July 10, 2012
Credit Card Act Increased Payoffs
Government policies often seek to alter human behavior: a 2009 tax credit for first-time homebuyers, for example, encouraged more people to buy houses.
Now research has determined that the first federal update since 1968 to the interest rate disclosures on credit card statements has changed card users’ behavior for the better.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD) increased the number of users who pay off their bills each month, from about 60 percent prior to the act, to between 64 and 69 percent currently, concluded Cornell University doctoral student Lauren Jones, Ohio State University professor Cäezilia Loibl, and Cornell professor Sharon Tennyson.
They also found that the size of card holders’ payments, relative to their debt levels, increased, and that fewer card users are paying only the minimum. Their findings, though somewhat mixed, provide support for the increasingly popular notion that more precision and clarity in financial-product disclosures can be effective.
Their research controlled for the effects of the Great Recession and its aftermath, when consumers slashed their debt; in other words, card holders improved their behavior on top of the belt tightening forced upon them by lower wages, unemployment and other recessionary impacts. A previous report also suggested that other provisions of the CARD Act that made it more difficult for college students to obtain credit cards have curbed card use on campus.
However, Jones cautioned against being complacent about CARD’s impacts, because they are “positive and significant” only for a subset of credit card users.
Some consumers are “overleveraged, and they shouldn’t be getting any more credit,” she said. “I worry that passing these very chic disclosure regulations may stop us from considering the possibility that stronger regulation is needed.”
Even tougher regulations on card companies may be necessary for credit card abusers, she said, such as limits on allowable debt that are based on wealth or income or even on prior credit card behavior.
The researchers’ analysis was based on a monthly survey of 300 to 500 households by the Center for Human Resources at Ohio State University. After the CARD Act became effective, card holders’ average payments increased, from 72 percent of their total balances, to between 76 percent and 79 percent. And the proportion of cardholders who paid only the minimum (or less) declined, from 8 percent to about 5 percent.
The Truth-in-Lending Act, passed in 1968, was groundbreaking: for the first time, card companies had to provide the annual percentage rate and fees they charged their customers. But its passage did nothing to stop the credit-card binge during the latter half of the 20th century, which pushed Americans’ outstanding balances to nearly $870 billion by the end of 2008.
The disclosure probably didn’t work, past research has determined, because customers who buy financial products often have a hard time interpreting the fine print. For example, disclosure of the annual percentage rate (APR) raised consumers’ awareness of card costs – but not their understanding of what it means. [When interest on a card is shown, for example, as a monthly rate of 1.5 percent, the APR is the equivalent rate over a year, which would be about 20 percent.]
The chart below shows the new disclosure, under the CARD Act, which should appear on statements. It dramatizes the true cost of not paying off the balance. In this example of a card with a $988.04 balance, paying only the minimum takes an additional decade and runs up $875 in additional interest – nearly as much as the initial card balance: