We almost fixed the credit card industry. Here’s what’s left to do


(Daniel Acker/Bloomberg News)

Not too long ago, credit card companies could jack up your interest rate or change your payment due date without warning, a tactic that, not surprisingly, led to late payments. And if you paid late or exceeded your credit limit, you'd get hit with hefty fees. But no more.

All of those sorts of abusive — and very lucrative — practices are no longer the norm thanks to the Credit Card Accountability, Responsibility and Disclosure (CARD) Act. The landmark legislation to clean up the credit card industry was signed into law five years ago this week, and it has since shed light on the once opaque pricing structure that allowed credit card companies to put the screws on customers.

But for all that the legislation accomplished in the past five years, it's failed to prevent credit card companies from peddling useless debt-protection products or murky promotional financing deals.

The law also didn't address many of the same eyebrow-raising antics in the debit card market. Industry lobbying during the fight over the bill resulted in carve-outs for bank-issued debit cards and prepaid debit cards, which continue have minimal consumer protections.

Still, there is a lot to celebrate on the CARD Act's anniversary consumer advocates say, even as they rally for tweaks to the law. Here's a breakdown of what went right:

Savings: A recent study from New York University estimates that CARD Act fee reductions have saved consumers $12.6 billion a year since being enacted. Researchers examined 150 million credit card accounts and found that limits on fees reduced overall borrowing costs to consumers by an annualized 1.7 percent of average daily balances. The sheer volume of fees that credit card companies used to charge has declined. Gone are fees for not using your card and multiple fees in a single billing period for being late on a payment.

Faster repayment: Because credit card statements must now say how long it will take to pay off the balance if you only pay the minimum each month, people are apt to pay down the debt faster, according to a report by Demos. One third of the households surveyed by the liberal think tank said the new disclosure has led them to do just that.

Lower late fees: A key change brought about by the CARD Act was the requirement that penalty fees be "reasonable and proportional" to the violation of account terms. In the past, credit card companies would, for instance, charge a $35 late fee for a $25 minimum payment that was two days past due.

Once the law took effect, late fees came down because companies could not charge more than $25 unless one of the previous six payments were late. The Consumer Financial Protection Bureau estimates that the average late fee went down by $6, leading to a $1.5 billion reduction in the amount of fees paid by cardholders in 2012.


And that brings us to the shortcomings of the CARD Act:

Deferred interest cards: You've probably seen these products, or even have one. Retailers often peddle this kind of plastic that lets customers finance purchases without interest for a period of time. Here's the catch: If the balance is not paid in full by the end of that period, you will get hit with accumulated interest. Some of these cards will also charge you a daily periodic interest rate, even during deferred interest periods.

Say you opt for the credit card financing plan to buy a $1,600 MacBook Air. There is zero interest for 12 months under the terms of the deal, but the card carries a 20 percent interest rate that takes effect once the period is up. If it's a deferred interest card and it takes you 13 instead of 12 months to pay off the computer, then you will owe retroactive interest. This part of the deal is not always clear, which is why regulators are now examining the risks.

Overdraft fees: Most credit card companies stopped charging customers for going over their credit limit after the CARD Act. The law lowered the fees and required that customers opt-in to have limit-busting transactions covered by card issuer, with the understanding that customers pay fees for the service.

That same opt-in feature was applied to debit cards, but with limited impact because banks often fail to inform customers of the right. And since there are no caps on the fees banks can charge for overdrawing your checking account, there's little incentive to curb the practice.

There are also no restrictions on the tricky ways banks can trigger multiple overdraft fees. Ever heard of reordering? Let's say you had $900 in your checking account. You pay your $300 student loan bill, $500 car note and $150 electricity bill, or $950 in charges. Then you accidentally spend $100 at the grocery store. No sweat, you figure its only one standard $35 overdraft fee. Oh no, my friend -- your bank decides to process the transactions from largest to smallest. After the car note and student loan payments go through, there is only $100 left and two more debits to go, leading to two overdraft charges.

There are tons of people who prefer to have the option of overdraft, but banks are not transparent about the service. The CFPB has studied the issue and could write rules to end onerous practices like reordering.

Fees and term disclosure: In line at your local drug store, you're bound to see a rack filled with prepaid debit cards that have most of the features of a checking account. Some cards have concise explanations of fees, others do not. And there-in lies the problem: There is no industry-wide standard on prepaid card fee disclosure. The entrance of big players like JPMorgan Chase and Wal-Mart into the space has driven down fees, but there is no legal requirement for any of these companies to spell out all possible charges to consumers.

Danielle Douglas-Gabriel covers student debt. Before that, she wrote about the banking industry.
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