In 2009, the Credit Card Accountability, Responsibility, and Disclosure Act, better known as the CARD Act, was signed in to law. One year later, the act went into effect. February 22, 2012 marked the two-year anniversary of the legislation that was supposed to finally put a stop to the predatory policies that banks were using to put middle- and lower-class Americans deeper in to debt while lining the banks' pockets.
Looking at the CARD Act two years later, has it accomplished everything that Washington intended when it swept through Congress with very little public opposition? Washington will tell us that the legislation has made our lives better but is that really the case?
The first place consumers are advised to go when evaluating a credit card is the interest rate, so let's do the same thing. According to Forbes, from 2008 to 2011 the prime rate and mortgage rates fell year-over-year, but credit card rates rose by an average of 2.1%. Existing customers who pay their bills on time may not see these higher rates, but Forbes estimates that the 2.1% increase could mean $16.8 million or more in added interest to a country of credit card users already in debt more than $800 billion combined.
If the CARD Act was supposed to help the lower and middle class that may have a lower credit score, interest rates may tell a different story. Credit cards designed for borrowers with excellent credit scores only saw an interest rate increase of 1.6% on average, but for subprime as well as cards for those with slightly less than excellent scores, the interest rates rose 3.4% from 2008 to 2011.
Maybe you've never used the balance transfer feature on a new credit card, but it remains highly popular for many. Before the CARD Act, 33% of credit card companies put a cap on their balance transfer fees, but today that figure sits at just 4%. In addition, the average interest rate on balance transfers is now 3.3%, up from 2008 levels of 2.1%.
Is It All Bad?
Experts say no. Fewer late fees, over the limit fees and their compounding effects have helped the consumer get out from under the ballooning fees that used to run up the balance, which sometimes triggered more fees. What we've learned from the CARD Act and other financial legislation is that one income stream closing means another will quickly take its place in order to remain profitable for shareholders, an action not unique to the financial industry.
Experts say that the best way to avoid becoming victim to higher interest rates is to use your credit card wisely. Charge only what you can afford to pay off at the end of the month. This makes the interest rate largely unimportant to you. Although banks want to charge for the use of your debit card, most still don't, and using that instead of a credit card is still the best way to keep fees and interest from taking a large bite out of your monthly budget.
The Bottom Line
The CARD Act may have put a stop to the credit card companies' practices that most people found to be unfair and unethical, but no business is going to allow its income stream to be impacted without finding a place to replace its profits. In the future, when we hear of similar legislation, we should always remember that closing one profitable door will only open another, but that isn't always bad.