Credit cards are a fixture of US economic life. For consumers who use a credit card simply for convenience and pay off the balance in full each month, credit cards generally work well. Problems may occur when a consumer carries a balance, and gets caught in a spiral of high interest rates, fees, and penalties.
Total credit card debt has decreased in recent years. According to the Federal Reserve Board (FRB), credit card debt grew from $730 billion in 2002 to a record high of over $1 trillion in 2010. As of June 2016 consumer credit card debt had decreased to $729 billion. The FRB’s Survey of Consumer Finances found that in 2013 a large percentage of American families had credit card debt, including 43 percent of families headed by people age 55-64, 33 percent of families headed by people age 65-74, and 21 percent of families headed by people age 75 and older.
Unmanageable debt causes many seniors to seek bankruptcy protection. A study conducted for AARP found that in 2009, 70 percent of all adults and 60 percent of those age 50 and older reported having debt or loan obligations. The study found that of respondents with debt, four in ten had debt that totaled more than half their income. One in ten respondents said they had either filed or considered filing for bankruptcy. A 2010 study from the Institute of Financial Literacy found that people age 55 and older accounted for 30 percent of bankruptcy filers, up from 22 percent in 2006. Credit card debt is one of the top reasons seniors file for bankruptcy, according to some reports.
Deregulation of the credit card market, in which state laws limiting interest rates and fees were nullified by two US Supreme Court decisions in 1978 and 1996, drastically changed the way issuers price credit cards and market them to consumers of all ages. The result is that penalty interest rates, high and accumulating fees, and interest on fees often push consumers over the financial edge. In fact, consumers in debt trouble sometimes owe as much or more in fees and penalty interest charges as they do in principal. For the growing numbers of seniors who are unable to make more than the required minimum monthly payments on their cards, industry practices can lead them into unmanageable credit card debt.
The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009—prior to the effective date of this legislation in February 2010, the initial and contract terms in credit card applications were complicated and frequently written in small print and complex legalese. In addition, expansive change-in-terms provisions, which gave credit providers the discretion to revise key contract terms simply by sending notices to their customers, greatly weakened the usefulness of initial disclosures and contract terms in making wise credit choices. Card issuers also could raise interest rates or fees because of something unrelated to the consumer’s payments to the credit card company.
The calculation methods for annual fees, fees for cash advances, rebates, minimum finance charges, over-the-limit fees, and late fees made it difficult for consumers to estimate what they owed each month. In addition, the practice of calculating the average daily balance based on two billing cycles rather than one effectively eliminated the grace period for cardholders carrying a balance.
To address these consumer problems, Congress enacted the Credit CARD Act, which put in place a wide variety of consumer protections in the credit card marketplace:
- Credit card issuers cannot arbitrarily increase interest rates on existing balances.
- Issuers are prohibited from increasing interest rates for one year after an account is opened, and introductory rates must last at least six months. If they do increase consumer’s interest rate, they must also periodically review the account to determine whether a decrease in the rate is warranted.
- Issuers may charge over-limit fees only when the cardholder authorizes over-limit transactions.
- Fees and penalties must be reasonable and in proportion to the offense.
- Credit card statements must be mailed 21 days before the bill becomes due, and the average daily balance must be calculated off of one billing cycle.
- Consumers must receive at least 45 days’ notice of changes in interest rates and finance charges.
- Issuers are required to provide individualized pay-off information whenever terms change.
A 2015 Consumer Financial Protection Bureau (CFPB) analysis found that the Credit CARD Act helped consumers avoid over $16 billion in over-limit and late fees since its enactment in 2009. Further, the total cost of credit to consumers fell by 2 percent, and the availability of credit card credit increased by 10 percent. In addition, more than 100 million new credit card accounts were opened in 2014, belying concerns expressed prior to enactment that the new rules would price consumers out of the market, constrict the availability of credit, and even drive some companies out of business.
Prepaid cards—consumers are increasingly using prepaid cards for financial transactions instead of using cash or traditional banking services like checks or credit cards. According to the CFPB, the amount put on prepaid cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. The total dollar value loaded onto prepaid cards is expected to nearly double to $112 billion by 2018.
Many consumers, particular those with low incomes, rely on prepaid cards in lieu of a checking or bank account to make purchases and gain access to funds, but they lack key consumer protections. In 2016 the CFPB finalized a new rule for prepaid account users that requires financial institutions to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, and give consumers easy and free access to account information. The rule also includes new “Know Before You Owe” prepaid card disclosures to give consumers clear, up-front information about fees and other key details. In addition the rule provides that prepaid companies must offer protections similar to those for credit cards if consumers are allowed to use credit on their accounts to pay for transactions they do not have the funds to cover. The rule requires, in such cases, that prepaid companies determine a consumer's ability-to-repay a loan on their prepaid card and imposes important limits on credit repayment practices. However, it does not ban overdraft fees entirely.
Debit and Credit Cards: Policy
Disclosure of fees and terms
Disclosures must be clear, accurate, and informative so that consumers can make more meaningful credit card purchase decisions.
All fees, charges, and other costs of credit should be included in the finance charge so consumers will know the total cost of their credit and can make accurate comparisons among cards. The periodic statement should clearly identify the smallest dollar amount that the consumer can pay and still amortize the credit balance.
Capping interest rates
A floating interest-rate cap should be established as a maximum. This cap should be adjustable to a widely recognized independent index and reasonable in relation to prevailing lending rates. The cap also should protect consumers against potential cost shifts.
State regulation of credit cards
States should provide uniform guidelines to protect consumers against deceptive or usurious credit practices and to ensure access to credit; they should include provisions on advertising, disclosure, and reasonable interest rates, and protections against unreasonable tightening of credit availability and unwarranted cost shifts (through increases in annual fees).
The dual state-federal system of regulating credit card issuers must be preserved. States should be free to further strengthen minimum federal disclosure requirements and other consumer protections.
The Consumer Financial Protection Bureau should:
- carefully monitor and enforce compliance with prepaid card rules;
- prohibit overdraft or shortage fees;
- prohibit direct-deposit account advances with high fees to ensure that general-purpose reloadable cards do not have the same disadvantages as high-cost payday loans; and
- require employers and government agencies who distribute GPR cards to negotiate the best possible deal on behalf of card recipients.