to understand the terms of their credit cards contracts. Some of the paperwork that describes how your plastic works is dozens of pages long and when lawyers cannot make heads or tails of it then it’s going to be way over the heads of practically everyone else.

Whether or not the CARD Act of 2009 was ultimately a good or bad bill is still heavily debated and it will be years before a true determination can be made.  For now, allow me to take you through the facts and figures and in hopefully in the near future, we'll all be better off as a result.

The Background Story

The impetus for the legislation primarily came from reform-minded government officials who had their feet held to the fire by taxpayers and consumer advocacy groups. The nation was scared, confused, and seething with anger in the wake of the housing market collapse and sub prime mortgage debacle – which combined to trigger a total meltdown of the credit industry.

Politicians knew they needed to bring someone’s head on a platter to their constituents. Since all consumers seemed to be buried in credit card debt and dissatisfied with how credit card companies treated them, they decided to put plastic on that platter. Much of Congress had been in bed with the credit card industry for years, of course, but when push comes to shove inside the Washington beltway partnerships often part their ways.

But don’t get too excited or start sending sympathy cards to your bankers because they were betrayed by their Congressional buddies. After all, financial reforms don’t necessarily represent radical change any more than loading the dishwasher and wiping down the counter tops means you’ve remodeled your kitchen.

Many consumer activists are quick to point out that some of the trashiest crooks on Wall Street were rewarded with multi-million dollar bonuses, not punished with multiple criminal indictments. Instead of totally revamping the financial system to prevent this kind of shenanigans from happening again, they argue that Congress just recycled the same old leniency with laws that don’t have any real teeth.

You’ll have to decide for yourself what conclusions to draw, and to help you sort it all out here is an overview of the CARD Act.

Main Provisions of the Credit Card Act

  • Card companies cannot increase the interest rate charged on an existing balance unless you’ve agreed to a variable or adjustable rate or have managed to fall at least 60 days behind on your payments. Plus if your rate does get hiked because of failure to pay on time, you can get your old lower rate reinstated by making on-time payments for the next six consecutive months.
  • Payments above the monthly minimum will be applied to the balances that carry the highest rates of interest. Card companies used to do just the opposite in order to keep you paying high interest as long as possible. Banks now have to apply your payments in a timely fashion, too, rather than waiting a long time to credit the payment to your account.
  • Card companies cannot charge over-limit fees unless you have specifically asked for the ability to go over your credit limit. Also if the terms of your card agreement are going to change in any significant way you have to be notified 45 days ahead of time. There are also limits on how many fees you can be charged, and how your interest rate is calculated.
  • Another big change is that if you close your credit card account, the issuer cannot require immediate repayment of your entire balance or continue to charge you monthly maintenance fees. They have to give you five years to repay the remaining balance, although they can double the size of your minimum monthly payment.

Implementation and Reaction

Much has made of the pros and cons of the Credit Card Act in recent weeks, because the 2nd anniversary of the Act just passed. That gave analysts one of the best opportunities thus far to study the impact of the bill, since many of its provisions can only be effectively tracked over time.

The average rates for credit cards rose about 2% during the first two years after the bill was passed, for example, while other key interest rates fell. The amount it costs to allow balance transfers also appears to have jumped about a percentage point. Many argue that the CARD Act is to blame.

Bank Losses as a More Realistic Explanation:

My take on it is that this critique may be factual, but since it only tells part of the story conclusions based on the uptick in rates can be misleading. That’s because during this same time frame the banking industry was reeling from the worst catastrophe it had experienced since the Great Depression. Millions of customers defaulted on their credit card debt, for example, and millions of customers cancelled their plastic in order to become debt-free. Both of those trends cost card companies money and resulted in lost customers. Meanwhile banks also suffered disastrous losses in their mortgage portfolios, stock share prices, and other revenue streams.  So they were desperate to raise some money, but the Credit Card Act prevented them from continuing to gouge customers with unreasonable fees.

The one place left for them to squeeze out a profit was interest rates. Some say the new law forced banks to hike rates by taking away their ability to make enough money. Banks argued, for instance, that it is expensive to provide credit card products and services so they had to raise rates in order to make a healthy profit and continue offering credit cards. But I think that the more plausible explanation is that banks were hemorrhaging cash due to lost customers and the overall impact of the historically unprecedented banking crisis. They saw a chance to make money on higher rates and they did it.

Higher Risk Equals Higher Rates:

There’s another factor that I think contributed greatly to the rise of interest rates, and that is that Americans were faced with historically high levels of foreclosure, unemployment, and general loss of income. The credit ratings of tens of millions of cardholders plummeted. Their ratio of debt to income spiked. Creditors everywhere tightened their purse strings and made it harder to get loans because borrowers generally represented an exceptionally high level of risk.

What does every lender do in order to insulate themselves from risk when extending credit to a borrower? They raise the interest rate to give themselves an added margin of safety. So if rates on cards went up a couple of points I do not buy into the notion that it is the fault of the Credit Card Act. I think that a riskier credit environment contributed to that predictable outcome, as it does whenever banks believe that consumers are less credit worthy.

Banks were under extreme duress and the entire credit card industry was feeling fragile and vulnerable. So when card companies were allowed to raise rates before the Act went into effect they immediately did so. To identity the new legislation as the main cause of the rise is naïve, I believe, and it fails to acknowledge the power of other more influential economic factors.

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