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How Credit Card Reform Totally Worked

Thanks to new rules, credit card issuers are limited in what fees they can charge. And they're actually charging fewer fees, especially to the riskiest borrowers.

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The CARD Act, signed by President Obama in May 2009, was the largest overhaul of the $688 billion credit card — and 470 million cards — industry in years. The legislation instituted a wide variety of protections that took aim at some of the fees that consumers understood the least and banks profited from the most. More than three years after it began to take effect, the evidence is starting to trickle in on whether or not the legislation has been effective at protecting consumers, especially those riskiest borrowers, with lower credit scores, who were the richest source of fees for banks issuing credit cards.

Some of the rules instituted by the CARD Act mandated that customers had to be given 45 days' notice before an interest rate jump and be given statements three weeks before a bill was due. It also stipulated that issuers could process payments only above the credit limit (and charge the requisite fee) if the customer opted in, and said that fees for going over the credit limit could be charged only once per billing cycle. The act made a raft of new regulations on credit cards for borrowers under 21 and college students.

Payments for interest and fees are lower.

The CARD Act's limits on fees are working, according to a new paper from four research and government economists that looked at 150 million credit card accounts that cover about 40% of all credit card counts. Over the limit fees, which the CARD Act greatly restricts and increases transparency for charging, used to be about 1% of a credit card user's average balance and have fallen to about zero. Now that banks have to clearly disclose their structure for late fees and get explicit permission to even process the charges that incur the fee, people have basically stopped going over their credit limit.

Something similar happened to late fees, which used to be about 2% of balances — they've been cut in half to 1% of daily balances. Overall, the cost savings on fees alone, about 2.8% of annual borrowing on credit cards, have dropped by $21 billion per year thanks to the new restrictions. And the decline has been the biggest for borrowers with the lowest credit card scores: For borrowers with FICO scores below 620, fees went from 23% of their average daily balance to 9%. Those borrowers represent 17% of all credit card accounts.

Cards aren't getting more expensive.

With revenue from fees cut off by the new legislation, one might expect that credit cards would get more expensive, especially for those with worse credit. But the researchers "[did] not observe a sharp uptick in interest charges" while the CARD Act was being implemented. Even new credit card contracts, issued after the rules were fully in effect, don't have an "uptick or gradual increase" in pricing, while the "number of new accounts opened and the credit limits on new and existing accounts seem unaffected or are even increasing during the CARD Act's implementation period."

Once again, the credit card borrowers with the worst credit are seeing the biggest gain, according to the paper, the low-FICO score borrowers with fee drops of 10% "did not experience a resulting increase in interest charges" compared with credit card users with better credit whose fees stayed steady as the bill was implemented.

Cards are still profitable and available.

What's interesting about credit cards is that if you have pretty good credit, you're probably costing your bank to have a card with them. The researchers found that card holders with FICO scores below 620 generated profits of 7.9% of their balance, while the most creditworthy generate 1.5% profits on their balance and those in the middle, with FICOs between 660 and 719, cost their bank 1.6% of their balance.

The four economists conclude that "credit cards are a particularly profitable segment of the banking industry," and that "at the height of the financial card issuers were earning their largest profits from the subprime segment of the market."

That's a changed a little thanks to the new rules: For the riskiest borrowers, net income for card issuers dropped 18 percentage points, while it dropped around 3 percentage points on average.

But if the profitability of cards has fallen off, will banks restrict consumer credit? This has been the argument of the American Bankers Association, which said in a letter to the Consumer Financial Protection Bureau this year, "Credit card interest rates are higher, despite the fact that interest rates are at historic lows."

But the researchers say that the data doesn't quite bear this out: If there was an overall trend of lower interest rates that was forestalled by the regulations, then you'd expect the risky borrowers who had the biggest drop in fees due to the CARD Act to have higher interest charges, compared with those borrowers with good credit whose fee payment were not affected by the new rules.

That didn't happen, and instead the researchers have found that the risky borrowers whose fees were reduced did not see their interest charges go up any more than the high FICO score cardholders — indicating that the CARD Act didn't raise interest rates compared with a downward trend.

Matthew Zeitlin is a business reporter for BuzzFeed News and is based in New York. Zeitlin reports on Wall Street and big banks.

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