Credit card reform that took effect more than three years ago has helped reduce borrowing costs for U.S. consumers, especially those with the lowest FICO scores, according to a new report.
Neale Mahoney, an economist at the University of Chicago’s Booth School of Business, co-authored the study, telling the New York Times that he was surprised by the results.
“Using an unique panel data set covering over 150 million credit card accounts, we find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 2.8 percent of average daily balances, with a decline of more than 10 percent for consumers with the lowest FICO scores,” a summary of the report reads.
The Credit Card Accountability Responsibility and Disclosure Act of 2009, or Credit CARD Act, took historic steps in limiting the ability of card issuers to raise rates, impose fees and allocate payments. It also prohibited “universal default,” the practice of raising interest rates on customers if they are late paying an unrelated bill, such as a car loan or a utility bill.
Most of the reform’s provisions amend the Truth in Lending Act and took effect on Feb. 22, 2010, while others covering penalty fees took effect Aug. 22, 2010.
The study found no evidence of “an offsetting increase in interest charges or a reduction in access to credit.”
The CARD Act fee reductions have saved U.S. consumers $20.8 billion per year, the report found.
The study’s other authors are Sumit Agarwal of the National University of Singapore, Souphala Chomsisengphet of the Office of the Comptroller of the Currency and Johannes Stroebel of New York University’s Stern School of Business.