• Home
• Checking Accounts – Everything You Need To Know

‘Gotta Give ‘em Credit’:

Consumer Concerns & the Credit CARD Act of 2009

Over the past decade, credit card debt has increased by 25% in our country. Nearly half of all Americans carry a balance on their cards. Those who do carry an average balance of more than $7,000. [...] Millions of cardholders have seen their interest rates jump in just the past six months. One in five Americans carry a balance that has been charged interest rates above 20%. One in five.

- President Obama

At the signing of the Credit CARD Act of 2009, 5/22/09.

I

In the recently passed Credit CARD Act of 2009 (1), Congress set into law some requirements for how credit card issuers must operate. These requirements cover billing procedures, internal procedures, and consumer access to account information and payment methods. Regulation of the terms of teaser rates and the disclosure of information to consumer reporting agencies will also effect advertisement and inter-bank communication, respectively. This broad regulation will limit certain ways in which these companies make money from their customers.

…[W]e’re not going to give people a free pass; we expect consumers to live within their means and pay what they owe. But we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives.

- President Obama

Ibid. (2)

Since the passing of this act, credit card companies have increased rates and fees, including the required minimum monthly payment, the transaction fee for balance transfers, and the interest rates of even more of their customers. The aim is to both make more money on current customers as well as set the standard fees high enough that customers who join after the CARD Act comes into effect (February 2010) will still help their bottom line. Right now it’s not looking great for card issuers. They are posting record-high 10.4% (3) losses on credit card debt due to, among other things, a high number of customers defaulting (4). Understandably, these companies want to avoid losing even more money.

Samuel Wang, vice president for public affairs at Citi, would not disclose details of the rate increase but said the company adjusts pricing as part of a regular review of accounts. ‘These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit,’ he said.

- Nancy Trejos

“Credit Card Issuers Raising Rates Ahead of the New Law” (Washington Post)

Members of congress have publicly stated their frustration with these new fees. Senator Charles E. Schumer, addressing what he calls the money these companies are “wring[ing]” out of their customers, said “It is against the spirit of the law, and it’s just plain wrong” (Trejos, cited above). DR from DoughRoller gives a good explanation of the banks’ reaction to the the Credit CARD Act in a post regarding the Act as it appeared in 2008 (5):

[The Credit CARD Act] won’t stop credit card companies from making the profit the market allows them to make. What it will do, however, is change how they do it. The point is that credit card companies make what the market will bear.

- DR

“Credit Card Reform Act of 2008–Congress to the Rescue” (DoughRoller)

In order to minimize losses, credit card companies will have to do adjust their practices and find new revenue stream that the new market will allow. This brings us to the questions I now want to address:

• What will the market bear?
• How many ways can fees be tacked onto contracts before the card issuers lose customers?
• And most importantly, at what point will people stop opening poor credit card accounts?

II

While fixing the current problem for credit card companies is far from easy, minimizing future problems is necessary for promoting stable relationships between financial institutions and their customers. Fees publicly deemed ’sneaky’ have headlined the attack on card issuers, and I don’t think it’s presumptuous that  customer relations would improve if these companies promoted transparency.  As covered earlier in FABB.log, members of the AIGA Design for Democracy suggested a “Credit Card Facts Box” similar to the nutrition facts found on the side of food items we buy at the grocery store. A simpler design alone cannot change the ways in which people use credit, but a clear, thoughtful presentation of facts can lead customers into a better understanding of the contracts they sign, prepare them to successfully manage their accounts, and grant them a larger feeling of responsibility regarding their debt.

Unfortunately, incorporating the “Facts Box” into the current legislation is out of the public’s hands, and an equivalent measure is not stated explicitly in the passed Credit CARD Act. I think it’s safe to assume that major banks won’t present their customers with a “Facts Box” on their own accord, so while a standardized, intuitive design of contract descriptions is practicable, it’s far from probable.

The evidence so far suggests that the credit CARD Act is likely to bring about moderate, and even positive, changes. Card issuers, after all, need to retain customers. Any bank that attempts to pad its bottom line by, say, levying large annual fees will likely see its customers flee to credit unions or to banks that emulate the credit union model.

- Ryan Bubb & Alex Kaufmann

“A Fairer Credit Card? Priceless.” (NYTimes)

It is possible that the Harvard doctoral candidates in Economics quoted above are right in saying that large annual fees will turn off customers from a bank, but I believe that their prediction reflects the theory of a perfect market more than the real things that influence how people pick a financial institution. These influences include friends’ suggestions, obvious proximity to a branch, advertising and marketing, and imperfect knowledge in general. And when we recognize the impact of these factors, it’s not surprising that many people will open accounts at popular financial institutions that put money into advertising campaigns rather than using it to offer better customer service or lower “service” fees.

The solution is far from clear, but now seems as good of time as any to put great consideration into the concerns of many Americans who can’t find a good credit card and settle for a mediocre one.

Notes

1. Summaries of the Credit CARD Act of 2009 are offered by GE Miller (here) and by the Congressional Research Service (here). The full bill can be found here.
2. Please note that emphasis (bold) in all quotations in this post are mine.
3. Stacy-Marie Ishmael discusses this statistic in her blog post “US credit card losses hit record, Fitch says” (The Financial Times).
4. See the New York Times Magazine article from May, “What does your Credit Card Company Know About You?” for a compelling case-study and investigation of the methods employed by banks to minimize customer defaults and maximize debt payment.
5. The Credit CARD Act has been floating around Congress for awhile. [See earlier versions from the Senate (2008, 2005, 2004) and from the House of Representatives (2007, 2006)]

Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.