A new report found American consumers have avoided more than $9 billion in over-limit fees and saved more than $7 billion in late fees since the implementation of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act).
“The Consumer Credit Card Market” report from the Consumer Financial Protection Bureau (CFPB),
says since the reform law, total costs to consumers have fallen with the elimination of certain back-end pricing practices such as over-limit fees. Over the same period, credit has generally become more available to consumers and the number of new accounts has grown faster than in almost every other major consumer credit market. Concerns remain, however, about other back-end practices such as deferred-interest promotions that can hit consumers with unexpected costs.
Areas now on the CFPB radar screen include:
• Deferred-interest promotions can hit consumers with back-end pricing: Deferred-interest promotions on credit cards dangle the possibility of financing purchases without interest. With these products, if the balance is not paid in full by a given date, the accumulated interest is assessed retroactively. Deferred-interest products remain the most glaring exception to the general post-CARD Act trend toward upfront credit card pricing. Consumers with lower credit scores are paying more for these products, but they do so at the back-end of the transaction, with annual interest rates of around 25 percent.
• Subprime credit card companies charge much more for credit: When the credit is being provided by a subprime specialist credit card company, the total cost to consumers with lower credit scores can be much more than what they would pay on a mass market credit card. These companies charge more for origination and maintenance fees. This puts consumers at risk of more of their monthly payments going toward fees and interest charges, instead of the principal balance. Subprime companies also tend to have longer, more complicated agreements.
• Rewards programs have obscure and incomplete terms and conditions: Over half of all consumers say they select credit cards based on the rewards they provide. But the terms of rewards programs are often not available to consumers until after they apply for the card. Even then, some rewards terms may be obscured by glossy “program guides” that provide only partial information. And if consumers were to find, read, and understand the terms, they would frequently discover that issuers retain the right to change those terms at any time, for any reason.
• Debt collection practices pose risks to consumers: When consumers fall behind on their bills, their accounts are moved into collections. Initially, collections are generally handled in-house. There is a wide variation in how aggressively these collectors pursue the debts. After a while, accounts that have not been paid are often placed with third-party debt collectors that compete with other collectors and are paid a percentage of the debts they collect. Banks vary widely on the extent to which they rely on these third-party collectors and also on the extent to which they sell unpaid accounts to debt buyers. The Bureau has found numerous problems in the practices of many of these third-party collectors, including the accuracy and completeness of their information.
• Some agreements are still long and complex: Today’s report identifies a number of opportunities for card issuers to improve the transparency of their products. For example agreements can still range in length from 3,000 to 8,000 words.
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