A year has passed since the final provisions of the CARD Act went into effect on February 22, 2010, and industry experts are looking back to see if it had its intended effects.
In many ways it did, but it also had some unintended and less than positive effects.
First, the good news. While some credit card holders still don’t understand what they’re paying for credit, the “Schumer Box disclosures” have made it clear to most. If consumers read their credit card statements, they’ll see how much interest they’re paying, what it will cost if they make only minimum payments, and what they’ll save by increasing their payments.
Since credit card issuers can no longer raise rates on existing balances unless the card holder is 60 days late with a payment, consumers are naturally paying less interest. We’re also getting at least some warning before seeing rate hikes on future purchases.
Banks aren’t particularly happy with the changes, but are working to find ways to add some costs and fees that weren’t covered under the CARD Act. Bank of America issued a statement stating that the CARD Act had a $20.3 billion adverse impact on their credit card operations.
Meanwhile, what happened in the months preceding the final implementation of the Credit CARD Act had unintended and adverse consequences for credit card holders – and for the real estate industry.
In the course of the year prior to implementation of the law, 15% of credit card accounts saw rate increases. Some of these increases were drastic, and thus raised monthly minimum payments beyond what card holders were able to pay.
In addition, credit card issuers slashed credit lines. Many consumers reported having their formerly high credit lines slashed to less than their outstanding balances – triggering over-limit fees.
What did this have to do with the real estate industry?
These actions reduced credit scores for thousands of consumers at a time when mortgage lenders were tightening their requirements, demanding higher credit scores. .
Because 30% of a credit score is based on the consumer’s ratio of credit used to credit available, credit scores tumbled. Where some had remained comfortably under 30% of credit use, their credit reports suddenly showed that they were using 100% of their available credit.
Other reports show that today’s consumers are using less credit, paying down credit card balances, and slowly regaining their credit scores – and that’s a good thing. But these moves did put a dent in the number of consumers who have been able to take advantage of today’s low mortgage interest rates.