Are We Better Off With the CARD Act, or Not?

Between 2007 and 2009 most of the large credit card issuers were changing the terms of some of their customer’s accounts.  The reason they did so was because of a general lack of comfort for credit risk as well as the slumping economy.  Changing the terms was and still is allowed under almost any circumstance, depending on the cardholder agreement.

Some of the more common actions being taken by credit card issuers before the CARD Act, and the reasons why, are as follows;

Credit Limit Reductions – This was being done on a very large scale.  In fact, Fair Isaac published the results of a study that measured the breadth of credit limit reductions during a 7-month period in 2008.  Their findings showed that 16% of cardholders saw their credit limits reduced in 2008, which translated to roughly 32 million consumers.  Out of the 32 million, 22 million had a median FICO score of 770.  This means that their credit limits were reduced for a reason other than poor credit or elevated credit risk.  For these people it was because of inactivity, under-usage, or general lack of profitability.  The remaining 11 million did have some sort of credit problem such as late payments, collections or adverse public records hitting their credit files so the reduction in credit limits wasn’t a surprise.  What is important to remember is this study took place over a 7-month period from April through October 2008.  Credit card issuers had been lowering credit limits since October 2008 and were doing so well before April 2008.  What this means is the FICO numbers, while very accurate for the time frame covered, were likely to underplay the true amount of consumers who had seen their credit limits reduced.  Credit limits can still be reduced, post CARD Act.

Increased Interest Rates – There were no numbers to quantify the breadth of rate increases but we know it was significant.  The excuse being given by some banking industry leaders was that a rate increase was meant to be both punitive and motivational.  It’s punitive in order to punish cardholders who have done something wrong, like missing a payment due date.  And it’s motivational because the logic is if your debt is more expensive then you’ll be more likely to pay it off faster.  And while both are certainly true in some circumstances it’s hard to honestly argue that increasing an interest rate always leads to a consumer accelerating their payments.  In fact, an alternative and much more damaging result is more likely, which is to push an already struggling consumer over the edge into default.  This doesn’t do the consumer or the creditor any good because of the damage it does to the consumer’s credit files and credit scores and it could motivate the consumer to seek the services of a debt settlement company or even a bankruptcy attorney.  In either of the latter cases the lender gets much less, if any, of the money they are owed. Rates can still go up for almost any reason but retroactive rate increases are no longer legal, unless you go delinquent on the account.

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Increased Minimum Payment Requirements – The amount of money you are required to pay your credit card issuer each month is referred to as the “minimum payment required.”  This amount is a percentage of the overall balance.  Normally it’s 2% of the outstanding balance.  But, in the months throughout 2008 some credit card issuers had increased that minimum requirement to 5% from 2%.  This means if you were normally making a $350 minimum payment now you are required to make a $875 minimum payment.  Don’t misinterpret this as them gouging you.  In this case they simply want back more of their money, faster.  But, this also can lead to consumers defaulting on loans because they simply didn’t have the capacity to make the larger monthly payment. Minimum payment increases are still legal.

Reduction in Grace Period – The grace period is an often misunderstood component of a credit card account.  The grace period is the amount of time between when the statement billing period has closed and the date when your payment is due.  A simpler way to define the grace period is the period of time before interest begins to accrue on the balance.  Some people incorrectly define the grace period as being the amount of time AFTER the due date a payment can be made before the credit card issuer starts to report your account to the credit bureaus as being past due.  That’s incorrect.  Grace period has nothing to do with credit reporting.  The reason a grace period would be reduced is all about cash flow for the bank.  If you never revolving a balance from one month to the next then you’re not going to earn the bank any interest income.  As such, it would be reasonable for the bank to want their money back faster since it’s not earning for them.  This allows them to lend it out to other people who are going to generate more income.   The CARD Act mandated a 21 grace period, which had shrunk on many accounts down to 14 days.

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