Credit cards are a fixture of U.S. economic life. Americans held approximately $815 billion in credit card debt in early 2018, according to the Federal Reserve Bank of New York—the highest level since 2009. Some consumers use a credit card simply for convenience or rewards and pay off the balance in full each month. Problems may occur when a consumer carries a balance and gets caught in a spiral of high-interest rates, fees, and penalties. Unmanageable debt causes a growing number of older Americans to seek bankruptcy protection. Approximately one-third of all bankruptcy filers between 2013 and 2016 were age 55 and older, compared with only 8 percent of filers in 1991. However, this data is of limited value because bankruptcy data collection methodology and bankruptcy law have changed significantly since 1991.
Deregulation of the credit card market drastically changed the way credit cards are priced and marketed 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. Consumers in debt trouble sometimes owe as much or more in fees and penalty interest charges as they do in principal. Among households with a credit card, 28 percent make only the minimum payment at least occasionally, according to a 2017 Federal Reserve survey.
The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009—to address consumer problems with credit cards, Congress enacted the Credit CARD Act. This put in place a wide variety of consumer protections in the credit card marketplace, including the following:
- Interest rates on existing balances cannot be increased arbitrarily.
- Introductory rates must last at least six months. If interest rates are increased, they must be periodically reviewed 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. 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 more than $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. More than 100 million new credit card accounts were opened in 2014, belying concerns expressed before 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, particularly those with low incomes, are increasingly using prepaid cards for financial transactions instead of using cash or traditional banking services like checks or credit cards. According to the Federal Reserve Payments Study, $290 billion in prepaid card payments were made in 2016.
Consumer Financial Protection Bureau rules for prepaid account users require financial institutions to:
- limit consumers’ losses for preregistered cards that are lost or stolen,
- investigate and resolve errors for preregistered cards, 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 the 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 whether a consumer can afford to repay a loan on their prepaid card and imposes important limits on credit repayment practices. However, it does not ban overdraft fees entirely. After several delays, the rule went into effect in 2019.
Protections against fraud—federal law provides greater protections against fraud for credit cards than for debit or registered prepaid cards. Specifically, federal law limits liability for lost or stolen credit cards to $50 ($0 if reported before a fraudulent transaction is made). For debit and registered prepaid cards, it is $50 only if a reported within two days. Between 2 and 60 days, it is $500. And more than 60 days, there is no limit.
DEBIT, CREDIT, AND PREPAID CARDS: Policy
Disclosure of fees and terms
Disclosures must be clear, accurate, and informative so that consumers can make more meaningful credit card purchase and payment decisions.
All fees, charges, and other customary costs of credit should be included in the finance charge. This allows consumers to know the total cost of their credit and to make accurate comparisons among cards. The periodic statement should clearly identify the smallest dollar amount that the consumer can pay and still pay off the credit balance
Capping interest rates
Policymakers should create a maximum floating interest rate to protect consumers against cost shifts on credit products. This cap should be adjustable to a widely recognized independent index. It should also be reasonable in relation to prevailing lending rates.
Policymakers should provide additional protections for prepaid card users, including prohibiting overdraft or shortage fees. In addition, they should:
- carefully monitor and enforce compliance with prepaid card rules;
- require employers and government agencies who distribute prepaid cards to negotiate the best possible deal on behalf of card recipients; and
- ensure that employers and government agencies offer consumers timely access to wages and benefit payments in an account of their choice, not only on a prepaid card.
Protection from fraud
Consumers should receive the same federal protections for fraudulent transactions for credit cards, debit cards, and registered prepaid cards. Federal regulators should ensure that fraud complaints are addressed promptly and adequately, including with respect to prepaid cards for government payments.