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3 Years In, Credit CARD Act Working

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Back in the late 1970s, the US Supreme Court ended all federal predatory lending laws. Before long, the credit card economy was born and began thriving almost immediately. Banks were issuing credit cards to anyone who applied, often with double digit APR – usually around 25% and those transactions that were cash advances often come at interest rates of 29.99% or more. The fees tucked into the fine print made it even more expensive. The low monthly payments were irresistible to millions of consumers and as a result, credit card debt climbed nearly every year. And for those who missed a payment or two, they made the late payments, often unaware of the hit their credit reports were taking.

Wages Leveled Off

Then, wages for middle and lower class Americans began to level off. It was the 1990s and there were massive numbers of jobs being outsourced to other countries. Consumers were spending using their credit cards, with about 80% of American families owning at least one. Fast forward to current day and the writing is on the wall – the credit card debt has far surpassed the trillion dollar mark. The banks are doing quite well, even if the rest of the country is floundering in tough economic times.

CARD Act

Enter the 2009 CARD Act.

Not long after President Obama took office, he began signing new laws – many that required to credit card companies to significantly change the way their conducted their business with consumers.

More than three years in, the 2009 Card Accountability Responsibility and Disclosure Act (CARD) Act has helped credit card consumers better handle their debt in several ways. It’s resulted in the founding of the Consumer Financial Protection Bureau, which has served as a powerful – and successful – consumer watchdog group. Much has changed, including the way credit card companies communicate with their customers.

First up, the CARD Act has played a big role in significant cuts in interest rate hikes. Credit card issuers can no longer raise interest on a whim and they cannot raise interest rates unless a card holder has missed two payments in a row. Not only that, but consumers must now be given at least a 45 day notice prior to any changes in their APR. This allows consumers the opportunity of canceling their account. It’s believed that prior to the law’s passage, up to fifteen percent of all credit card accounts were hit with rate hikes with no warning. Less than two percent of credit card accounts have been hit with these increases now – and the consumers were given proper notice.

Consumer Education

Another important element of the law which has empowered consumers is the efforts made in educating them. One third of all credit card consumers are now paying off their debts faster. The law makes it mandatory for lenders to show how long it takes to pay off credit card balances using different dollar amounts versus the minimum payment.

Many consumers are shocked by just how difficult it is to pay down their debt. The average American credit card carries about $10,700. The average interest rate is 24.99%. Using those numbers and making the minimum payment, which calculates to $213.50 on that balance, a consumer will, in ten years, have paid $26,930. This is double the original balance, but not only will that consumer not paid his balance, it will have increased. He now owes $11,790. Twenty years later, he will have made $56,660 in minimum payments. He now owes $13,016. Thirty years, he’s paid more than 800% of the original balance, totaling about $89,000 – and you guessed it – he still owes the original balance plus some. The new laws don’t change that, but it ensures a consumer is better informed prior to opening new accounts.

It’s clear that awareness has been raised. It’s due, according to many, to the information that’s now included on monthly credit card statements.

Restricted Late Fees

Another benefit of the law is that late fees were restricted. In its first year, the law cut late fees from more than $900 million to $427 million. A full 52 percent of households had late fees in 2008. Last year, there were 28% who were stuck paying those fees. The late fees themselves have been slashed, as well, from $35 to $23. Not only that, but over the limit fees have been significantly reduced. Currently, less than one percent of credit card accounts are hit with over the limit fees. Compared to 12 percent from 2008, it’s clear the law is working.

Despite the benefits of the law, there are those who say it’s too far-reaching – and many of those complaining are the consumers themselves. One of the complaints has to do with the way credit decisions are made. One rule requires credit card companies and banks to only consider the applicant’s income instead of the total household income. This was problematic for those who opted to stay home versus continuing with their careers when raising a family. Efforts have been made to make the necessary revisions to the law, which affected about 5 million full time stay at home moms and dads.

The intent was to keep college students from using their parents’ income for qualification purposes. The Consumer Financial Protection Bureau proposed changes to rule this past October. The revision would let creditors include shared income for a stay-at-home spouse or partner age 21 or older. It would fall to the lenders to determine how much money the applicant has access to in order to pay bills and would apply to all applicants, regardless of whether they’re married or not. The changes haven’t been finalized, but it’s believed those modifications, if approved, will take affect later this year.

Of course, this is in no way a final cure-all but it has made significant differences in the lives of millions of consumers and has provided what is so far the only speed bumps banks and credit card companies face. Despite other laws, including Frank Dodd, that seek to rein in recklessness in the banking industry, the 2009 CARD Act has at least put into place protective mechanisms for consumers.

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