New Evidence on the Effects of Credit Card Regulations

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For borrowers with FICO scores below 620, overall fee revenue dropped by more than half after enactment of the CARD Act...

In 2009, Congress passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, which was designed to protect credit card users from hidden or ill-understood borrowing costs. In Regulating Consumer Financial Products: Evidence from Credit Cards (NBER Working Paper No. 19484), Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, and Johannes Stroebel investigate how the law affected consumers. They analyze data from over 150 million credit card accounts administered by the eight largest U.S. banks. These data were collected from the Credit Card Metrics dataset of the Office of the Comptroller of the Currency (OCC) and provide account-level information on contract terms, use, and payments at the monthly level from January 2008 to December 2012. The dataset is detailed enough to allow the authors to observe fees and to isolate how the law may have affected detailed provisions such as over-limit and late penalties.

The researchers focus on two key aspects of the CARD Act: regulatory limits on the ability of banks to charge certain types of credit card fees, and attempts to affect consumers' repayment behavior by installing requirements that credit card bills provide clear information on the costs of making only the minimum payment. They find that regulations to limit fees had clear effects: over-limit fees dropped from an annualized 1 percent of average daily balances to zero in February 2010. Late fees dropped by 0.5 percentage points in February 2010 and another 0.5 percentage points in August 2010, for a combined decline of 1 percentage point on a base of 2 percentage points. Across all implementation phases, the authors estimate that the CARD Act reduced overall fee costs by an annualized 2.8 percent of borrowing volume. With an outstanding credit card volume of $744 billion in the first quarter of 2010, this translates into annual savings for credit card users of $20.8 billion per year. The decline in fees was the largest for borrowers with low FICO scores, from whom the companies had traditionally collected sizable interest and fees. For borrowers with FICO scores below 620, overall fee revenue dropped by more than half after enactment of the CARD Act, from 23 percent to about 9 percent of their average daily balance.

The authors also analyze the law's requirement that banks reveal the interest savings from paying off balances within 36 months rather than making only minimum payments. They find that this "nudge" boosted the number of account holders making the 36-month payments by 0.5 percentage points, with a similar decrease in the number of account holders paying less than this amount.

--Matt Nesvisky