Ten years ago, on May 22, 2009, credit card customers got some needed relief when the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) became law. Since then, the law has saved consumers an estimated $12 billion a year, which translates into well over $100 billion in total savings over the past decade. As the New York Times reported, the CARD Act proved so effective that it led economists studying the law to a single conclusion: “The regulation worked.”
Before the CARD Act, some credit card companies took advantage of their customers by raising interest rates or changing the terms of their contracts without notice. Hidden terms and fees were lucrative for credit card companies but they were extremely costly to consumers. However, the new law was revolutionary, establishing strict rules for how credit card companies must treat their customers, barring many unfair practices. On the 10th anniversary of the CARD Act, it is important to remember how far we have come and also to look ahead to changes we still need to make.
So what did the CARD Act do? For starters, it protected consumers from arbitrary interest-rate increases by prohibiting retroactive rate hikes. Companies now are required to provide 45 days’ notice of a rate increase and cannot raise rates on existing balances. In the past, companies regularly increased your interest rate if your risk profile worsened – now they are required to decrease rates if your credit picture brightens. That is only fair.
But consumers were also getting socked by a host of fees, so the CARD Act introduced some common-sense changes that made it much less likely that consumers would be hit by these fees. The law requires companies to mail credit card bills at least 21 days before the due date; it prohibits companies from charging extra fees for paying online or by phone; and it requires companies to apply payments to balances with the highest interest rate first. All of these changes save consumers money.
The law protects young people from aggressive marketing tactics. Companies no longer can sell cards to individuals under the age of 21 without an adult co-signer.
The law also protects consumers when they cancel their credit card. In the past, a company could demand immediate payment of your balance. Now, a customer has five years to pay off the balance.
These important changes have kept money in consumers’ pockets. The next battle is to institute fair, common sense regulation of the overdraft fees on bank accounts. Some financial institutions use “overdraft protection” to slap their customers with exorbitant fees. With the growing use of debit cards, it’s easier than ever to overdraw a checking account, with fees that can run as high as a 17,000 percent annual percentage rate, according to the Consumer Financial Protection Bureau. That’s not a financial service – it’s a robbery.
That is why, since 2005, I have been introducing legislation that would ban abusive overdraft practices like reordering transactions in order to maximize the number of fees banks can charge, and to require overdraft fees to be proportional to the size of the overdraft — no more $35 overdraft fees for a $2 cup of coffee. My bill would also require banks to notify consumers that a purchase or an ATM withdrawal is about to trigger an overdraft, and provide consumers with a choice of whether to accept the overdraft service and fee. That, like the CARD Act, would prevent millions of Americans from unwittingly losing money to their banks.
Opponents of the CARD Act said that trying to limit the fees credit card companies charged would prove unsuccessful and that companies would just create new fees. But that has not happened.
So when people tell me that regulation does not work and is costly, I remind them that well-crafted consumer protections will not only work, but can save Americans tens of billions of dollars. The CARD Act is proof.
Carolyn B. Maloney represents New York’s 12th District. She is Vice Chair of the Joint Economic Committee and is a senior member of the House Financial Services Committee. Maloney is the author of the CARD Act, which President Obama signed into law May 22, 2009.