Happy Birthday CARD Act!! A First Person Perspective on The Accomplishments and Failures

February 22^nd 2011 marked the one year anniversary of most of the CARD Act provisions.  12 months after its implementation some consumer advocates are saying that the “legislation worked” (because they want more of it) and the industry saying the “legislation worked” (because they don’t want more of it).  The truth, however, is somewhere in between.  I reached out to CARD Act expert John Ulzheimer to get a more balanced summary of the Act.  Since John and I are the same person it was an easy interview to schedule.

Interest Rates – The average credit card interest rate is higher now (14.7%) than in recent history…thanks to the CARD Act’s restrictions on changing rates for the first 12 months after issuance of a card.  Win – Industry.  According to Ulzheimer, “The Act forced the credit card industry to raise interest rates to help subsidize the cost of compliance.  When you take money away from the industry over HERE they’re going to try and get it back over THERE.  The industry warned us they would have to do this.”

Fees – Some fees have been largely eliminated such as over limit fees and the ubiquitous minimum $39 late fee.  However, the loss in revenue has been subsidized by changes in other product pricing.  Free checking is now on the list of endangered species.  Win – Consumer, unless you are having to pay for checking now.  “This is a win for some consumers but I’m not sure they deserved the concession.”, says Ulzheimer.  “Over limit fees were only assessed to consumers who were charging over their limits, which made them incredibly risky borrowers.  They should have been the ones paying that type of punitive fee.”

Credit Availability – While the flow of credit is starting to loosen it remains a borrower’s market but only if you’re among the credit elite.  Until very recently credit card issuers had all but abandoned the moderate to higher risk consumers because of the CARD Act.  Win – Nobody.  According to Ulzheimer, “The Act didn’t dry up credit availability…the contemplation of the Act did.  Credit card issuers had to hear about the upcoming CARD Act for 18 months before it became law.  They had no clue how or whether or not they could continue to manage their cardholder risk as easily as they could in the pre-CARD Act days.  That’s why we saw large scale account closures and credit limit reductions.  The issuers were cleaning house before it became harder for them to do so.”

Debit Card v Credit Cards – Despite the desire for consumers to use credit cards over debit cards, the CARD Act has left many consumers with no other choice but to use debit cards, which have much less fraud protection than credit cards.  And now you have lawmakers wanting to cap the interchange fee on debit card transactions to $.12 per transaction.  Win – Fraudsters and retailers. “What’s being contemplated with debit card fees being capped at $.12 per transaction is criminal”, according to Ulzheimer.  “The retail industry says they’ll pass on the savings to consumers but who are they kidding?  Give me one example of prices going DOWN in the past decade even as the retailer’s cost of goods or cost to buy goods has gone down?”

Influx of Less Attractive Credit Products – Since the implementation of the CARD Act the pre-paid debit card has become possibly the most aggressively marketed piece of plastic on the web.  These products, of course, are loaded with fees and are not very consumer unfriendly.  Win – Pre-paid debit card issuers.  “I deposit $1,000 into an account and then pay a monthly fee to have access to that money”, Ulzheimer sarcastically asks.  “Does anyone honestly think that’s a good product?”

The CARD Act has done little to change how credit card issuers are managing credit risk, which is actually good news.  It has, however, lead to fees being spread across all consumers rather than just those with elevated credit risk.  Overall, the Act grades out at a C-, and Ulzheimer is being liberal with that grade.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

Categorised in: Debt, Money & Identity

This post was written by John Ulzheimer