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Credit Card Law Saved Billions Of Dollars

coins, cash on top of credit cardsTwo reports — one independent, one from the Consumer Financial Protection Bureau — suggest the Credit CARD Act of 2009 has saved consumers billions of dollars in fees and interest payments.

The CARD Act, which went into effect in February 2010, created new regulations for credit card accounts with the goal of improving fairness and transparency for consumers.

Among other things, the act limits late fees and places restrictions on when credit card companies can increase interest rates.

Every two years, the government must review the act’s impact on the cost and availability of credit and consumer protection. Here are the highlights from the CFPB’s recent report.

Some changes in the credit card market are directly tied to the act’s provisions:

  • Over-the-limit and late fees have fallen or gone away altogether.
  • It is more difficult for creditors to adjust existing customers’ interest rates.
  • There has been a major decline in new credit card accounts among consumers younger than 21.
  • A small percentage of consumers have been declined for a credit card because of insufficient income.

Other changes could have been caused by the act, by economic factors or a combination of the two:

  • The average annual fee increased from $32.48 in 2008 to $34.19 in 2012.
  • Other fees increased from $1.35 per quarter in 2008 to $1.75 per quarter in 2012.
  • Interest rates are higher for some groups and the same for others. Overall, interest rates are 2.2% higher.
  • The total cost of credit to consumers (which consists of both interest and fees) declined by 1.94% from the fourth quarter of 2008 to the fourth quarter of 2012.

An independent report titled “Regulating Consumer Financial Products: Evidence from Credit Cards” finds that consumers are even better off than the CFPB report does. It is based on data collected by the federal government from the eight largest banks from January 2008 through December 2012, one quarter longer than the period the CFPB report covers. The report’s lead author, Sumit Agarwal, is associate professor of economics, finance and real estate at the National University of Singapore.

Agarwal’s team found that credit card consumers overall are paying 2.8% less in interest annually since the CARD Act’s implementation, and subprime borrowers are paying 14% less.

Unlike the government report, this report does not find that consumers have experienced reduced access to credit since the CARD Act.

The independent report also finds that consumers have collectively saved $20.8 billion annually thanks to lower card fees, and a tiny percentage of consumers is now paying off card balances in 36 months instead of making minimum payments because of the way card issuers are now required to present payoff information on customers’ statements.

CARD Act critics asserted that regulatory requirements to lower some fees would cause card issuers to increase other fees, resulting in no net benefit for consumers.

While they may have been right about the shift in fees, they seem to have been wrong about the overall effect: Consumers seemingly have benefited on balance.

And credit card companies are still profitable, the report states. Across all accounts, they earn an average of 1.6% of consumers’ average daily balances.

Perhaps the biggest question that neither report answers is: At what cost to taxpayers has the CARD Act achieved these savings for consumers? Is there a net loss or a net gain? There are no figures on the precise cost of implementing and managing the act.

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