The Evolving Role of Plastic:
Consumer Credit, The Credit CARD Act
of 2009 and the Emergence of Prepaid
Debit
J. Michael Collins
Aug 2009
Background
• Four in five households have a credit card
– 44 percent of households carry a balance
– Aggregated $15 billion in penalty fees annually
• About 20% of population unbanked
– More than lack of access – ‘opting out’
– Fringe vs. Mainstream – artificial distinctions
“Plastic”
• Credit cards very common
– Store, branded
• Convenience users 54%
• Revolving Credit Users 46%
– Average outstanding credit card debt: $10,679
(Source:
Nielson Report, April 2009)
– $763 per open bankcard; An average of 5.6 cards (Source:
Experian marketing insight snapshot, March 2009)
– 84% of the college students have cards (Source: Sallie Mae, "How
Undergraduate Students Use Credit Cards," April 2009)
http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
Terms
• Annual Percentage Rate (APR): interest rate charged for
amount borrowed in terms of percentage per year
• Grace Period: amount of time allowed before finance
charges (interest or cost of credit) are applied
• Minimum Finance Charge: minimum amount charged
for card use
• Balance Calculation Method: method used to
determine balance including finance charges
Truth in Lending Act
“Schumer Box”
Annual Percentage Rate for purchases
and balance transfers*
2.99% APR (.00819% daily periodic rate) on purchases and balance transfers until the
first day of the billing cycle that includes the six (6) month anniversary date of the
opening of your account. In the absence of the introductory rate, 12.99% APR(.03559%
daily periodic rate) on purchases and balance transfers.**
Grace period for repayment of the
balance for purchases
You will have a minimum of 25 days without a finance charge on new purchases if the
total New Balance is paid in full each month by the statement closing date.
Method of computing the balance used
in calculating finance charges for
purchases
Average daily balance (including new purchases)
Annual fee
$25
Minimum finance charge
For each Billing Period that your Account is subject to a finance charge, a
minimum total Finance Charge of $0.50 will be imposed.
Miscellaneous fees
Cash advance fee: 2.5% of amount of the cash advance, but not less than
$2.50.
Late payment fee: $25
Over-the-credit-limit fee: $25
Returned check fee: $25
CARD Act Timeline
• Federal Reserve proposal
• Fed approves rules
– Proposed implementation date
• Bill Introduced
• Reported by Committee
May 2, 2008
Dec 18, 2008
July 1, 2010
Jan 22, 2009
Apr 22, 2009
– 89 Amendments
• Passed House
• Passed Senate
• Signed by President
Apr 30, 2009
May 19, 2009
May 22, 2009
– Public Law No: 111-24.
• Provisions take effect
– Except 45 day notices; 21 day grace
February 22, 2010
August 22, 2009
CARD Act vs. Prior Fed Changes
Fed
2009 Act
No interest rate increase on old balance
X
X
No universal default
X
X
30 days
60 days
21 grace period
X
X
Clearer due dates and times
X
X
Proportional
Highest 1st
Limits on over-the-limit fees
X
X
No double-cycle billing
X
X
45 day notice for change in terms
X
X
Default rates
Highest interest balance paid first
Under 21 co-signer
Subprime card fee limits
Disclosure of foreign transaction fees
X
50%
X
25%
Rate Changes
• Bans Retroactive Rate Increases
– "any time, any reason"
– "universal default
– restricts retroactive rate increases due to late
payment.
• First Year Protection:
– Contract terms must be clearly spelled out and stable
for the entirety of the first year.
– Firms may continue to offer promotional rates with
new accounts or during the life of an account,
• must be clearly disclosed and last at least 6 months.
APR Changes on Existing Balances
• Cannot raise interest rates for 12 months
– unless you are more than 60 days behind
• back your original rate if on time for 6 months in a row
– Unless variable rate card
– Unless teaser rate (6 months minimum)
• Must specify promotional and
• Terms must stay in place for 5 years/until that
balance is paid off
• Bans raising interest rates due to late payments or
defaults on other credit cards, loans or bills
Fees
• Grace Periods
– 21 calendar days from time of mailing
– Bans weekend deadlines, due dates that change each
month, and deadlines that fall in the middle of the day
• Balance Payments
– apply payments to the highest interest balance first
– Bans use of balance in a previous month to calculate interest
charges on the current month ("double-cycle“)
• Opt-In to Over-Limit Fees
– Have to obtain a consumer’s permission to process
transactions that would place the account over the limit; can
only charge once per bill
• Payments
– Bans issuing a charge for paying a bill by phone or online
(except if use a service rep)
Notices of APR Changes
on New Balances
• Requires 45 days notice before increasing
interest rates.
– Increases made will not affect existing balance.
– Only affect the credit card balance accumulated
45 days after receiving the notice
• Issuer must consider ability to pay before
raising limits
– Or issuing a new card
Restricted Availability, if Under 21
• Prohibited from issuing cards to consumers
who are under 21,
– unless the application is co-signed by a parent
– proof of ability to repay the debt can be supplied
•
•
•
•
Cannot raise limit without co-signer consent
Opt in only for pre-screened offers
No more ‘gifts’ on campus
Colleges must publically disclose all marketing
relationships with issuers
Fair Payment Allocation
• Example: A balance transfer at one rate,
while purchases accrue interest at a higher
rate.
– Card companies applied your payment to the
balance with the lowest interest rate first, so that
your balance with the higher interest rate would
keep racking up interest.
– Now, payments must first be applied to the
balance with the highest interest rate
• Except last 2 months of before deferred balance is due
Disclosures
• The Fed will issue “model disclosures”
– based on reviews of the market, empirical research,
and testing with consumers to ensure that disclosures
remain clear, useful, and relevant.
• Issuers will be required to show the ‘real’
consequences to consumers of their credit
decisions.
• Issuers will display how long it would take to pay
off the existing balance if only pay the minimum
due.
– Display the payment amount and total interest cost to
pay off the existing balance in 36 months.
Regulators
• Regulators will be required to report annually to the
Congress on their enforcement of credit card
protections
– Regulators will be required to request public input on
trends in the credit card market and potential consumer
protection issues on a biennial basis to determine what
new regulations or disclosures might be needed.
– Regulators will be required either to update the applicable
rules, or to publish findings if they deem further regulation
unnecessary.
– FRB will issue ‘safe harbor’ levels for acceptable fee levels
• Increased penalties for violators
– Card issuers will face higher penalties
Misc. CARD Provisions…
• AnnualCreditReport.com must be displayed on
all fee-based credit reporting sites
• Cannot finance fees on low balance cards
(typically subprime) if more than 25%
– EG: Fees and charges of $50 on $200 limit card
• Card agreements must be public (internet)
Store-linked Gift Cards
• Limits Fees on Gift and Stored Value Cards
– Restricts inactivity fees unless the card has been
inactive for at least 12 months
– After that just one fee/month
– Cards must stay valid for 5 years from date of
issue / last deposit
• Covers retailer and general use cards
– Not phone cards, rewards/loyality cards or paper
certificates
Not Covered by CARD Act
• No restrictions on the level of interest rates
• No restrictions on the size of the rate
increases that are allowed
• May still reduce credit limits at any time for
any reason
• No restrictions on forced arbitration clauses
Looking Ahead
• Fewer 0% offers (especially on balance transfers)
– Variable rates will be norm
• Smaller credit lines; Higher membership fees
– Maybe fewer/weaker rewards
• Convenience user - Little impact
• Revolver - Fewer unexpected fees
– may pay marginally higher rates
• Not in the market yet- Harder to qualify
– especially youth or subprime
CARD Act information
• http://www.whitehouse.gov/the_press_office
/Fact-Sheet-Reforms-to-Protect-AmericanCredit-Card-Holders/
• http://www.creditcardreform.org/pdf/doddsummary-509.pdf
• http://www.cbo.gov/doc.cfm?index=10097
Pre-Paid Debit
• General purpose
• Branded (VISA, MC)
• Stored Value
– Linked to name, address, DOB, SSN/ITN, Gov’t ID
• Re-loadable
– like bank account
• Buy at retailers, check cashers, etc
Benefits
• Withdraw cash at ATMs (w/ PIN)
• Make point of sale purchases (PIN); Online like credit
– Alternative to cash; pay bills online; reserve hotel rooms
• Deposit money
– Replace paper paychecks
• Lost or stolen cards and their full balance will be
replaced
– Alternative to traveler's checks.
• Bridge between ‘fringe’ financial services and
‘mainstream’
Growth of PP Debit
• $4.7 billion in 2003 to $38.7 billion in 2007
- The Mercator Advisory Group
• Recent estimates: $100 billion+
• Still small overall:
– Federal Reserve Estimates in 2006
• 313 million prepaid (open loop) debit transactions
• 25 billion debit-card transactions
• 19 billion credit-card transactions
Fees: Caution
•
•
Activation fee: (may be waived with direct deposit)
Monthly maintenance fee: $2.95 to $9.95
– Annual fee: Alternative to monthly; Some cards charge for credit reporting (optional)
•
•
•
•
•
•
•
•
Signature purchases: Some cards charge up to $1 per transaction.
PIN purchases: Some cards; up to $2 per transaction.
ATM withdrawals: Fees to ATM owner depend in network.
Refund fee: Close prepaid debit card & balance sent: $5.95 or more
Balance inquiries: online is free, but by phone or ATM fees common
Statements: Archived paper statements in the mail can cost $1 to $5.95.
Replacement cards: $3.95 to $10.
Online bill pay: Some cards charge 49 cents to $1 per transaction.
So totals depend on usage. One study suggests $15-$25 is typical; Others are lower
Source: Rachel Schneider The Industry Forecast for Prepaid Cards, 2009 Center for Financial Services Innovation, 2009
Why Are Consumers Signing Up?
• Debit costs less.
– Bank fees seem capricious - Never know when
next fee comes
• Low balance, NSF, statement fee, etc
• May exceed $25 per month for <$500 balance
• Convenience, Accessibility, Transparency
• One example: tax refunds
• Inclusion into mainstream ‘plastic economy’
Recent Research on
Stored Value PP Debit Customers
•
•
•
•
•
•
48% have bank account
33% have credit card
52% use to pay bills
37% use a ATM
44% bought at retailer / 15% online / 13% payday lender
21% use direct deposit
• Average 1 deposit ($200), 4 purchases ($40); 1 ATM per month ($40)
• 80-90% of balance spent per month
Source: CFSI InBrief 2008; Sherrie L. W. Rhine, Katy Jacob, Yazmin Osaki & Jennifer
Tescher 2007
Consumer Education:
Pre-Paid Debit Cards
•
•
•
•
•
•
Not a bad alternative to bank accounts
Shop around
Read details
“Loading” the card strategically
Take advantage of web-based management
Advanced features: credit reporting, budgeting, savings
• Regulations still murky – some issuers are not technically a
“bank” or have regulator oversight
• Not much attention to this topic within Cooperative Extension
Nationally as of mid-2009