Consumer Protection That Works: CARD Act Already Helping Americans’ Finances

Even as the Senate continues work on comprehensive financial reform, a new analysis finds that the more narrow credit-card reform law already enacted a year ago already is helping consumers keep more of their money.

Senators continue their consideration of a broad package of reforms aimed at imposing new regulation on the financial industry. But last year they passed, and President Obama signed into law, legislation designed to help protect consumers who use credit cards.

That law, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, is enabling credit card borrowers who pay more than the minimum payment each month reap big savings, according to an analysis from the Center for Responsible Lending (CRL), a nonprofit, nonpartisan organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.

Under the Credit CARD Act, borrowers can pay down existing credit card debt sooner by paying less interest than under the old rules, all the while improving their credit score, CRL says. The CRL analysis estimates that for each dollar above the minimum that a customer pays, he or she may save $2 in interest.

For its new analysis, CRL says it studied several scenarios with different types of balances and interest rates. One that is common in the market featured a borrower whose credit card had one balance for purchases and another balance for cash advances, which carry a higher interest rate. By paying an extra $100 above the minimum in one month, this borrower saved $224 in interest expenses over the life of the loan.

“We want Americans to know that the new law’s changes to credit card practices can work for them,” says Joshua Frank, CRL’s senior researcher on the credit card industry. “We urge credit card customers to make the most of this new law by paying as much as possible above the minimum.”

While paying more than the minimum has always been a good idea, the new law allows the strategy to earn even greater benefits, CRL says. Under the law, any amount that customers pay above the required minimum must be applied to the balance in their credit card account carrying the highest interest rate. That’s the opposite of what credit card issuers had been doing for years, when they applied payments to the lowest-rate balances first — maximizing interest charges, CRL says.

The technique worked for credit card issuers because most people were unaware of the practice and, even if they knew, could have done little about it. Frank says the new law puts borrowers in the driver’s seat. But, he cautions, to benefit they have to take control and pay more than the minimum.

The CRL analysis, “Capitalizing on New Consumer Protections: Four Tips to Rid Yourself of Credit Card Debt Sooner and Save Money,” advises credit card holders to:

  • Pay more than the minimum amount due each month.
  • Watch out for hair-trigger interest rate hikes. While rates on existing balances can be raised only if a borrower falls behind by two months, the new law still allows issuers to raise rates on new purchases or cash advances for any reason.
  • Decline offers to opt-in for over-the-credit-limit coverage because this lets the issuer extend additional credit at exorbitant cost.
  • Avoid credit cards requiring grievances be settled through mandatory arbitration rather than in the courts. CRL research has found mandatory arbitration favors issuers over consumers

The publisher of the news site On The Hill, Scott Nance has covered Congress and the federal government for more than a decade.

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