After the financial crisis of 2008, regulators scrambled to develop new rules that would prevent a catastrophe of this nature from happening again. Thus the Credit Card Accountability Responsibility and Disclosure Act of 2009 was born.
Commonly referred to as the CARD Act, this has put into place new regulations requiring fewer fees and more transparency from lenders. Now that one year has gone by since the act went into effect, thereâ€™s enough preliminary data to determine if itâ€™s working. So far, signs are pointing to yes!
According to a study explained in detail in the New York Times, fees and interest rates have taken a drastic dive â€“ even for subprime borrowers: â€śThe study shows just how the fees added up before the Card Act took effect. Those with the worst credit â€” the subprime borrowers â€” were paying an effective interest rate of 20.6 percent, plus an additional 23.3 percent in fees. Most of those fees are now gone.â€ť
Read on to find out just how much this act has changed the climate for borrowers and what you can do to benefit even more.
How the Card Act Has Effectively Changed the System
Once people started picking up the pieces after 2008, the American public made it clear that they wanted more transparency in lending. More transparency and fewer fees would be the only way consumers could feel good about getting back into the credit market again. The CARD act responded to this need and these are the results:
A limit on interest rate increases. Previously, credit card companies could raise interest rates without a momentâ€™s notice. This inevitably would lead to higher minimum payments and/or longer repayment terms, since less of a consumerâ€™s payment would go to principal. Now these rate increases are less common and the creditor is required to notify the consumer prior to the increase, giving the consumer time to act.
Reduction in fees. Late fees and overlimit fees used to be common practices that would plunge consumers even further into debt. The CARD Act has limited these fees greatly. Now, late fees have to be â€śreasonable and proportionalâ€ť and are not occurring as frequently thanks to a new rule that credit card bills due dates have to be the same each month.
Overlimit fees are bound by the same limits as late fees and canâ€™t even be charged unless a consumer opts-in to allowing transactions which would go over the limit to go through. In that case, if a consumer doesnâ€™t â€śopt-inâ€ť, then overlimit transactions would be denied and new late fees issued.
More Transparency on Costs. Finally, the CARD Act has succeeded in making costs clearer to the consumer so that they can make more informed decisions with their credit. This transparency is available on a consumerâ€™s monthly statement, which now must show how long it will take to pay the debt if paying minimum only, how much a consumer would have to pay each month to eliminate the debt in three years, and total interest and fees charged year to date.
This information gives consumers the power to make better payment decisions and a powerful insight into the cost of their credit.
A byproduct of the changes brought on by the CARD Act, combined with a real need for banks and lenders to get back into the good graces with borrowers, has led to even more favorable borrowing conditions, such as lower interest rates. This is thanks in part to the competition banks and lenders now feel to gain new customers and keep their current customers happy.
How Consumers Can Remain Ahead of the Fee Game
For many, credit card statements are both difficult to navigate and a reminder of something most of us donâ€™t really want to deal with. However, if you typically toss your statement aside each month, you could be seriously missing out.
According to the New York Times article on this study, the typical consumer only pays attention to three things on their credit report: APR, Annual Fee, Rewards
While these three factors are undoubtedly important, theyâ€™re not all you should know about. If you donâ€™t read your statement, you could find that youâ€™re paying on fees you didnâ€™t know about, paying for services that you didnâ€™t know were included, and paying for services that could be costing you more than helping you. (For a detailed list of marketing ploys and add-ons that The CARD Act is going after next, view the bottom of this page on the Consumer Financial Protection Bureau website.)
Thatâ€™s not all. Ignoring the fine print on your credit card statement renders some of the The CARD Actâ€™s benefits useless to you. Now that banks and lenders are required to be more transparent about changes on your account such as new fees, an increase in your interest rate, etc., you actually have time to act on these changes. That action could be calling and asking your lender to reverse the changes or finding a new lender which better meets your needs.
The point is, The CARD Act is providing a way for consumers to be better informed on their accounts and thus empowered to find more favorable terms. But this can only work if you stay up to date on all of the details of your accounts. This may take time to get started on but itâ€™s well worth it for the money you could save in the future.
Image credit: sergign
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This post was published by Shannon, Community and Customer Support Manager for Â»Â ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.Download