Around this time last year, the CARD Act was gaining steam in the legislature. At that time, the Dow and S&P 500 were touching decade lows and anger towards our nation’s banks was peaking. Smelling blood in the water, Congress seized upon the populist backlash against banks and pushed through the reforms of the CARD Act at exactly the wrong time.
Since its passage last spring, the CARD Act has done nothing but damage the balance sheets of American households and will likely prove to be a large impediment to our country’s recovery. Here are just a few reasons why the CARD Act, despite its noble intentions, is a colossal failure.
1.) Interest Rate Increases: Although the Prime Rate has been at historically low levels since December of 2008, variable credit card interest rates, which are generally tied to the Prime Rate, are higher today then they were in December of 2008. Many Americans saw their interest rates doubled or tripled during 2009, as some credit card companies raised rates as high as 29.99%.
On the surface, this can be sold as the actions of greedy credit card companies. In reality, these rate increases were defensive moves taken because the new laws now limit the ability to re-adjust interest rates based on risk. Knowing they would be prohibited from raising rates on delinquent and problematic borrowers in the future, the banks proactively raised rates across the board. And American consumers are paying the price, using dollars that may have been spent to stimulate the economy to stay above water on their credit card debt.
2.) Credit Card Limit Decreases: Perhaps the most common consumer complaint in recent months, credit limit decreases have become one of the few remaining tools banks have to manage credit card risk. Consumers deemed risky are seeing their credit lines pulled when they need them most, removing both an economic safety net and the stimulative effects the use of these credit lines could be having on the economy.
To make matters worse, credit limit cuts are likely damaging credit scores, as many consumers see their credit utilization ratios skyrocket. Because credit utilization ratios account for about one third of credit scores, many borrowers, through no fault of their own, are being pushed down the credit quality ladder. This is increasing the cost of all loans and leaving many unable to qualify for the low mortgage rates that should be fueling a stimulative housing recovery.
3.) Access Denied: With sky high interest rates and reduced credit limits, consumers seeking out new credit cards for 0% APR balance transfers or simply to ease them through a financial rough patch are finding that, if they can get access to a new credit card, the terms are much less generous than they were a year ago. 18 year-olds can vote and buy cigarettes, but they need a co-signer or “sufficient income” to get their first credit cards. Once again, access to reasonably priced credit is being shut off and the once steady flow of credit from banks to consumers to businesses is now a mere trickle.
While it is difficult to argue against the reality that credit card reform was long overdue, it is relatively easy to argue that the timing of the CARD Act was disastrous. In the long run, the CARD Act will provide useful consumer protections. Unfortunately, the cost of protecting American consumers in the future is being paid by American consumers today, at a time when they can least afford it.
-Jeffrey Weber
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