ABA: Credit Card Act Reduced Available Credit
While the federal Credit Card Act of 2009 has provided consumers several benefits, including reduced volatility in the cost of credit card transactions, there have been tradeoffs, most notably increases in the cost and reductions in the availability of credit, the American Bankers Association (ABA) said.
ABA, which also represents Puerto Rico banks, made its remarks to Mónica Jackson, executive secretary of the Consumer Financial Protection Bureau, because that entity is conducting a review of the consumer credit card market, terms of credit cards and the effects of the Card Act on cost and credit availability, particularly for individuals with difficulty obtaining credit.
The local Bankers Association declined to provide additional comments to ABA’s remarks because it has yet to receive input from local banks about the federal law.
The Card Act, which is applicable to Puerto Rico, contains provisions that limit how card companies can charge consumers. The law gives consumers enough time to pay their bills; prevents retroactive rate increases; makes it easier to pay credit cards; and restricts marketing to young people.
The Card Act restricts several practices that credit card issuers historically used to manage risk, most notably the ability to increase interest rates on existing credit card balances and charge certain other fees. For instance, consumers are also paying less for late payments and over-the-limit fees.
However, this predictability presents tradeoffs, ABA said. “Card issuers are more inclined to deny credit to applicants they see as potentially high risk—including those with no or limited credit history—whose creditworthiness is more difficult to evaluate,” the organization said.
These developments have harmed consumers in multiple ways because credit availability has declined, particularly for subprime borrowers (high risk) who have no, limited or poor credit histories.
“Those unable to obtain credit may turn to other short-term lending options; for example, payday lending. For consumers who still have access to credit, average credit lines are lower than they were before the Card Act was implemented, and interest payments are higher than they otherwise would be,” ABA said. A payday loan is a small, short-term unsecured loan, whether repayment of the loan is linked to the borrower’s payday.
The Card Act’s restrictions on issuers’ risk management practices have adversely affected the availability of card credit, particularly for consumers with low credit scores. Super-prime accounts, or those with high credit scores, now comprise nearly half of all accounts, up from 42% in 2008, while the share of subprime accounts or low credit scores has fallen from 25% to 20% in the past eight years, ABA said.
While the industry has been able to bring back some higher-risk borrowers to the market, albeit with reduced credit lines, many other potential borrowers continue to be frozen out, leading to several negative consequences, ABA said.
“Denying borrowers with no, limited or poor credit history an ability to build credit places severe limitations on their capability to become eligible for other types of loans, for example, auto loans and mortgages…,” ABA said.
The contraction of available credit is also evidenced by declines in credit card lines since the Card Act was implemented, ABA said. Average credit lines for prime and subprime accounts (for consumers with average and low credit scores) declined 26% and 20%, respectively, from 2008 to 2016, while the average credit line for super-prime accounts (for consumers with high credit scores) fell only 5% over the same period.