How the CARD Act is Saving You Money – A New CFPB Study

In 2009, the Credit CARD Act was passed.

Among other things, the CARD Act changes how APR can be re-priced, and requires credit card issuers to be more transparent about what fees are charged — and how long it will take for consumers to get out of debt.

Many said the effects of the CARD Act would just shift the fees credit issuers charged from one spot to another and it could even end up costing consumers more in the long run.

It turns out that, for consumers, the CARD Act has truly lowered consumer costs.

At least, that’s the assertion made by a study put out by the Consumer Financial Protection Bureau.

Ways the CARD Act Lowered Consumer Costs and Fees

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Late Fees

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According to the study, the average late fee consumers pay has fallen by $6.  That doesn’t seem like much, but it does add up.

Here’s what the CARD Act did with late fees:

  1. Payments wouldn’t be considered late if the due date fell on a weekend or holiday and the payment was received the next day;
  2. The payment due date should be the same day every month;
  3. Billing statements have to be mailed at least 21 days prior to the due date;
  4. Statements had to tell you the late fee and any penalty rate you would get if the payment is late;
  5. Late fees had to be “reasonable and proportional to the violation” (first offense is $25 whole following offenses are $35 within the next 6 months).

The CFPB study says consumers have saved at least $1.5 billion in fees that would have been charged prior to the CARD Act.

Overlimit Fees

It used to be that credit issuers would regularly approve purchases you’d make even if it went over your credit limit.  This allowed the issuer to collect overlimit fees, though you can imagine how it would hurt you the consumer.

With the CARD Act you have to opt into allowing overlimit charges.  If you don’t opt in you can’t get hit with an overlimit fee.  Makes sense, right?  I should note that overlimits aren’t all bad.  There could be times when you might need to make a purchase that puts you over your limit.  But in general you don’t want to be making purchases that put you over your limit.  They cost you in fees as well as big dings to your credit score.

The CARD Act also required that any overlimit fees be fair and reasonable.  First violations would cost you $25 while additional violations within a six-month period would hit you with a $35 fee.  Prior to the Act the average fee was $34.80.

What the study found was many issuers dropped overlimit fees altogether.  What fees that are still getting charges are much lower than what they had been before the Act was put into place.  The CFPB report estimates that consumers saved $2.5 billion in overlimit fees.

How Do You Make Credit Card Decisions?

Not only has the CARD Act lowered credit card costs for most consumers, but it also makes it easier to compare those costs when shopping for the best credit card deal.

The CARD Act requires issuers to be transparent about costs, and many of those costs are now related to the disclosed fees and interest rates.  This means that consumers can make more informed decisions when deciding which credit cards to apply for.

Also, since there are limits on so-called “back end” fees, it’s easier for consumers to get the whole picture, rather than end up surprised by hidden fees.

On top of that, the new law is saving consumers money by showing them how much they could benefit by paying off their credit cards early.  Thanks to the Credit CARD Act, issuers must include information on the statement about how much consumers will pay in interest if they only make minimum payments.  This disclosure also includes how long it would take to pay off the credit card if only the minimum is paid.

This is actually a pretty eye-opening chart to see on your bill.  It’s incredible how long it can take to pay off your balance if you only pay the minimum as well as how expensive your purchases become with the added interest.

Issuers not only have to share the grim realities of minimum payments with consumers, but also show consumers how they can save by paying off the card faster.  Issuers have to offer up the amount necessary to pay off the credit card in three years.  Many consumers, when confronted with this information, choose to make larger payments so that they can get rid of their debt sooner — and save money in interest.

Finally

While some consumers doubtless continue with their poor habits, many consumers find that they are able to accomplish more, and do it for less, when they are equipped with the right information.  Educated consumers make better decisions, and are more likely to save money.  This goes for credit card use, as well as in other areas.

The reality is that the Credit CARD Act has forced credit card issuers into making their fees more transparent (that’s a good thing).  On top of that, the restrictions on the types of fees charged has provided consumers with solid savings, and the ability to get out of debt much faster.  This is good news for consumers struggling with high interest credit card debt, since it gives them a little help in their efforts.  This also helps those who may only have the occasional discretion from getting hit with high fees and penalties.

It’s great to hear that this legislation, aimed at protecting consumers, is actually doing its job.

Here’s the pdf of the CFPB report if you want to get into the details.

Published or updated October 7, 2013.

Comments

  1. No doubt the Credit Card Act standardized some industry practices which saved consumers money on the targeted practices. Those savings are easily identified.

    What is harder to determine is how the banks changed in other areas to adjust for the lost revenues. Of course a government body is less likely to dig, find the cost shifts, and publish them in a study designed to tout the benefits of their own work.

    • You make a good point. If you look at the report it does say that some fee decreases can’t be directly correlated with the CARD Act. IT also goes into problem areas that the CFPB needs to watch as well.

      We know that one place some banks tried to make up revenue was in ATM fees and other checking account fees.

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