Why the CARD Act is Good for Consumers

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The market works well when everyone understands what they are buying and selling. But credit cards are complicated financial products. Few consumers can make an intelligent comparison of one card to another. That is a big part of why credit card companies have gotten away with charging ridiculous fees, double-cycle billing, and other transgressions over the years. Nobody knows what they are, and there may not be alternatives, anyway.


The business model works: advertise great interest rates—at least up front—then nickel and dime the customer with exorbitant fees, goofy billing practices, universal default, and other dirty tricks.

Because consumers understand interest rates. Interest rates are an easy way to compare one card with another. Up until now, they just haven’t been a good indicator of the true cost of a credit card, which has more to do with the fees than the teaser interest rate. The CARD act essentially forces credit card companies to be honest about their interest rates. Sure, if they can’t pile on fees, interest rates will rise. But the hidden costs of credit that nearly all of us pay should drop in proportion.

In the short term, expect interest rates to rise. After all, the CARD Act will create uncertainty, and credit card companies will react the only way they know how: raising rates to hedge against risk. But consumers have two options: (1) they can get a card with a lower interest rate; or (2) they can decide not to use a credit card at all. Both options mean credit card companies will have to lower rates to hold onto existing customers and get new ones.

And, of course, credit card companies will probably find new ways to insert hidden fees. They are already looking at things like annual fees and low-usage fees. Of course, that may just mean more people take option 2, and leave credit cards behind entirely.