CARD Act Limiting Access to Credit

by Matthew Glans on March 2, 2011

A recent article by Kara McGuire in the Minneapolis Star Tribune on the effects of the CARD Act on the availability and cost of credit understated the effect of the new regulations on credit card fees. While some parts of Dodd-Frank and the CARD Act address real problems in the financial system, many of the new policies have strong negative effects on consumers.

From the Star Tribune:

“Before the Credit CARD Act — designed to protect borrowers from unfair credit card practices — banks could charge high fees to cardholders who went over their limit, apply payments in a way that maximized their profits and raise interest rates whenever they pleased — even on old balances. These practices were outlawed in 2009, along with a host of others that cost consumers big money. Many of the new rules went into effect last February. One year later, are credit card users better off? Yes, say most consumer advocates.”

The new standards under Dodd-Frank and the CARD Act make it more difficult for credit card companies to manage the risk they take on with each line of credit. Popular as they may be in some circles, these actions are unwise.

“Many banks adjusted to the tougher financial times and the new law by cutting card limits, closing accounts and offering credit only to less-risky customers. In a shareholder letter last spring, JP Morgan Chase CEO Jamie Dimon said the mega-bank stopped offering cards to 15 percent of the customers who were once offered credit “because we deem them too risky in light of new regulations.

Credit card offers are starting to fill mailboxes again, according to research firm Synovate, which tracks card mailings. Yet they’re still below the numbers sent before the Great Recession and CARD Act, and very few are going to households with FICO credit scores below 620.”

By controlling certain fees—particularly those assessed on people who use credit cards irresponsibly—government meddling has encouraged banks to raise fees on everyone. Increased regulation and restrictions on fees will inevitably increase the overall cost of providing credit, reduce consumer benefits, and even increase some of the costs the regulations are designed to minimize.

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