5 Signs That Credit Card Reform Is Really Working

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In 2009, the Credit Card Accountability, Responsibility, and Disclosure Act became law. The law's intent was to set limits on certain fees that credit-card issuers charged their customers and to make it clearer to cardholders what they needed to do in order to avoid other fees.

Most of the provisions of the CARD Act went into effect in 2010. Now, three years after the law's implementation, the Consumer Financial Protection Bureau has come out with a report evaluating the successes and failures of the CARD Act in relation to credit-card customers. Here are five signs that the law has helped achieve its goals.

1. Credit-Card Customers Are Paying Less in Over-the-Limit Fees.

Most credit cards impose a fee if you make charges above your credit limit. For customers who routinely stay nearly maxed out on their credit cards, staying below those limits can be a challenge.

The CFPB report found that over-the-limit fees have become much rarer under the new law. During the fourth quarter of 2008 before the law's implementation, 16.4 percent of accounts were over their credit limit at some point, and card companies imposed over-the-limit fees almost half the time. By the fourth quarter of 2012, over-the-limit situations affected 12.7 percent of accounts, but card companies almost never imposed fees when that happened -- only 3.4 percent of the time.

2. Late-Payment Fees Have Gotten Smaller.

Credit-card companies also routinely charge fees if you're late in making a payment on your account. In 2008, the average amount charged for late-payment fees was more than $33.

In the aftermath of the CARD Act, late-payment fees dropped markedly to just over $23 in 2010. Since then, fees have crept up again, approaching $27 by late 2012. Also, the percentage of accounts incurring late fees has dropped by three to four percentage points, falling to 22.2 percent in 2012.

3. Fewer Young Adults Are Getting Credit Cards.

One big danger that the CARD Act sought to address was the incidence of adults age 18 to 20 obtaining credit cards without any income to support payments. As a result, many young adults got deeply into debt even before they began their careers, digging financial holes that were understandably difficult to climb out of.

The CFPB reports that the number of new cards issued to customers between 18 and 20 has fallen by more than half over the past five years. Only 14.4 percent of young adults had opened a credit-card account in 2012, down from 33.6 percent in 2007. The reductions can largely be traced to the requirement that card applicants under 21 either show proof of adequate income to cover their own payments or obtain a cosigner.

4. Credit Card Agreements Are Getting Easier to Read.

If you've ever tried to read the fine print of a credit-card agreement, you already know how long and complicated they are. The CARD Act sought to make credit disclosures shorter and easier to understand, providing realistic examples that would show the impact of certain decisions on how much customers would pay for their credit.

It worked. The CFPB found that on average, credit-card agreements have gotten substantially shorter -- by almost 25 percent. In addition, the CFPB found that the agreements also used language that was easier to understand, making their terms more readable.

5. Total Cost of Credit Has Fallen.

Overall, the CFPB found that the amount that cardholders pay for credit on their card accounts fell by almost two full percentage points between 2008 and 2012, from 16.4 percent to 14.4 percent. The CARD Act can't claim to be the sole cause of that phenomenon, but in light of the fee reductions that have resulted from its enactment, the law deserves at least some of the credit.

Be Smart About Credit

Even with the CARD Act's success, you still have to be careful in managing and tracking your credit-card accounts to avoid fees. With issuing banks still looking for ways to make money from their cards, you should stay vigilant to make sure you don't fall into any unexpected fee traps.



You can follow Motley Fool contributor Dan Caplinger on Twitter@DanCaplinger or on Google+.

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