The Credit Card Act of 2009 (Credit Card Accountability, Responsibility, and Disclosure Act of 2009) became effective as of February 2010. So what does it really mean to you? Is it truly designed to protect you or is there a loophole for the credit card companies?
The Card Act was originally intended for consumer protection, but some key issues regarding predatory lending may have been missed. On the surface this bill has multiple protections or improved protections for the consumer, some of those include:
Limits creditors on raising interest rates during the first year
Limits creditors on raising interest rates on existing balances
Mandates longer notice for future rate increases on purchases
Right to pay off the balance on old terms
Limits are set on penalty interest rates, as well as fees
Regulates/Mandates reasonable time to pay by due date
Various rules for young consumers ~ including a minimum age of 21 unless there’s a cosigner
Limits creditors on issuance fees on ‘fee harvester cards’ (typically “bad credit” – credit cards)
Mandates clearer disclosures
Mandates/Regulates gift card protections
So at first glance everything seems pro consumer, however, the key issue for many consumers are banks raising rates. Based on how this law is written, banks may not be able to charge exuberant “annual fees” (no more than 25% of the credit limit), but they can charge whatever they want for an interest rate. The law never mandated a cap on interest rates. It was something brought up but quickly passed over thanks in part to the bank lobbyists…
An article posted on Yahoo Finance by CreditCards.com, quoted Miles Beacom, CEO of Premier Bankcard on this issue. His response to the interest rate increase Premier Bankcard began marketing: “We need to price our product based on the risk associated with this market and allow the customer to make the decision whether they want the product or not,” Premier Bankcard has been getting publicity, whether or not you consider it good publicity is a whole other story. This issue came up when Premier Bankcard sent out offers for credit to a sub-prime niche of customers. The annual percentage rate proposed by Premier was a whopping 79.9% and on top of that, a 75 dollar upfront fee all for a $300 credit limit (notice they are right at the 25% of the credit limit for the annual fee).
While you may think that’s absurd, maybe even illegal, it’s not. This is perfectly legal under the Truth in Lending Act, provided the issuer states or discloses the APR, fees, and other costs in their term & conditions. Before Premier Bankcard was approving applicants at 79.9% (before the CARD Act), they were charging a 9.9 APR, a $29 account setup fee, $95 one-time program fee, $48 annual fee plus a $7 monthly servicing fee ($84 a year). All of this (256 dollars in fees plus 9.9% APR) on a $300 credit limit card.
So which is worse? Believe it or not, the fees before the CARD Act equates to about an 83% APR. The key is, while the intention may have been good, the overall benefits for consumers are still minimal. There is another side to the story. Would regulating a cap on APRs be beneficial? Probably not…
If there were caps set on lenders, they would immediately stop issuing cards to anyone deemed too risky. Why lend to someone risky for a minimal return on investment? The reward isn’t worth the risk. Cutting out the sub-prime borrowers isn’t the only thing that would change. Borrowers with good and excellent credit would be affected too. Let’s face it, a borrower with risky credit can make the lender good money, losing that income would hurt the bottom line and they’d start seeking higher rates on better credit risks to make up that difference. Moreover, they would likely cut reward programs and only make that available to a very small portion of credit card holders. Perhaps the next measure the lenders would have to take is charging annual fees for all credit card holders, something those with good credit now don’t pay…
In conclusion, some parts of this Act will benefit some consumers, whether they know it or not. Perhaps the best part of this Act is increasing the minimum age to 21 (unless they have a co-signer). Even with a co-signer, the banks are now mandated to seek proof this under 21 year old individual has the ability to pay his or her obligations on their own. While this Act may not be the perfect consumer protection act, it may not need to be. Sure there needs to be standards and abuse shouldn’t be permitted, but the consumer also has a responsibility to know what they are signing up for. Consumers today are becoming more financially informed and have a better knowledge on credit than before, so there may not be a need for tougher regulations. The fact is, savings rates have increased, spending has gone down, and the days of reckless spending and free traffic – make sure to go through this web page. The times have come when concise information is truly within one click, use this possibility.
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