Credit cards are a fixture of U.S. economic life. Americans held approximately $887 billion in credit card debt in the second quarter of 2022, according to the Federal Reserve Bank of New York. 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 48 percent of all bankruptcy filers in Q3 2022 were age 50 and older.
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 of 2009, also known as the Credit CARD Act, put in place a variety of consumer protections in the credit card marketplace. For example, it prohibits arbitrary interest rate increases. Credit card companies are required to provide adequate notice before increases in interest rates and finances. And fees must be reasonable and proportional to the offense. Other provisions include:
- 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.
- Credit card statements must be mailed 21 days before the bill becomes due. The average daily balance must be calculated off one billing cycle.
- Issuers are required to provide individualized pay-off information whenever terms change.
Between 2009 and 2015, the Consumer Financial Protection Bureau (CFPB) found that the Credit CARD Act helped consumers avoid more than $16 billion in over-limit and late fees. 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.
The CFPB estimated that 181 million adults in the United States (70 percent) had a credit card account in their name as of the end of 2020. However, the share of consumers with subprime credit scores with at least one open credit card account fell in 2020 following several years of moderate growth. The credit card market continued to grow until March 2020, the start of the COVID-19 global pandemic.
Prepaid cards: Consumers, particularly those with low incomes, are increasingly using prepaid cards for financial transactions instead of cash or traditional banking services like checks or credit cards. According to the Federal Reserve Payments Study, $350 billion in prepaid card payments were made in 2018.
The Consumer Financial Protection Bureau requires financial institutions that issue prepaid cards 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, much of 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 reported within two days. Between 2 and 60 days, it is $500. And more than 60 days, there is no limit.
Government benefits payments: In recent years, the federal government and some states have deposited government benefit payments directly onto government-issued prepaid debit cards, called electronic benefit transfer (EBT) cards. They do so for those who lack a checking or savings account and sometimes offer the option to others. Types of benefits that may be distributed through prepaid debit cards include unemployment insurance, child support, Social Security, SSI, Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Family payments, and COVID-19 stimulus payments. Consumers use these cards the same as any debit card.
Consumers have experienced an array of problems related to using EBT cards, including excessive fees. A Federal Reserve report found that consumers paid more than $97 million in ATM fees and $33 million in servicing fees in 2019 using government benefit cards. Even small fee charges for using the card could have a harsh financial impact on someone living on a limited fixed income. Consumers also report problems activating or registering their cards, withdrawing money, being charged for fraudulent or unauthorized charges, and resolving disputes. Moreover, some government EBT cards lack the consumer protections that other prepaid cards have.
DEBIT, CREDIT, AND PREPAID CARD: Policy
DEBIT, CREDIT, AND PREPAID CARD: Policy
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.
Disclosures should be required to be clear, accurate, and informative so that consumers can make more meaningful card purchase and payment decisions.
All fees, charges, and other customary costs of credit should be included in the finance charge. Doing so allows consumers to know the total cost of their credit and 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.
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.
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.
Government benefit payments
Consumer protections should be added to government benefits payments, including those made through direct deposit and prepaid cards.
The Electronic Funds Transfer Act should be strengthened to ensure:
- financial institutions promptly notify consumers when direct-deposit payments are received;
- mechanisms for prompt, effective resolution of problems are provided; and
- consumers are more accurately informed about how and where to complain if they have problems with direct deposits.