I’m Kathleen Day from the Center for Responsible Lending and I’m going to give an overview of credit cards, where the big news continues to be about the success of the CARD Act. Passed in 2009, it was fully implemented in early 2010Since then the evidence shows how successful it’s been at curbing unfair, deceptive practicees and, in the process, making pricing clearer.And clearer pricing fosters competition, which lowers price in the long run.
• Issuers can no longer increase interest rates on an existing balance unless the cardholder 60 days or more behind in payments, he or she has agreed to a variable rate or a promotional rate ends. If a customer's rate is raised because of a delinquency, but he or she then pays on time for the following six consecutive months, the lender must revert to charging the previous, lower rate.• All payments above the monthly minimum to the balance carrying the highest interest rate.• Must stop charging over-limit fees unless a customer has explicitly said he or she wants to be allowed to exceed the credit limit and understands a fee will be incurred for doing so.• Must give greater consideration to a customer's ability to repay before issuing credit or increasing a credit limit.
And these changes have been in place for over two years without, as bank industry lobbists had predicted, raising the cost of credit or making it scarcer.In fact our research shows that consumer safeguards don’t undermine a bank’s financial soundness but enhance it.
Our research found that losses during the recent downturn rose fastest at firms with the most unfair, deceptive practices.Practices that are better for consumers end up being better for business long term.
The more often a bank engaged in consumer-unfriendly practices, the greater its jump in losses during the downturnGoing into the recession, an institution’s size, type or loss rate didn’t predict its change in credit lossesPractices best predictor of lossUnfair, deceptive practices like those curbed or banned by the CARD Act didn’t reduce a lender’s risk, but rather increased the risk a borrower would default.
*Raise your interest rate without limit on future purchases as long as they give 45 days notice. If consumers don't want to accept the higher rate, they have the right to close the account and pay it off over five years. *Arbitrarily change any or all terms for credit cards issued to small businesses.*Close accounts or reduce lines of credit without notice for any reason, although they must wait 45 days before they can impose an over-the-limit fee or a penalty rate on a newly lowered credit limit.*Require card holders to address grievances through mandatory arbitration rather than the courts.
*Especially onerous when banks re-order transactions, putting them through in a manner that triggers the most overdrafts
Credit cards are a common financial tool• 68% of US households have a Total Outstanding Credit Card credit card; 40% carry balances. Debt in the U.S. 2000 2003 2006 2009 2012 $1,050• Over $850 billion in outstanding $1,000 $950 US credit card debt. $900 (in Billions) $850 $800• 40% of low- and middle-income $750 households use credit cards to $700 pay for basic living expenses. $650 $600
The Credit Card Act Works• Curbed many unfair, deceptive practices• Made pricing clearer
Among the Changes...• Curbs rate hikes on existing balances• Payments above minimum applied to balance with highest APR• No over-the-limit fees unless opt-in• More attention to customer’s ability to repay
Issuers’ Claims Unfounded Reforms did NOT raise the cost of credit or make it scarcer Consumer safeguards don’t conflict with banks’ safety, soundness—the two go hand-in-hand
CRL Research Shows… Losses rose fastest at firms with worst practices What’s bad for consumers is bad for business
Why? Issuers’ claim that high-cost fees and interest were tools to manage risk: False These fees, rates didn’t mitigate risk, they became the risk---they amplified it.
But Problems Persist So There’s Work to Do Issuers can raise future rates for any reason Mandatory arbitration limits remedies of customers who’ve been treated unfairly
Also with Debit and Prepaid Cards…• Overdraft fees should be banned on debit AND on prepaid cards• Convenience and safety of prepaid cards lost with excessive, hidden fees• Credit—and overdraft fees—should be banned on prepaid cards
For More InformationSee all CRL research on Credit Cards: http://rspnsb.li/S2HQJbContact us: Kathleen Day (DC): 202-349-1871 Graciela Aponte (CA): 510-379-5518 Ginna Green (SC): 510-866-5989