Pew Finds Credit CARD Act Will Save Consumers Billions

Washington, DC — The Credit CARD Act of 2009, with major provisions taking effect this month, will save American cardholders billions of dollars by banning unfair or deceptive practices, according to research from the Pew Safe Credit Cards Project.  Just two of these practices – retroactive rate increases and “hair-trigger” penalty interest rates – were costing U.S. consumers a minimum of $10 billion per year.

Congress designed the Act to be implemented in three phases. The first part of the law took effect last summer, and the second phase begins on February 22.  The third and final stage of new protections will be enacted in August when the Federal Reserve issues its final rules on “reasonable and proportional” penalty fees and charges. 

“The implementation of the Credit CARD Act is a major victory for millions of American households, many of whom will be able to save hundreds or even thousands of dollars,” said Nick Bourke, manager of the Pew Safe Credit Cards Project. “Yet, there is more work to be done. In the coming months, the Federal Reserve will issue rules on ‘reasonable and proportional' penalty fees and interest rates, and we urge regulators to establish common sense guidelines to improve consumer safety and transparency of credit card products.”

According to the Project's latest research, the median penalty fee for late payments is $39 and the median penalty annual percentage rate is 28.99 percent. This type of penalty pricing can cause significant financial harm to credit card holders. For example, a cardholder with a modest balance of $3,000 will have a minimum monthly payment of roughly $68. However, if the consumer falls into penalty status they will experience the combined effect of increased interest rates and fees, which may raise the minimum payment by 107 percent to $141. Additional details are available in the Project's new fact sheet Moving Towards Safer Credit Cards (PDF).

“We are seeing instances where Americans are being charged excessive penalties for exceeding their credit limits by even one dollar. A $39 fee for exceeding a credit limit by just a few dollars, or for missing a $70 minimum payment deadline by a few hours, is difficult to justify as ‘reasonable' or ‘proportional' under the factors identified in the new law. Altogether, these penalties can more than double cardholders' minimum payments” said Bourke. “We encourage regulators to implement strong rules that directly address disproportionate penalties.”

Based on the Project's current research and the Pew Safe Credit Card Standards released last year, Pew encourages the Federal Reserve to take the following steps:

• Restrain the size of penalties relative to the amount past due;
• Limit how high penalty interest rates can climb and how long they can apply; and
• Stop “hair trigger” late fees and eliminate overlimit fees entirely.

The Pew Health Group is the health and consumer product safety arm of The Pew Charitable Trusts, a nonprofit organization that applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life. www.pewtrusts.org/health.